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- Written by Dr. Duke
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The markets continue to take a pause after the strong run higher since the beginning of November. The Standard and Poor’s 500 Index (SPX) just traded sideways to slightly lower this week, closing today at 3558, down 24 points for the day and down 1.2% for the week. To keep it in perspective, SPX gained over 333 points or ten percent since the first of the month. So, we have lost very little of those gains. That is significant. Trading volume for the S&P 500 companies declined steadily this week and ended the week well below the 50-day moving average (dma).
The volatility index for the S&P 500 options, VIX, was unchanged this week, opening at 23.7% on Monday and closing today at precisely 23.7%. But stay awake. This remains a heightened level of volatility.
IWM, the ETF based on the Russell 2000 group of companies, traded slightly higher this week, opening the week at 176.49 and closing today at 177.50, up about one half of one percent. That was a small gain, but the stocks of the Russell 2000 tend to be the high beta stocks that lead markets higher as the institutions shift to “risk on” mode.
The NASDAQ Composite index just treaded water this week opening at 11,847 and closing today at 11,855, essentially unchanged for the week. NASDAQ’s trading volume was much stronger than that of the S&P 500 companies, increasing almost every day this week.
After a strong bullish run since the first of November, it would not have been surprising to see traders taking profits, but the market has essentially held its gains. The strong behavior of the Russell 2000 index is particularly encouraging. The largest risk we face in this market derives from the external events and rumors. Each day seems to bring news or rumors about Covid-19, the development of the vaccines and, of course, the sorting out of the election results. But the market held up rather well this week as some states chose to lock down once again. As the old saying goes, the beatings will continue until morale improves. I don’t know how many small businesses will survive. Barring some surprises next week, I think the bulls will remain in control. Volatility has declined but remains relatively high from a historical perspective. Watch your positions diligently.
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- Written by Dr. Duke
- Category: Dr. Duke's Blog
- Hits: 1967
You may recall the old joke about the optimist and the pessimist that fell off a skyscraper. As the optimist passed one of the intermediate floors, he was heard to say, “So far, so good.” It would be unrealistic to expect another market performance this week like we saw last week. But the markets did hold. The Standard and Poor’s 500 Index (SPX) gained 48 points on Friday, closing at 3585, but that close was almost precisely where SPX opened the week, at 3583. Friday’s close matched SPX’s all-time high set on September 2nd. Monday’s trading volume matched record highs earlier this year, but volume fell each trading session this week with Friday’s volume of 1.93 billion shares coming in well below the 50-day moving average of 2.53 billion shares.
The volatility index for the S&P 500 options, VIX, opened the week at 24.8% and closed yesterday at 23.1%. Intraday lows all week ranged around 22.5%. These are the lowest levels of volatility since mid-August. The split nature of the election with neither party dominating the Congress appears to have reduced uncertainty, always a bullish factor for the markets.
IWM, the ETF based on the Russell 2000 group of companies, opened the week with a huge gap up in price, but then backed off that high and traded sideways the balance of the week, closing Friday at 173.50. IWM gained 6% from last Friday’s close to yesterday’s close. That represents a bullish move for the entire market.
In contrast to last week, the NASDAQ Composite index lagged behind this week, opening at 12,047 and closing Friday at 11,829, down 1.8% for the week. NASDAQ’s trading volume was similar to that of the S&P 500 companies, spiking Monday but declining the balance of the week.
This week’s market behavior was essentially sideways with minimal change in either direction. After the very strong market last week, this sideways move was very bullish. We could have easily seen a rash of profit taking this week and given back much of last week’s gains.
I am trading this market more aggressively now. We have survived the cautionary September - October period when so many crashes have occurred in the past. Barring some unforeseen news events, I think the bulls will remain in control. Volatility has declined but remains relatively high from a historical perspective. Watch your positions diligently.
