Dr. Duke's Blog
Do you know any trading coaches who publish the results of their trades daily? Dr. Duke posts the trading track records of his Flying With The Condor™, Conservative Income, Dr. Duke's Trading Group, and The No Hype Zone Newsletter services in the free downloads section of this web site. If you have questions about any of the trades, Ask Dr. Duke.
Nice 21% Overnight Gain
- Written by Dr. Duke
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.
The Bulls Are Running
- Written by Dr. Duke
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…
2017 Comes To An End
- Written by Dr. Duke
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.
- Written by Dr. Duke
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.
All About the Tax Bill
- Written by Dr. Duke
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.
The Tax Reform Soap Opera
- Written by Dr. Duke
After the Standard and Poors 500 index (SPX) hit an all-time high on November 8th, the broad market indices traded down steadily until the bullish spike higher yesterday. SPX gapped higher at the open and tacked on twenty-one points before the day’s trading was done. But today was a different story with SPX closing down 7 points at 2579 on declining volume. I think the tax reform soap opera is taking its toll on the markets.
We have nearly completed the earning announcement cycle for the third quarter and it was one of the better earnings cycles with 80% of companies beating analyst earnings estimates. With solid corporate earnings growth, a strong bull market shouldn’t be a surprise. Perhaps this market isn’t as reliant on passage of a tax bill as many have speculated. The recent market slide through this past Wednesday was said to be based on rumors of the tax reform push meeting significant hurdles. If that were true, why did the market pop back so strongly yesterday? If anything, it is becoming clear that the probability of a tax bill reaching the President’s desk is seriously eroding.
The Russell 2000 Index (RUT) has become the anti-establishment index. October 3rd started a steady slide in RUT, giving up 48 points or 3.2% by the close on this past Wednesday – a 3% decline at the same time that the broad market indices were setting new highs. RUT played ball with its big brothers and spiked higher on Thursday. But today’s trading continued higher on Russell, with a close at 1493, up 6 points.The volatility index for the Standard and Poors 500 index, VIX, rose during the recent market decline, from a low of 10.5% on November 9th to an intraday high of 14.5% on Wednesday this week. VIX closed today in much calmer territory at 11.4%.
Continue to trade from a bullish posture, but we need to become more selective in our stock picking. Keep a close watch on your positions and set tight stops. This is a nervous market. I believe we can still achieve some nice gains in this market, but it will pay to be more picky in our trade selection and to quickly cut losses.
Waiting On A Correction?
- Written by Dr. Duke
It is difficult to tune in any financial program without hearing someone warning of an imminent market correction. Does that mean conservative investors should be moving to the sidelines and going largely to cash? Let’s apply to solid analysis to this question rather than falling for the emotional plea of the doomsday gurus.
The Standard and Poor’s 500 index (SPX) put on a strong run higher from September 27th through October 5th, up 49 points or 2% in seven trading sessions. But last week’s trading results were much more modest, up only two points, essentially unchanged. SPX opened this morning at 2556 and is trading sideways. Are the bulls losing momentum or is this just one more pause in this lengthy bull market? Another way to measure this past week is to note that three of five days were down days and one trading session yielded a doji candlestick, the classic mark of indecision. And it looks like today’s trading in SPX may yield another doji candlestick.
Trading volume of the S&P 500 companies hit a recent low last Monday at about 1.4 billion shares, well below the 50-day moving average at 1.8 billion shares. But trading volume rose the rest of the week, breaking above the 50 dma on Thursday and dipping back a bit Friday, but remaining above the 50 dma. I have to wonder if the lack of progress on tax reform in the Congress is beginning to weigh on this market. I believe this market has priced in tax reform, but many analysts are beginning to doubt Congress’ willingness to pass the administration’s plan. Time is running out.
The Russell 2000 Index (RUT) continued the decline that began the previous week, opening Monday at 1510 and closing at 1502. RUT opened at 1503 this morning and is modestly lower at 1500 as I write this article. These are small losses, but the down trend is becoming clear. The nature of the Russell 2000 index, composed largely small to mid-capitalization stocks, leads me to conclude that money managers are closing their high beta positions, thereby reducing risk. Perhaps they are anticipating a breather or even a minor pull back.
The Standard and Poors 500 volatility Index (VIX) spiked up a bit last Monday, but had returned to historically low values by Friday, closing at 9.6%. Today, Monday, 10/16, VIX opened up a little higher at 9.95%, but this remains historically low. I keep a close eye on VIX. Many market analysts have been predicting a correction simply because VIX has been running at historically low levels. The key is to watch for an increasing trend higher in VIX. VIX is the early warning signal for the correction.
