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Members of my trading group are happy campers today. We entered a spread trade on NFLX yesterday, playing the earnings announcement scheduled after the market closed. We could have closed this morning for a 21% gain, but I rolled the short option out and locked in a very conservative 40% gain that will mature in three weeks. If that trade intrigues you, join us at our next trading group meeting, scheduled for February 8th, at 8 pm CT. Our trading group achieved net gains of 133% in 2017 and 169% in 2016.

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It is interesting that passage of the tax bill near the end of the year resulted in a flat, sideways market. It seemed as though the tax cuts were already priced into the major market indices. But something happened over the holidays. The champagne must have still been flowing Tuesday morning as the market opened in the new year. The Standard and Poors 500 Index (SPX) jumped out of the gate and accelerated every day this week, closing today at 2743, up 19 points. SPX gapped open higher at each opening this week. I have never seen anything like it.

Trading volume in the S&P companies was above the 50-day moving average (dma) Wednesday and Thursday, but fell off slightly today. The price action this week was classic strong bullish behavior: gap opening higher, a market unfazed by any negative news, and strong above average trading volume.

I keep thinking this market has to take a breather at least, if not correct, but it keeps surprising me with its strength. Shorting this market is a fool’s errand.

The Russell 2000 Index (RUT) closed today at $1560, a new closing all-time high. RUT is the only major market index that has been trading somewhat more restrained. SPX and the NASDAQ have been setting new highs almost every day. All three indices closed at all-time highs today – think about that for a minute.

The NASDAQ Composite has also been gapping open higher all week, setting new all-time highs. NASDAQ closed at 7137, up nearly three percent in this four-day week! Trading volume in the NASDAQ composite companies ran parallel to SPX, peaking Wednesday and coming down slowly towards week’s end.

Market volatility, as measured by the S&P 500 volatility index, VIX, set new record lows this week, hitting levels below 9% intraday and closing as low as 9.2% yesterday and today. These record lows in volatility tell us that the large institutional traders don’t see much on the horizon to worry them. Of course, we have been seeing low levels of volatility for most of 2017. In fact, many gurus have pointed to that as an precursor of impending doom and gloom. It does seem reasonable to expect some slowing of this bull market. In fact, I would consider that a healthy sign. But we will have to allow some time for the euphoria of the corporate tax reduction to sink in.

I found it interesting that the FOMC minutes that came out this week showed that the committee members were increasing their GDP forecasts even before the tax bill passed. Remember all of the naysayers who said lowering corporate tax rates wouldn’t do anything for economic growth? Apparently the economists on the FOMC haven’t drank the political Kool-Aid.

Hard economic data continue to be at least moderately positive, with some measures coming in very strong, e.g., Chicago PMI at the highest level since March 2011. The corporate earnings reporting cycle has begun and the large banks are scheduled to report next Friday. Analysts will be watching those bank reports, and especially their forward guidance, very carefully. Presuming the majority of the corporate earnings announcements continue to show positive growth and optimistic future guidance, we may safely assume a continuation of this bull market. But that statement worries me…

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As I watched the Standard and Poors 500 index (SPX) trade upward so strongly today on the news of agreement on a final tax reform bill, I couldn’t help but think of that old television show, Happy Days. Are we off on another leg up of this remarkable bull market? Are Happy Days here again?

SPX spiked to another all-time high today, closing at 2676, up just under one percent. But the spike in trading volume was truly remarkable. Trading volume for the S&P 500 companies ran below the 50 day moving average (dma) at 2.1 billion shares all week. But today’s volume hit 3.5 billion shares, the highest level seen in SPX all year. It certainly appears to have been an “all in” day as the poker players would say. But is that appropriate?

I think most, if not all, market analysts would attribute today’s spike to the news that a final version of the tax reform bill was ready for release and congressional leaders think they have the votes for passage next week. But passage in the senate is anything but a slam dunk. That fragile majority could easily unravel. If that happens, look out below!

I also worry about the market’s reaction to passage of the tax reform bill. Will this be another “sell the news” moment?  In many ways, my position on this market hasn’t changed. I continue to play the bullish market trend, but I am increasingly cautious.

The volatility index for the Standard and Poors 500 index, VIX, remains relatively low. VIX opened the week at 9.7% and rose to 10.5% on Thursday, but closed today at 9.4%. VIX tells us that Happy Days are indeed here again. But that worries me. Maybe we are too comfortable. The market has been rather volatile over the past couple of weeks. Many of the market darlings have been whipsawed back and forth. Passage of a tax bill will certainly push the market higher, but it could also be a “sell the news” moment. The spike in today’s market worries me when the bill’s passage is anything but certain. Black swan events have a tendency to occur when everyone is fat and happy.

Be cautious. This is a nervous market and next week could bring some big moves higher or lower. Keep a close watch on your positions and set tight stops.