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- Written by Dr. Duke
- Category: Dr. Duke's Blog
- Hits: 1969
The Standard and Poor’s 500 Index (SPX) looked weak last week, but it really fell out of bed this week. SPX opened the week at 3441, broke the 50-day moving average (dma) on Monday, and then gapped open lower on Wednesday. Thursday looked better, but today’s trading took us even farther down, closing at 3270, down 1.2% today and down 5% for the week. SPX found support today at 3234, near the high from June 8th. SPX bounced from there, recovering 36 points of today’s loss. That recovery gave the bulls something to cling to. Trading volume on SPX has been running consistently below average until Wednesday this week, and volume remained well above the 50 dma the balance of the week.
The volatility index for the S&P 500 options, VIX, closed today at 38% after opening at 41% this morning. VIX began the week at 29%, so it was quite a ride. Today’s decline gives the bulls some hope, but not much. This is close to if not at the “all in cash” level.
IWM, the ETF based on the Russell 2000 group of companies, resisted the downward trend last week and even to some degree on Monday and Tuesday, but IWM gave way on Wednesday, finally closing today at 153.09, down 1.3% for today and down 4.9% for the week. The low today at 151.39 was very close to the close on June 8th at 151.99. IWM recovered much of today’s losses, similar to the pattern observed in the S&P 500.
The NASDAQ Composite index has been trading steadily lower since October 13th, unlike SPX and RUT that seemed to resist the downward push until this week. NASDAQ closed today at 10,912, down 2.5% on the day and down 4.6% for the week. Surprisingly, NASDAQ’s trading volume barely reached the 50 dma today and didn’t spike much above average on Wednesday’s big drop. NASDAQ did not recover much of its losses today before the close, unlike SPX and IWM.
In summary, all of the broad market indices are screaming bear market this week. The small to mid-cap stocks of IWM and the Russell 2000 index are signaling “risk off”. The only bright spot to be found was the recovery from today’s lows before the close. But that may be grasping at straws.
The move today of IBD’s market assessment moved from Confirmed Uptrend to Market In Correction reinforces the seriousness of this bear market.
The conventional wisdom is that the market is spooked by the prospect of more economic closures in the states. But one has to believe that the upcoming election also has people taking risk off the table. That leaves us with the bottom line: How will the election result Tuesday affect the market?
The most prudent action is to sit on the sidelines and watch. In last week’s newsletter, I opined that it wasn’t a bad time to be largely in cash. I have changed my mind. Go to 100% cash on Monday if you aren’t there already.
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- Written by Dr. Duke
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It is hard to overstate the strength of the market this week. The Standard and Poor’s 500 Index (SPX) essentially recovered the losses of the past three weeks in five trading sessions this week. SPX opened the week at 3,296 and closed yesterday at 3,509, up 6.5% in one week! That included three trading session opens with large opening gaps higher. Even Friday’s pause in this week’s strong run had a positive aspect in that traders took the market lower, but that slight pause was seen as a bargain as traders pushed the market higher to close very close to Friday’s open. SPX trading volume spiked on Tuesday but trading volume then declined and closed the week well below average.
As one might have expected, the volatility index for the S&P 500 options, VIX, made a dramatic decline this week as SPX headed higher. VIX opened the week at 38.6% and closed yesterday at 24.5%, roughly at the base level of the past couple of months.
IWM, the ETF based on the Russell 2000 group of companies, ran higher this week, largely in parallel with the broad market indices. IWM opened the week at 154.77 and closed Friday at 163.62, up 5.7%. Although IWM’s increase this week was less than that of the S&P 500, it is worth noting that IWM didn’t decline as far in October as the broad market indices.
The NASDAQ Composite index was the star in this bullish market run this week, closing at 11,895 Friday, up 8.0% for the week. The high-tech stocks that were the center of the bullish run earlier this year have returned to center stage. Unlike the S&P 500, NASDAQ trading volume gained steadily this week.