CBOE SPX Volatility Index (VIX)
Chart courtesy of StockCharts.com
Let’s examine the flash crash of 2015 for pointers on impending corrections. I plotted VIX above for the period of June 1st through the end of the year in 2015. The S&P 500 lost 41 points on Thursday, August 20th and VIX popped up to 19%. That was the early warning signal. I closed my positions on Thursday. At a minimum, one should have closed on Friday as VIX rose to 28%. The flash crash occurred on Monday as SPX lost 71 points and VIX spiked to 53% intraday. SPX hit its low on Tuesday at 1867, a net loss of 10% from Thursday’s open. The flash crash on Monday was predicted by the previous two days of spiking VIX values.
I track VIX because it shows us when the largest institutional money managers are beginning to be concerned. And right now, they are as calm as they have been in years. Don’t let the doomsday gurus spook you. You don’t want to miss out on this huge bull market. But we could see a pull back or correction at any time. At a minimum, add trailing stops to your stock positions and contingency stop loss orders to your option positions. Continue to trade from a bullish posture, but keep your stops tight.
New All-Time Highs
- Written by Dr. Duke
The Standard and Poor’s 500 Index (SPX) broke out on Monday to set a new all-time high, but that was only the beginning of a very bullish week for stocks. SPX closed today at $2500, the fourth new all-time high this week.
Trading volume of the S&P 500 companies trended right at or just above the 50 day moving average (dma) all week, but spiked much higher today, up to 3.0 billion shares, as compared to the 50 dma at 1.9 billion shares. Today’s spike higher was due to what is called “quadruple witching”, the expiration Friday each quarter when stock index futures, stock index options, stock options, and single stock options all expire. This has always resulted in a high trading volume day in the markets.
The recent trends in the S&P 500 trading volume may be instructive. If we ignore the quadruple witching exception today, this week’s trading volume, as the market hit new all-time highs, was lower than last week, as the market was faltering. That tells me that traders are primarily focused on a fear of correction and avoiding losses. Market commentary this week seemed to focus on rationalizing why the market continues higher in spite of congressional dysfunction and North Korea’s saber rattling.
Last week, traders were worried about hurricane damages, and the week closed with everyone focused on North Korea’s Founders day on Saturday and what the short fat tyrant might do to celebrate. But Monday came and it was a rerun of Happy Days. The hurricanes were suddenly ancient history and even after North Korea launched another ICBM last night, and London endured another terrorist attack before the market opened this morning, the market remained ebullient.
The Russell 2000 Index (RUT) took a breather last week from its remarkable bullish run that started in late August. RUT joined its big brother indices this week and ran higher, but the difference is that Russell remains well short of its all-time highs that were set back in July. The collapse of RUT from July 28th to August 21st covered 6.4% - near market correction territory. Its run higher since then has been significant, up 5.4%, but it had a lot more to recover than SPX and the NASDAQ Composite. RUT closed today at $1432, well short of the $1450 close on August 25th. RUT seems to be behaving as the leveraged version of the S&P 500 Index. In one sense, this isn’t surprising since RUT is made up of higher beta stocks, but the behavior over the past several weeks seems extreme.
The NASDAQ Composite’s price action this week is unlike SPX or RUT. NASDAQ closed today at $6448, attempting unsuccessfully twice this week to break the resistance level set by the opening high of $6460 on July 27th.
NASDAQ trading volume was similar to SPX, trading at or just under the 50 dma all week, with the exception of today’s quadruple witching volume spike.
Market volatility remains historically low. The volatility Index for the Standard and Poors 500 Index, VIX, moved lower all week, closing today at 10.2%. I read and heard market analysts this week expressing concern that such low levels of volatility must be predicting a correction, but they are proving the old adage that the market can continue trading however it wishes far longer than your money will last.
I displayed the price charts for SPX, RUT and NASDAQ for the past 18 months and looked for the overall long-term trend. The differences were intriguing. Russell has run steadily higher since March 2016, but has largely traded sideways since May. However, Russell takes the prize for price volatility. NASDAQ displays a solid uptrend from July 2016 through July of this year, but is largely flat for the past six weeks or so. The S&P 500 has the steadiest and most consistent upward trend line from March 2016 to today’s close. This index price chart comparison reinforces the conclusion that the overall market trend is bullish, but far from a high trading volume, “risk off” or “all in” bull market. Market participants are enjoying their gains but worried that it has gone too high, too fast. We see rapid dips that are just as quickly bought back to recover the bullish trend. The more defensive stocks of the S&P 500 display the steadiest and most consistent bullish trend. The bulls are in control, but they are also nervous. Congressional dysfunction and North Korea are the “monsters in the closet”. Continue to trade largely from a bullish posture, but keep your stops tight. Don’t short this market. I was protecting my portfolio with long index puts last Friday and was burned on Monday as the markets shrugged off all worries to run higher.
