Dr. Duke's Blog

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Written by Dr. Duke

Created: 13 January 2023

The Standard and Poors 500 index (SPX) closed today at 3999, up 16 points on the day or +0.4%. SPX broke out above the 200-day moving average (dma) today, a positive sign for the S&P 500 but it is far too soon to break out the champagne. SPX has run into strong resistance around 4100 three times since September of last year. Trading volume continues to be rather anemic, running along the 50 dma again this week.

VIX, the volatility index for the S&P 500 options, closed today at 18.4% after opening the week at 21.8%. You have to go back to January of last year to find volatilities below 18%. I am unsure this lower level of volatility actually reflects complacency on the part of the large institutional traders. The flat trading volume in the S&P 500 tells me they are largely still on the sidelines and remain fully hedged. They are waiting for a successful test of the 4100 level on SPX.

I track the Russell 2000 index with the IWM ETF. IWM closed today at 187.05, up 1.2 on the day or +0.7%, but IWM was up 4.5% for the week, much stronger than its big cap brothers. IWM broke out above both its 50 dma and 200 dma this week. The next level of resistance for IWM is around 188, where the rallies in November and December failed. Seeing the Russell 2000 lead the large cap stocks is very encouraging.

The NASDAQ Composite index closed at 11,079 today with a gain of 78 points or 0.7% but closed the week up nearly four percent. NASDAQ broke out above its 50 dma on Wednesday and made additional progress higher for the balance of the week. NASDAQ’s trading volume broke the 50 dma four times this week, but those were modest spikes in volume. However, NASDAQ must grow 3.6% just to challenge the levels of resistance from November and December when the earlier rallies failed.

Yale Hirsch of the Stock Trader’s Almanac was the first analyst to define and publish the Santa Claus Rally. This year’s Santa Claus was weak, but positive, with an opening on 12/23 at 3815 and a close on 1/4 at 3853, or +1%. Yale also would track the first five days of January and that was also positive this year. The January Barometer, defined as the trading record for the entire month, will be the next signal. In years when the Santa Claus rally, the first five days, and the full January results are all positive, the full year has been positive 90% of the time with an average gain in the S&P 500 of 17.5%.
 
FactSet Research published a report this week on the projected earnings of the S&P 500 for the fourth quarter of 2022. They predict a decline of 3.9%. This would be the first decline since the third quarter of 2020, at -5.7%. This earnings decline sets up the next question. Has the S&P 500 index price decline of 2022 been sufficient to balance that projected earnings decline? Or do we need prices to decline further to reach reasonable P/E ratios?
 
I remain cautious. I entered a few trades this week, but I am watching them like a hawk. My condor trades are on fire in this market. I have already closed both the January and February positions, leaving us up 11% for the year. The S&P 500 is only up 3% over the same period of time. Ouch! I just threw my arm out patting myself on the back.

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Written by Dr. Duke

Created: 07 January 2023

The Standard and Poors 500 index (SPX) closed yesterday at 3895, up 87 points on the day or 2.3%. That close was very close to the 50-day moving average (dma) at 3904. Breaking out above the 50 dma would be a positive sign for the S&P 500 that has been trading sideways since December 19th. On the other hand, a break below 3775 and then 3700 would be a significant bearish signal. Trading volume has run along the 50 dma in this first week of January and that is a great improvement from the last two weeks.

VIX, the volatility index for the S&P 500 options, opened the year at 23% and closed yesterday at 21% with a decline of 1.3 points yesterday alone, based on the strong bullish gain on Friday.

I track the Russell 2000 index with the IWM ETF. IWM closed Friday at 177.58, up 3.90 on the day or +2.3%, but IWM was up less than one percent for the week. The next level of resistance for IWM is the 50 dma at 179, although Friday’s move was a definite departure from the sideways channel of trading since December 16th.

The NASDAQ Composite index closed at 10,569 yesterday with a gain of 264 points or 2.6% but closed the week essentially flat with a gain of less than one percent. NASDAQ’s trading volume ran consistently along the 50 dma during this first week of trading in January.

The period from Thanksgiving into the first of the year has historically been bullish and small caps have normally outperformed the blue chips over this period of time. That didn’t happen this year.
 
Yale Hirsch of the Stock Trader’s Almanac was the first analyst to define and publish the Santa Claus Rally. Hirsch’s famous saying was: If Santa Fails To Call, Bears May Come to Broad and Wall. The Santa Claus Rally is defined as the net gain or loss during the last five trading days in December together with the first two trading days in January. This year’s Santa Claus was weak, but positive, with an opening on 12/23 at 3815 and a close on 1/4 at 3853, or +1%.
 
