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One of the advantages of being a perennial bear is that eventually you get to say, “I told you so”. This incredibly strong bull market was overdue for a minor pause and I believe that is all we are seeing at this point. The Standard and Poors 500 Index (SPX) hit its recent all-time high on January 26th at 2873. Friday’s close at 2762 represented a decline of 3.9%. The next obvious support level would be the
50-day moving average (dma) at 2715. That would be a 5.5% decline. Many technical analysts look for minor pull backs in the 5 to 7% area and refer to corrections as declines in excess of 10%.
What triggered last week’s pull back? The most common answer cited by analysts was the FOMC announcement that suggested more interest rate increases were coming this year. That should not have been a surprise and one or two modest interest rate hikes will still leave us at historically low levels of interest.
We are in the middle of the earnings announcements for the fourth quarter of 2017 and those announcements have been generally exceeding analysts’ estimates. The effects of the recent tax law changes are only beginning to percolate through the economy. Just consider one of many examples: Apple’s announcement of investing 350 billion dollars into the U.S. economy has not yet resulted in any construction expenditures or new jobs. But it will. My point is simple. The economic foundations are strong. A minor pull back in a strong bull market is perfectly normal. There is no reason to panic.
Trading volume in the S&P companies was above the 50 dma all week as large institutions adjusted their portfolios in the face of the pull back. Many traders are locking in recent gains. When we draw the Bollinger bands on the S&P 500 chart, we see another clue as to where this pull back ends. The lower edge of the Bollinger bands is at 2725, or down 5.2% from the high on January 26th. That 5% number is coming up frequently.
The Russell 2000 Index (RUT) closed Friday at 1547, down 64 points or 4.1% from its recent high of 1611 on January 23rd. RUT has traded much more conservatively for the past month so one might expect less of a pullback in this index. RUT broke its 50 dma at 1553 today.
The NASDAQ Composite has traded strongly in January, matching the trajectory of the S&P 500 index. Similar to SPX, trading volume in NASDAQ exceeded the 50-day moving average (dma) all week. NASDAQ closed Friday at 7241, down 3.5% from its closing high on January 26th of 7506. NASDAQ’s 50 dma stands at 7068, or down 5.8% from the 1/26 high – another number around 5%.
The volatility index of the S&P 500, VIX, closed Friday at 17.3% after opening the week at 11.7%. This remains a relatively low level of volatility. We hit 17.3% intraday on August 11th last year. I am certainly not suggesting you ignore this increase in volatility, but pull backs and corrections normally display levels of 25% or higher. Friday’s VIX, at 17.3%, was higher than any VIX number from 2017, but that was a record year for low volatility. In 2016, we hit highs of 23% in November, 26% in July, and hit 29% twice, once in January and once in February. VIX is a very good warning signal, and we should pay attention, but the current levels are far from correction territory.
My clients routinely have trailing stops and contingent stops on all stock and option positions, and Friday’s price actions certainly tripped several of those stops. But I don’t think wholesale moves to cash are warranted as yet. Monday’s price action will be a critical sign. I am inclined to think the weekend will give traders time to reflect on the market fundamentals and reduce some of the interest rate hike concern.
If we are looking at a pull back of the order of 5%, we may be close, and the 50 dma lines may be expected support levels, at least for SPX and NASDAQ. If we break the 50 dma on SPX this week, I will be making some serious moves to cash my portfolio. But I don’t expect that to be the case. The bulls just need a breather.
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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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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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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.