The Bulls Are Resting
- Written by Dr. Duke
This week’s price action in the Standard and Poor’s 500 Index (SPX) has tracked almost perfectly sideways, closing Friday within a dollar of Monday’s open. Friday’s price action resulted in the classic doji candlestick, where the opening and closing prices are very close or identical (five cents apart on Friday). The doji candlestick is the result of market indecision; the strength of the bulls and the bears are almost perfectly matched. But note that this doji is very close to the all-time high of SPX, so the bulls are holding up this market very well.
The Russell 2000 Index (RUT) has been the weakest of the major market averages all year and the contrast last week was particularly stark as RUT ran steadily lower all week. RUT's bearish trend continued this week, but RUT bounced strongly on Friday, recovering almost all of Thursday’s losses. RUT now is running roughly at its March peak. RUT has now eclipsed four previous all-time highs and is almost three percent below its most recent high on July 25th. Support around $1396 held through June and July, so I will be keeping a close eye on that support level. If RUT breaks support, I will be concerned about the overall market following suit.
The SPX volatility Index, VIX, spiked up over 11% last week and essentially moved sideways with the markets this week, closing Friday at 10.0%. Volatility remains at historically very low levels. Some of the recent correction chatter is based on the history of periods of low volatility preceding a major correction. While that is true, they fail to note that those periods of low volatility may last a long time. As many wise traders have observed, you can lose a lot of money waiting on the market to do what you predicted.
This market is nearly perfect for my SPX iron condor trades with the August and September positions standing at gains of 14% and 4%, respectively. No adjustments have been necessary for these trades, in contrast to the July SPX iron condor that required three adjustments to finally reach a gain of 12%.
I am still playing this market as a sideways to bullish trend, but I am cautious. it is a nervous market. Many traders are concerned about giving back any of the gains from this bullish trend. Their hands are on their sell buttons.
Is a Correction on the Horizon?
- Written by Dr. Duke
The last two weeks have rattled many market analysts. As part of my effort to monitor the markets for my clients, I track several newsletters, read various blogs, and watch selected programs on the financial cable networks. The large number of analysts recommending their clients move to cash and/or hedge the markets by buying index put options has surprised me.
The Standard and Poor’s 500 Index (SPX) closed yesterday at 2425, up 15, but the severe dip last Friday (6/30), and Thursday’s collapse down to 2423 unnerved many market participants. The bulls came back to the table yesterday, recovering all of Thursday’s losses, and bringing SPX solidly back to the middle of the recent trading range. The bulls have bought the dip one more time.
The Russell 2000 Index (RUT) price chart is markedly different from SPX or the NASDAQ Composite – much choppier, as RUT has largely just traded sideways all year. RUT traded down to the 50-day moving average (dma) this past Thursday, but recovered almost all of that loss yesterday. The Russell 2000 index has been much more volatile than the other major market indices. RUT hit an all-time high in late April, and then proceeded to decline to its recent trading lows by mid-May. Then RUT swung all the way back to match the April highs in early June.
The SPX volatility Index, VIX, spiked on last Thursday’s decline, and exceeded 15% briefly on Thursday this past week, but closed yesterday at 11.2%, well within the range from earlier this year. Comparing yesterday’s closing VIX at 11.2% with the minor pullbacks in April and May of 15% to 16% appears comforting, but if we look at the November 2016 correction, VIX peaked at 23%. And that didn’t happen overnight. It required nine days to climb from 12.9% to that high of 23%. We aren’t seeing that kind of volatility spike building here.
Trading volume is another critical market indicator, whether we are looking at an individual stock or a broad market index. Above average trading volume reinforces the momentum of the price move; everyone either wants to jump into this stock or everyone is trying to get out. Trading in SPX yesterday at 1.7 billion shares was well below the 50 dma at 2.1 billion shares. The NASDAQ Composite followed suit with 1.7 billion shares, below its 50 dma at 2.0 billion shares. This tells me that the large institutional traders are not panicked and making any large moves, whether that be moving to cash or going “all in”.
One final comparison is worthwhile. Pull up the SPX price chart for the flash crash of August 2015. For several days of the week preceding the flash crash on Monday and Tuesday, SPX traded lower and closed at or near the lows for the day. In recent weeks, we are seeing several long lower candlestick shadows – traders are buying when the market hits the intraday lows. They aren’t selling into the close.
I don’t believe this current price volatility is preceding a “sky is falling” moment. However, many market analysts are nervous, so we will continue to see price volatility. I remain cautiously bullish. Watch your positions carefully. Keep your stops tight.