The Stock Trader’s Almanac also tells us to watch the first five days of trading in January and the full month of January, known as the January Barometer, as additional signs of what the new year has in store. The first five days of January trading will be confirmed with the close on Monday.
 
In years when the Santa Claus rally, the first five days, and the full January results are all positive, the full year has been positive 90% of the time with an average gain in the S&P 500 of 17.5%.
 
I am not forgetting the pain of 2022 and I remain cautious. I will be entering fewer and smaller trades as I watch the market pattern develop this month.

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Written by Dr. Duke

Created: 03 December 2022

The Standard and Poors 500 index (SPX) closed yesterday at 4072, down less than five points on the day but up 1.7% for the week. With the exception of the trading volume spike on Wednesday, volume has run well below the 50-day moving average (dma) at 2.6 billion shares. The week closed with 2.1 billion shares traded.

VIX, the volatility index for the S&P 500 options, opened the week at 22.1% and declined all week to today’s close at 19.1%. VIX opened 2022 at 17.6% and hit highs over 35% several times. Friday’s close was slightly lower than the previous low in August but above the April low of 18.5%.

I track the Russell 2000 index with the IWM ETF. IWM closed Friday at 188.05, up 1.09 on the day, and up 2.1% for the week. IWM has held up with three closes above its 200 dma but is encountering resistance around 189 from highs set in September and mid-November.

The NASDAQ Composite index closed at 11,462 yesterday with a loss of 21 points or 0.2% but closed the week up 2.8%. NASDAQ’s trading volume spiked on the large gain on Wednesday but declined the rest of the week, closing below the 50 dma.

The period from Thanksgiving into the first of the year has historically been bullish and small caps have historically outperformed the blue chips over this period of time. Although trading  was technically up this week, the market was very choppy. The S&P 500 index has managed to hold above the 200 dma, but we are off to a weak start for the Santa Claus Rally.
 
Trading volume remains well below average, suggesting that the large institutions and hedge funds are waiting on the sidelines for a clear direction to solidify.
 
SPX hit its low for the year on October 13th with a decline of 27% from the year’s opening. The market has risen 17% from that low to yesterday’s close. But this rise has been erratic and choppy. It doesn’t instill confidence. I remain largely in cash, but I am entering a small number of trades when I see opportunities. However, I am taking profits and closing out losses quickly.

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Written by Dr. Duke

Created: 25 November 2022

The Standard and Poors 500 index (SPX) closed this holiday shortened week at 4026, down 1.1 point on the day, but up 1.8% for the week. Trading volume was typical of Thanksgiving week with many traders on holiday. The period between Thanksgiving and the end of the year is traditionally bullish and this week appears to be following that trend, but this is an unusual year for the country and the economy. Volume ran below average all week and came in at 893 million shares today, well below the 50-day moving average (dma) at 2.6 billion shares.

VIX, the volatility index for the S&P 500 options, opened the week at 24.1% and declined all week to today’s close at 20.5%.

I track the Russell 2000 index with the IWM ETF. IWM closed today at 185.58, up less than half a point on the day, but IWM rose 1.5% this week. IWM broke through its 200 dma on Wednesday and held that level today.

The NASDAQ Composite index was essentially unchanged today, closing at 11,226, up only 59 points or less than half a percent. NASDAQ’s trading volume ran well below the 50 dma all week and traded only 2.2 billion shares today with the 50 dma at 4.75 billion shares.

Using the S&P 500 as our proxy for the market as a whole, the bullish rally that began on November 10th was stopped by the bears last week, but the support level at 3900 held (that support level was the high of the October rally that was stopped on November 1st).
 
Traditionally, the period from Thanksgiving into the first of the year has usually been bullish and small caps have outperformed the blue chips. So, this may be a reasonably bullish period for the market, even though we are far from being able to say the bear market has been broken.
 
To put things in perspective, The S&P 500 opened the year at 4797, declined and then rallied back to 4632 on March 29th. The latest rally took SPX to 4305 on August 16th. Today’s close is 16% below the high at the beginning of the year. Even if this bullish period culminates in the classic Santa Claus rally at the end of the year, we aren’t out of the woods yet. My caution will continue until we reclaim that SPX high of 2022.
 
However, I am trying pick off some low hanging fruit from now until the end of the year. But my finger is on the button for the escape hatch. I remain largely in cash, trading small, and taking profits whenever I can.