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We are nearly ready to bid farewell to 2017. I find it a bit hard to believe it's almost over. This was a year for the record books with the stock market just steadily climbing higher since the election last year. The S&P 500 Index had one of its rare down days today, closing at $2674, but still gaining 19% for the year. That isn't a record for SPX; it was up over 30% in 2013, but that was a roller coaster ride. I don't know of anyone who remained fully invested throughout 2013, but many investors did just that this year.

Economic data have been building all year. It looks like GDP will achieve a 3% plus year and we haven't seen that in a while. Consumer confidence measures continue at or near recent highs. One of the economic indicators many investors track is the Chicago PMI, a survey of industrial purchasing managers. The PMI reported at 67.6 this week, the highest level for that measure since March of 2011.

Our trading services all had positive returns for 2017, with Dr. Duke's Trading Group leading the pack at a net gain of 133%. A total of 66 trades were recommended with a win/loss ratio of 74%. Our weekly newsletter, The No Hype Zone, finished 2017 with a net gain of 32% on 27 recommended trades with a 70% win/loss ratio. The Conservative Income service ended 2017 at +12.4%. This service didn't beat the S&P 500, but those traders slept well at night. Our Flying With The Condor™ service trades the broad market indices non-directionally and ended 2017 at +6.5%. In a year like 2017, trading the market non-directionally proves very difficult as we are continually adjusting and re-positioning the call spreads in our positions.

As we reflect on the past year and look forward to new beginnings, we would be wise to focus on the truly important aspects of our lives. My business focuses on managing our finances, and most of us work in demanding professions. It is easy to be distracted from our families. This is my favorite time of the year because we tend to all slow down and reflect on our families and take time to be thankful for all of the blessings we enjoy.

As we near the end of 2017, I wish all of you a happy and prosperous new year.

 

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The Standard and Poors 500 index (SPX) took a serious hit on December 1st due to the double whammy of what turned out to be a false news story about Trump and some concerns that the tax bill had hit a wall. The concerns that tax reform would not be passed continued to haunt the market on Monday. Many of the high-tech darlings that have performed so well this year were badly hurt on one or both days. But Thursday brought a new optimism to the market and SPX even gapped open higher on Friday morning.

Market analysts have been debating whether a presumption of passage of a tax bill has been “baked into” the current market prices. I have certainly found my thinking to waffle back and forth on this question, but recent market price action has convinced me that a failure to pass the tax bill this year will result in a pullback in the markets. The questions are the degree and duration of the pull back.

The most recent earnings cycle certainly documented solid corporate earnings growth, and that is the foundation of a strong bull market. But it is also true that several technical indicators have been suggesting an increasingly overbought market.

SPX opened Monday at 2657 and that tied the intraday high on November 30th. SPX closed Friday at 2652 so we have spent the last seven trading sessions trading sideways. This level of the market is the tipping point between higher prices upon passage of the tax bill and lower prices if it fails to pass. How much lower? That is hard to predict, but I will be looking at the support levels on SPX at 2596 and 2565. I think it is unlikely for the market to break those support levels.

Consider the pattern of trading volume for the S&P 500 companies. Recent trading volume has been relatively low, running at or slightly above the 50-day moving average (dma). When the market tanked on 12/1, 12/4, and 12/5, trading volume spiked higher. But when the market strengthened on Wednesday through Friday of this week, trading volume fell below the 50 dma. That pattern suggests that many more shares are prepared to be sold on any sign of weakness than are willing to “go all in” on a perception of strength.

The Russell 2000 Index (RUT) displayed a strong run for the last half of November. Many attributed this to a perception that the tax reform bill would be more helpful to smaller companies, such as those of the Russell 2000 index. And this perception appears to have been validated by the price behavior since December 1st. Once passage of a tax bill began to be doubted, RUT traded lower. Look at how far RUT fell on Friday, 12/1, touching the 50 dma before bouncing back higher. Wednesday’s price action broke support set by the early October high and the pause on November 21-27. But Thursday and Friday recovered some of those losses, closing at 1522 on Friday.


The volatility index for the Standard and Poors 500 index, VIX, spiked to an intraday high of 14.5% on December 1st, but began a steady decline this week, closing Friday at 9.6%, near lows for the year. This completed a full cycle from the low of 9.7% on November 24th to the high on 12/1 and back to 9.6% yesterday. VIX primarily reflects the perceptions of the large institutional traders. For now, at least, they are very complacent.

Where do we go from here? Many of our high flyers were taken to the wood shed last Friday and Monday of this week. But we seem to have recovered by week’s end. Passage of a tax bill will certainly push the market higher, but it could be a “sell the news” moment. The price action of the past six trading sessions suggests a sell off of some magnitude if the tax bill fails to pass out of Congress.

This coming week features the FOMC meeting and announcement and the expectation of a decision on the tax bill by Friday. We may be in for some choppy sideways trading until the fate of the tax bill is finally known. Keep a close watch on your positions and set tight stops. This is a nervous market and this week could bring some big moves higher or lower.