All of the broad market indices made a strong recovery this week. Everyone has their own explanation, but I think the assessment to which I personally subscribe is that the market is reacting very positively to the prospects of a split election result with neither political party dominating. Many may feel that this election result is less than optimal, but markets prefer minimized economic and political changes simply because that minimizes the prospect of unintended consequences, resulting in reduced risk.
Another indicator of the rapid price swings of this market is seen in IBD’s market assessment that has moved from Confirmed Uptrend to Market In Correction, and then back to Confirmed Uptrend in only 33 trading sessions or about six weeks. I have not done the research, but I suspect this may be a record round trip.
I would caution readers about returning to the market too aggressively. This is especially true in two cases. If your risk profile is more conservative, then caution remains the rule. Even if you are willing to take on more risk, a significant criterion is whether you are able to monitor your positions closely throughout the day. This market moves quickly.
I have personally started investing more capital into the market this week, steadily increasing each day as the market continued higher. But the need for caution remains.
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- Written by Dr. Duke
- Category: Dr. Duke's Blog
- Hits: 1929
Take a look at the price chart for the Standard and Poor’s 500 Index (SPX). The S&P 500 index hit its all-time high before the March correction at 3386 on February 19th. It recovered that high and set a new all-time high at 3581 on September 2nd. On October 12th, SPX attempted to retake that earlier September high, but only got as far as 3534. Since then SPX has been largely wandering sideways around 3450, closing today at 3465. We have support at the February high of 3386 and the 50 day moving average (dma) at 3408. Resistance will be found at the October high at 3534 and the September high of 3581. I expect SPX to continue this sideways dance until after the election. SPX closed Friday at 3465, up 12 points on the day but down 0.8% for the week. Trading volume for the S&P 500 companies continues to largely track below average, so none of the large players are venturing out very far in either direction. They are waiting for the dust to settle.
The volatility index for the S&P 500 options, VIX, rose on Monday and Tuesday, but declined for the rest of the week, with the close at 27.6% Friday being essentially unchanged for the week. These are elevated levels of volatility. Don’t make the mistake of becoming complacent.
IWM, the ETF based on the Russell 2000 group of companies, posted more bullish trading action than the larger blue cap indices. IWM’s pre-correction high was 167.59 and the close on October 12th at 163.79 was the closest IWM has come to recovering those levels. Since October 12th, IWM has effectively traded sideways, closing Friday at 163.07, less than five points below that previous high. The bullish behavior of the small to mid-cap stocks that make up the Russell 2000 index is encouraging. These are the “risk on” stocks for the market.
The NASDAQ Composite index took a large loss on Monday, but traded sideways the balance of the week, closing Friday at 11,548, down 1.6% for the week. Trading volume remains below average.
In summary, the S&P 500 index and NASDAQ Composite are trading sideways and holding price levels above their pre-correction highs and above their 50 day moving averages. The Russell 2000 companies nearly recovered their
pre-correction highs on October 12th. Unlike the larger market indices, IWM has not declined much at all and is trading sideways within 2% of the highs set earlier this month. These small to mid-cap stocks are signaling “risk on”.
One other bullish signal comes from the candlestick analysis. When a stock or index price trades lower on the day and then recovers to close much higher, it results in a long lower candlestick shadow. That is a bullish signal because it documents the situation where the stock or index was being sold off, but then a large number of traders saw that lower price as a bargain and began a buying spurt to result in a much higher closing price for the day. The S&P 500 index, NASDAQ Composite, and Russell 2000 Index all displayed long lower candlestick shadows on both Thursday and Friday this week.
I conclude that this market has an underlying level of strong bullish support, but traders are cautious due to the uncertainty of this election. Elevated volatility levels are also warning us to be cautious. This sideways churning or treading water price pattern will continue through next week and maybe even into the following week if the election results are in doubt.
The underlying uncertainty plaguing this market will be with us at least until after the election and may last even longer. This isn’t a bad time to be largely in cash.