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Written by Dr. Duke

Created: 19 November 2022

The Standard and Poors 500 index (SPX) posted a classic doji candlestick on Friday with a close at 3695, up 0.5% on the day and down 0.3% for the week. Doji candlesticks are signals of indecision as the bulls push the market higher, only to have bears pull it back lower, and the market closes very close to where it opened. The bulls and bears are at a standoff. SPX essentially traded sideways this week with a high of 4029 and a low of 3907. Trading volume ran below the 50-day moving average (dma) all week with a minor exception on Tuesday.

VIX, the volatility index for the S&P 500 options, closed down yesterday at 23% after opening the week at 24%. Volatility effectively tracked sideways for the week with a high at 26% and a low at 23%, consistent with market trading action.

The NASDAQ Composite index closed Friday at 11,146, essentially flat with a rise of only one point, but down 0.8% for the week. NASDAQ’s trading volume spiked higher on Tuesday’s strong bullish run but declined the balance of the week.

The market continues to focus on record rates of inflation and fear that the Fed will raise interest rates too aggressively to curtail inflation. Last week’s CPI report provided some welcome news with the year over year CPI declining to 7.7% from the last reading of +8.2%. That prompted the bulls to push the market higher, reasoning that the Fed would relax their pace of rate hikes and the economy would begin to fire on all cylinders.
 
A couple of hawkish comments from FOMC members threw cold water on those expectations for the Fed slowing their rate hikes and the market stalled. The good news is that a new bearish downtrend didn’t occur. Thus far, the market is churning sideways on declining trading volume. My assessment is that the large majority of institutional traders are essentially sitting on the sidelines, waiting for a clear signal one way or the other.
 
Market analysts expect corporate earnings to take a hit as companies are unable to pass through the price increases they are incurring. Earnings growth for the third quarter of 2022 grew 2.2%, the lowest rate of growth since Q3 2020. Analysts expect stock prices to decline further to compensate for the decline in earnings.
 
Whether we like it or not, the economy is in recession. We clearly have a large number of able bodied Americans who are choosing not to work. Today, I saw a sign at Walgreens offering a starting bonus of $1,250 for a pharmacy technician.
 
I remain largely in cash, trading small, and taking profits whenever I can.

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Written by Dr. Duke

Created: 11 November 2022

The Standard and Poors 500 index (SPX) gapped open higher on Thursday recovering the losses on Wednesday. SPX closed today at 3993, up 37 points or +0.9% on the day and up 5.6% for the week. Trading volume ran below the 
50-day moving average (dma) early in the week and spiked higher on Thursday’s strong run higher.

VIX, the volatility index for the S&P 500 options, closed down today at 22.5% after opening the week at 25.7%. The largest decline in the week was on Thursday as the market spiked higher.

I track the Russell 2000 index with the IWM ETF. IWM followed the lead of the large blue chips all week, down on Wednesday and then spiking higher on Thursday. IWM closed today at 186.90, up 1.52 points or 0.8%, but up a full four percent on the week.

The NASDAQ Composite index closed today at 11,323, up 209 points or 1.9%, and up 7.7% on the week. NASDAQ’s trading volume spiked higher on Thursday’s strong bullish run but fell below the 50 dma today.

The market has been focused on two issues: record rates of inflation and the fear that the Fed would raise interest rates too aggressively to curtail inflation. Last week’s FOMC announcement pushed more analysts into the hard landing camp and the market responded negatively. The election results appeared to initially disappoint traders with a weak day on Wednesday. But the other core issue worrying the market has been the record rates of inflation and the CPI report this week provided some welcome news with the year over year CPI declining to 7.7% from the last reading of +8.2%.
 
I believe the decline in the CPI numbers encouraged traders that the Fed may be more inclined to moderate their rate hikes. However, all it will take is some hawkish comments from a Fed member to scare the market. I expect the extreme price volatility we have seen all year may continue.
 
The markets traded to a high on September 12th before entering this latest decline. At today’s close, SPX is 3.2% below those highs, NASDAQ is 8.4% below and IWM is only 1.1% below. The most bullish point here is how close the small to mid-cap stocks of the Russell 2000 (IWM) are to the earlier highs in September. IWM actually pulled back from that resistance level today. Those most recent highs are the next significant hurdle for the bulls.
 
This economy is far from healthy and one good CPI report doesn’t provide much confidence. I am testing the waters with a couple of bullish trades, but I remain cautious.

