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Written by Dr. Duke

Category: Dr. Duke's Blog

Created: 03 October 2020

Last Updated: 03 October 2020

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We have been dealing with higher than normal levels of volatility in the market all year: Covid-19, the economic shutdown, riots and looting in our major cities, and record setting levels of political rancor. Then we learn that the President has tested positive for Covid-19 and market volatility popped up even more on Friday.

The Standard and Poor’s 500 Index (SPX) closed yesterday at 3348, down 32 points or just under 1%. SPX had traded higher until the news about President Trump hit Friday and we gave back most of those gains, closing the week essentially flat, up 0.4%. With the exception of Wednesday, trading volume for the S&P 500 companies remained below average all week. Lower trading volume on Friday was actually good news, suggesting the market wasn’t too concerned about the news about the President.

The volatility index for the S&P 500 options, VIX, opened the week at 27.2%, and was pretty steady and somewhat lower until Friday when it spiked up to 28% on the news about the President. But VIX calmed a bit and closed at 27.6% Friday.

IWM, the ETF based on the Russell 2000 group of companies, had a much better week than the other large-cap market indices, opening the week at 148.37 and closing Friday at 152.85, up 4.48 points or 3% for the week. The Russell 2000 companies are small to mid-capitalization stocks that tend to lead bull markets higher and bear markets lower. The fact that IWM could tack on 3% in a week when the S&P 500 only managed less than one half of one percent is a notable bullish sign.

The NASDAQ Composite index closed yesterday at 11,075 for a loss of 251 points or 2.2%. Unlike the Russell 2000, NASDAQ was essentially flat for the week, opening at 11,084 and closing at 11,075, down 0.08% for the week. With the exception of Wednesday, NASDAQ trading volume was at or below the 50-day moving average all week. It is worth noting that trading volume was barely below the 50 dma on Friday after the bad news hit the market.

The news that President Trump had contracted Covid-19 was certainly a scary event for the country, and especially on top of all of the other turmoil. However, I take some comfort from the market’s reaction Friday. Losses on the large blue-chip market indices were minimal and trading volume was below average. Traders didn't hit the panic button.

The Russell 2000 companies traded higher all week and had a strong day on Friday, gaining almost a half of one percent on Friday alone. Those small to mid-cap stocks are the stocks we watch to see if we are going over the cliff. They are the canaries in the coal mine. The opposite is also true. These are the so-called “risk on” stocks.

All of these measures support the thesis that the market still has strong bullish support. But the market consensus is also very anxious and concerned. If you are able to accept moderate levels of risk, there are opportunities out there. But scale back on the amount of capital at risk in your trades and stop them out quickly.

Remain vigilant. This volatility isn’t going away anytime soon.

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Written by Dr. Duke

Category: Dr. Duke's Blog

Created: 19 September 2020

Last Updated: 19 September 2020

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The Standard and Poor’s 500 Index (SPX) closed yesterday at 3319, down 38 points or 1.1%. SPX lost 1.3% of its value over the week. The 50-day moving average (dma) provided support to the sell-off that started last week until yesterday when the index broke through the 50 dma at 3343. I wondered last week whether this was just a temporary step on an overall trend lower, or part of a sideways cooling off period. Friday’s break of the 50 dma along is evidence on the side of a more significant pull back.

Trading volume for the S&P 500 companies spiked up significantly on Friday. Normally I would interpret that as reinforcement of the drop of the index and the break of the 50 dma. However, Friday was what is known as quadruple witching, the expiration of stock index futures, stock index options, stock options, and single stock futures on the same day. This occurs on the third Friday of March, June, September, and December and always contributes to higher volatility and wild market swings. Perhaps that gives us hope for a bounce on Monday. Perhaps not.

The volatility index for the S&P 500 options, VIX, opened the week at 25.9%, declined to low of 24.8% on Wednesday and closed the week at 25.8%. All in all, volatility remains steady and moderately high. Traders are nervous and on guard.

IWM, the ETF based on the Russell 2000 group of companies, has managed to continue to trade along its 50 dma all week, closing down 0.4 points on Friday at 153.29. That represented an increase of 1.8% for the week, quite an accomplishment for this week.

The NASDAQ Composite index closed yesterday at 10793 for a loss of 117 points or 1.1%. However, NASDAQ was down 2% for the week, breaking the 50 dma on Thursday and confirming that break of support on Friday.
NASDAQ trading volume was below average all week and spiked on Friday due to quadruple witching, so we should not read too much into that volume spike.

Markets hate uncertainty and we are in the most turbulent times of my lifetime. The coronavirus epidemic, economic shutdowns, political turmoil, rioting and looting in our large cities are featured on every newscast. It is a challenge to remain even marginally optimistic. The market reflects those anxieties. This market is volatile and very nervous.

If you can’t watch it throughout the day, you would be well advised to stay largely in cash and wait on the sidelines. There is nothing wrong with taking a pass right now.