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Written by Dr. Duke

Created: 04 November 2022

The Standard and Poors 500 index (SPX) recovered earlier losses in the week and closed up 51 points at 3882, up 1.4% on the day and up 2.9% for the week. Trading volume ran at or above the 50-day moving average (dma) all week.

VIX, the volatility index for the S&P 500 options, closed down today at 24.6% after opening the week at 26.9%. Even though the market declined significantly after the FOMC announcement, VIX steadily declined all week. This divergence was an early signal that the decline earlier in the week wasn’t likely to continue today.

I track the Russell 2000 index with the IWM ETF. IWM followed the lead of the large blue chips today and rallied 1.4% to close at 178.68. But IWM remains down nearly two percent for the week. IWM’s rise yesterday was another signal that the decline earlier in the week wasn’t likely to continue.

The NASDAQ Composite index closed up 1.3% at 10,475 but remained down five percent for the week. NASDAQ’s trading volume fell below the 50 dma today.

The market has been focused on two issues: record rates of inflation and the concern that the Fed would raise interest rates significantly to curtail inflation. Market analysts have been debating whether the Fed policies will result in a so-called soft or hard landing for the economy. This week’s announcement has pushed more analysts into the hard landing camp.
 
The key question now is the degree to which earnings will be decreased by the record rates of inflation. The most fundamental analysis of a stock price is to view it as the price of the time adjusted cash flow for the stock’s business. Hence, if earnings are declining, the stock price must decline. Higher interest rates exacerbate this decline.
 
This week’s announcement of another 75 basis point increase in the federal discount rate was priced into the markets – no surprise there. However, Powell’s comments during the press conference spiked worries that more rate hikes are coming. Markets rose initially but then plummeted. Yet the VIX declined. This VIX divergence was a signal that the market consensus has not panicked.
 
I am not in the camp of the “sky is falling” bears, expecting a severe market crash, but I can’t be bullish in the middle of a recession. My recommendation remains to stay on the sidelines.

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Written by Dr. Duke

Created: 21 October 2022

The Standard and Poors 500 index (SPX) spiked higher today and closed up 87 points at 3753, up 2.4% on the day and up 3.1% for the week. Trading volume spiked to three billion shares today, well above the 50-day moving average (dma) at 2.4 billion shares.

VIX, the volatility index for the S&P 500 options, closed down today at 29.7% after opening the week at 32.3%. Even though the market was up dramatically today, volatility did not decline as much as I would have expected. Obviously, traders remain a bit on edge.

I track the Russell 2000 index with the IWM ETF. IWM followed the lead of the large blue chips today and rallied up almost four points to close at 172.70, up 2.2% today and up 1.5% for the week. Watching the small cap stocks lead the market higher is encouraging. The question is whether it will hold next week.

The NASDAQ Composite index set a new low for the year last week, down 36%. But today’s strong reversal changed that tune, closing up 2.3% at 10,860, and up 2.7% for the week. However, NASDAQ’s trading volume barely reached the 50 dma today, so I have to wonder if this really is the beginning of a new trend higher.

The market set its new low for the year last Thursday and tried to recover through this past Tuesday, but then gave back much of those interim gains. Today’s market spike returned us to the highs set on Tuesday. The gain on the S&P 500 was accomplished with a strong spike in volume and that convinced the analysts at IBD to move their market assessment from Market In Correction to Confirmed Uptrend.
 
This year’s trading in the markets may have jaded me, but I am sure I have seen this show before. I jumped in with both feet a couple of times earlier this year and then had my head handed to me. The fact that VIX remains essentially at 30% today, even in the face of a strong day of trading, is a warning sign.
 
Today’s market surge in the S&P 500 was joined by NASDAQ and the Russell 2000 and that is certainly a good sign. But I remain cautious. My scars are fresh.
 
My recommendation from last week was to stay on the sidelines until we witness a clear bounce from the June lows. This week’s trading action wasn’t convincing. I respectfully disagree with IBD. Record rates of inflation and a Fed determined to continue raising the discount rate have not disappeared. Last week’s recommendation to stay on the sidelines remains good advice.

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Written by Dr. Duke

Created: 14 October 2022

The Standard and Poors 500 index (SPX) set a new low for 2022 yesterday at 3492, down 27% on the year. SPX opened higher this morning at 3690, but could not hold the gains, closing down 87 points at 3583, down 2.4% on the day and down 1.8% for the week. Trading volume spiked to 3.2 billion shares yesterday and remained above the 50-day moving average (dma) today with 2.6 billion shares.

VIX, the volatility index for the S&P 500 options, closed down today at 32% after spiking as high as 35% earlier this week. This level of volatility remains a concern. It seems like we have been saying this all year, but this is a nervous market.

I track the Russell 2000 index with the IWM ETF. IWM did not set a new low for the year on Thursday, which I regard as bullish since the small cap stocks usually lead markets lower in bear markets. IWM closed today at 166.81, down 4.6 points or -2.7% on the day and down 1.5% for the week.

The NASDAQ Composite index set a new low for the year on Thursday at 10,089, down 36%. NASDAQ closed today at 10,321, down 328 points or 3.1% on the day and down 3.2% for the week. NASDAQ’s trading volume spiked above the 50 dma on Thursday but remained below average the rest of the week.

On Monday, October 3rd, it appeared that the market had found support at the June lows. SPX gapped open the next day and set up a series of sideways trading days. Then SPX gapped downward last Friday and proceeded to break the June lows. The market opened much lower this past Thursday but immediately started a strong run higher, led by the financial stocks.
 
Thursday was a strong day for the markets, but Thursday’s opening set a new market low for 2022. The S&P 500 index touched down at -27%, and NASDAQ recorded a low of -36%. The Russell 2000 index, measured via IWM, did not quite reach its June low at -28%. Normally, the high beta stocks of the Russell 2000 would be leading the race to the bottom, but not this time. That is the only positive sign I can find in this market.
 
The only new trades I entered this week for the trading group were earnings plays on WBA (+16%), JPM (+17%), and UNH (+28%). Overnight earnings trades incur more risk, but they don’t require the trader to have a conviction for overall market direction. That market assessment has proven difficult to impossible this year.
 
I closed the October SPX iron condor for the Flying With The Condor™ subscribers for a gain of 23%. That service is up 27% for 2022, compared to the S&P 500 at -23%. This has been an excellent year for non-directional trading. These positions are far enough out of the money to withstand the price volatility typical of this year’s market.

My recommendation is to stay in cash until we witness a clear bounce from the June lows with follow through.

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Written by Dr. Duke

Created: 30 September 2022

One of the first principles taught to beginning stock traders for reading charts is “Higher highs and higher lows form an uptrend and lower highs and lower lows form a down trend”. Ever since the fed announcement last week, traders watched the chart to see if the June lows would be broken. Until about 1:30 pm ET today, it appeared that the Standard and Poors 500 index (SPX) was finding support at the June lows around 3640, but then it broke down and steadily declined into the close. SPX closed at 3586, down 55 points or -1.5% on the day and down 2.6% this week. SPX declined 8.9% in September. As one might expect on a dramatic break lower, trading volume spiked to 3.5 billion shares, well above the 50-day moving average (dma) at 2.3 billion shares.

VIX, the volatility index for the S&P 500 options, opened and closed today at 31.6%. The range was unusually large with a low at 29.4% and a high at 33.3%. This suggests that the decline late this afternoon didn’t panic the traders. Perhaps the large institutional traders were already adequately hedged.

I track the Russell 2000 index with the IWM ETF. IWM’s trading pattern differed from the S&P 500 in that it essentially traded sideways all week (down 0.3%) and never reached its June low. IWM closed today at 164.92, down 1.21 or -0.7%. The Russell 2000 normally leads the market lower in a correction, so today’s trading was a bit of a surprise.

The NASDAQ Composite index followed the S&P 500’s decline this afternoon but NASDAQ didn’t break its June low and didn’t spike its trading volume. NASDAQ closed at 10,576, down 162 points or 1.5% on the day and down 2.4% for the week. NASDAQ’s trading volume was at or below the 50 dma all week. The selling pressure in the NASDAQ stocks was much stronger earlier this year but it appears the sentiment has shifted.

The market gave every indication this week that it was finding support at the June lows. At first blush, this afternoon’s late decline appeared to break that support level, at least on the S&P 500 stocks. But SPX’s implied volatility was unchanged on the day – interesting. I would have expected it to spike higher with the selling pressure this afternoon. Both NASDAQ and the Russell 2000 have not yet broken their June lows.
 
I am more inclined to believe today’s trading was a test of the previous lows rather than a break that will lead the market significantly lower. But I am not going to test that hypothesis with my money or my clients’ money.
 
My recommendation remains the same. Stay on the sidelines until we witness a clear bounce from the June lows. Be patient. It is better to miss a bit of the turn higher rather than find that you jumped back in too soon.