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Written by Dr. Duke

Category: Dr. Duke's Blog

Created: 26 September 2020

Last Updated: 26 September 2020

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The Standard and Poor’s 500 Index (SPX) closed yesterday at 3298, up 52 points or +1.6%. That sounds great if we stop there, but SPX barely recovered Monday’s opening at 3286, so we were only up 0.4% for the week. Of course, we should be thankful for that. With all of the turmoil going on in this country, market volatility is to be expected. The June 8th high at 3232 provided support on Wednesday, and Thursday and Friday’s trading built on that base. However, we have yet to recover the 50-day moving average (dma) that was broken last week. The S&P 500 is now trading in a channel defined by the June high on the lower edge and the February 
pre-correction high on the upper edge. Trading volume for the S&P 500 companies opened the week above the 50 dma, but remained below average all week.

The volatility index for the S&P 500 options, VIX, opened the week at 28%, and closed Friday at 26%. It would be a mistake to count this decline as encouraging. Traders remain nervous and poised over the sell button.

IWM, the ETF based on the Russell 2000 group of companies, succumbed to the bearish pressure this week, closing up 1.6% at 146.41 on Friday, but remained down 1.9% for the week. The small to mid-cap stocks of the Russell 2000 are often the first to be sold in a bear market and the first to be bought in a bull market. Hence this week’s trading is a concern. IWM never did recover its 
pre-correction high.

The NASDAQ Composite index closed yesterday at 10,914 for a gain of 241 points or 2.3%. Even more positively, NASDAQ was up 2.9% for the week. It has not recovered its 50 dma, broken last week, but it is only 111 points away and remains 1,097 points above its pre-correction high at 9817. NASDAQ trading volume was at or below the 50 day moving average all week.

Markets hate uncertainty and is being fueld by the coronavirus epidemic, economic shutdowns, political turmoil, rioting and looting in our large cities. The market reflects those anxieties. This market is volatile and very nervous. Trading this week supports the thesis that we aren’t seeing the beginning of a bear market trend. Bullish support continues to hold support. NASDAQ remains well above its pre-correction high. Thursday and Friday’s market strength is encouraging. However, the light we think we see may be the train coming at us.

Remain vigilant and largely in cash.

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Written by Dr. Duke

Category: Dr. Duke's Blog

Created: 11 September 2020

Last Updated: 11 September 2020

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The Standard and Poor’s 500 Index (SPX) closed today at 3341, up a couple of points on the day but down almost one percent on the shortened holiday week. It appears as though the 50-day moving average (dma) provided support to the sell-off that started last week. The index nearly touched the 50 dma on Tuesday and Thursday, and then broke through the 50 dma today, but recovered decisively to close above support. It is hard to take much encouragement from today’s bounce; it has been a volatile week for the market. The question remains whether this is just a temporary step on an overall trend lower, or just part of a sideways cooling off period. Trading volume for the S&P 500 companies spiked up above the 50-day moving average (dma) on Tuesday but has declined the rest of the week. That decline in trading volume was a welcome relief, suggesting there was little interest in a strong move to cash.

The volatility index for the S&P 500 options, VIX, spiked higher on Tuesday, but dropped back at the close and has declined steadily all week – again, an encouraging sign. VIX closed today at 26.9% after hitting an intraday high of 36% on Tuesday. Much of the anxious edge has subsided this week.

IWM, the ETF based on the Russell 2000 group of companies, traded along its 50 dma all week, closing today at 149.15, down only one point today, but down 1.3% for the week. IWM traded more weakly than the broad market indices this week, as one would normally expect. The fact that IWM didn’t fall off the cliff is encouraging because these are usually the first stocks to be sold when the panic starts.

The NASDAQ Composite index closed today at 10,854 for a loss of 66 points. However, NASDAQ was relatively flat this week, closing down 0.4% for the week. The talking heads were talking sector rotation today, but NASDAQ remains reasonably solid. Trading volume was below average all week and the index essentially traded sideways. NASDAQ remains almost ten percent above its 
pre-correction high. For all the talk of NASDAQ being the poster child for this frothy market, it didn’t sell off as strongly as one might have expected.

As everyone around me knows, I have been worried about this market for quite a while now. The prices just didn’t seem consistent with the economic damage we continue to witness. Many of my stops tripped last week, but I have added new positions this week. I am not bullish, but I am doing my best to extract some quick profits where I can find them. In my opinion, the market remains over priced. There are opportunities if you have the freedom and expertise to find them.

I recommend you watch this market very diligently. It turns on a dime. I played the Peloton earnings announcement last evening and closed the trade only a few minutes after the market opened this morning for a 58% gain. If I had waited, nearly all of those gains would have been gone by noon.

This market is volatile and very nervous. If you can’t watch it throughout the day, you would be well advised to stay largely in cash and wait on the sidelines. There is nothing wrong with taking a pass right now.