Dr. Duke's Blog

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Written by Dr. Duke

Created: 14 July 2023

That was the robot’s warning in the sixties TV show, Lost In Space. That may be too old a reference for some of you, but that sentiment is my message. The Standard and Poors 500 index (SPX) closed down five points at 4505, in stark contrast to this week’s gain of over 2.5%. Three of the morning market openings this week were gap openings higher, and dramatically so on Wednesday and Thursday. Today’s market started higher but could not hold the new high and closed lower on the day. Trading volume ran below the 50-day moving average (dma) all week.

VIX, the volatility index for the S&P 500 options, opened the week at 16.1% and steadily declined all week, closing today at 13.3%. VIX spiked just over 17% last Thursday but continued its decline into this week.

I track the Russell 2000 index with the IWM ETF and IWM started the week strongly higher but slowed starting on Wednesday and continuing through today. IWM closed at 192, down two points or down one percent, but still maintained a weekly gain of 3.8%. We expect the small cap stocks of the Russell 2000 to lead both bull and bear markets, but they remain well below the February highs.

The NASDAQ Composite index closed at 14,114 today, down 25 points or -0.2% but NASDAQ had a very bullish week, up 3.4%. NASDAQ’s trading volume ran at or above average all week.

I follow the CBOE SKEW Index chart along with several others to monitor the overall state of the market, e.g., NYSE New Highs – New Lows, the CBOE Put/Call Ratio, etc. SKEW compares the implied volatility of ITM options versus the implied volatility of OTM options. If the implied volatility is rising for OTM puts, that implies increased demand and may suggest increasing probability of a black swan event, i.e., a large correction or market crash. The SKEW index over the past three years shows a couple of peaks during 2021 as the bear market developed. By the end of 2022, we had reached a minimum in the SKEW index. But now SKEW is rather high, over 150 in early June and closing today around 148.

The FOMC and central banks around the globe reduced interest rates to historically record levels to avoid a recession caused by the pandemic. Many banks and individuals purchased low interest treasury bonds to at least generate some measure of income. When interest rates rise, the prices of bonds decline to keep the effective yield of the bonds at market levels. If the average market rate is 6%, you would not pay the nominal value of $1000 for a treasury bond; the market will discount that bond to a level where the bond’s posted two percent rate yields a rate of return consistent with current levels of interest.

Individuals build bond ladders with a portfolio of bonds with different interest rates and maturities. When rates rise, one or more of those groups of bonds decline in price, reducing the value of the bond portfolio. When a particular group of bonds (a rung on the bond ladder) matures, the investor receives the full nominal value of the bond ($1,000) and replaces that portion of the bond portfolio with new bonds bearing the current market interest rate.

What happens when a bank holds billions of dollars of 2% treasury bonds? The bank’s balance sheet declines significantly due to the declining value of those bank assets. The bank may then be in danger of not being able to fulfill the requests of depositors for a portion of their funds. Rumors fly and this results in a run on the bank; the bank closes and the federal bank examiners take over. In most cases, FDIC insurance reimburses the depositors, but that is limited to $250,000 per account. The first bank to close was Silicon Valley Bank; their depositors were not middle-class Americans; many were Silicon Valley venture capitalists with multi-million dollar accounts. As you might expect, those depositors had political clout and new Federal rules were quickly created to make them whole. The next group of banks that were in danger of failing were saved in a different manner. Treasury officials found a larger bank and convinced it to buy the smaller bank to keep it financially “whole”. It isn’t clear if more banks will follow. It is a scary scenario.

I tell you this long story to illustrate the underlying problem. The fundamental mandates of the Federal Open Markets Committee (FOMC) are to maintain steady economic growth, prevent economic recession and control inflation. Their two main tools are buying and selling treasury bonds to control the money supply and establishing the federal discount rate, the interest rate charged by the Federal Reserve to member banks. That rate is marked up as it filters down through the banks to businesses and individuals.

As inflation heated up over the past two years, the FOMC began to raise interest rates to slow down inflation and return the inflation rate to the federal target rate of 2%. Those rising rates have put the banks holding 2% treasury bonds in a tight spot. The FOMC is also in a tight spot. Should they continue to raise rates in order to bring down inflation at the expense of some banks failing and possibly risk pushing the economy into a severe recession? I am sure Powell is receiving a lot of political pressure to back off on the rate hikes.

Now you see why the SKEW index may be at such high levels. The risk of a recession is increasing, and traders are buying OTM puts for protection. We have seen the failure of several reasonably large banks. Are more failures on the horizon?

In light of this background, I find the recent bullish stock market strength we have witnessed to be very surprising. The weak trading volume we have observed all year shows a lack of conviction by the bulls. A lot of capital remains on the sidelines. The hesitancy of the Russell 2000 to join in the rally is another bearish sign. Those small to mid-cap stocks normally lead bull markets.

I am even more cautious now. I am not a day trader, but the day trader is always fully in cash at the end of each day of trading and that appears very attractive to me right now. Be careful out there.

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Written by Dr. Duke

Created: 07 July 2023

The Standard and Poors 500 index (SPX) closed down at 4399, down 13 points or 0.3%. Monday’s open at 4450 set up a down week of -1.1%. Yesterday’s market took a tumble, but the long lower shadow on the candlestick was encouraging. However, today’s candlestick was the classic shooting star, commonly presaging a downturn. Trading volume was well below the 50-day moving average (dma) on Monday, but it didn’t fare much better all week.

VIX, the volatility index for the S&P 500 options, opened the week at 13.9% and generally rose all week, closing today at 14.8%. VIX spiked just over 17% on Thursday’s market drop, but recovered to close the day at 15.4%.

I track the Russell 2000 index with the IWM ETF and IWM had a disappointing week, closing at 184.7, up two points or +1% today, but down 1.2% for the week. IWM almost gave up all of its gains from last week. We expect the small cap stocks of the Russell 2000 to lead both bull and bear markets, but they seem to only lead the downturns of late. IWM remains well below its February highs.

The NASDAQ Composite index closed at 13,661 today, down 18 points or -0.1% on the day and down 1.0% for the week. Today’s candlestick on NASDAQ was the shooting star we noted on SPX, a bearish sign for next week. NASDAQ’s trading volume ran above average all week with the single exception of the half day of trading on Monday.

Last week, the market ignored Powell’s clear message to Congress that the Fed isn’t through raising the discount rate. That set up a solid market run that almost reached the mid-June highs. The FOMC minutes on Thursday confirmed Powell’s sentiment that the inflation rate remains too high and more rate hikes will be required. That appeared to surprise the market and it took a tumble. Today’s trading recovered some of yesterday’s losses, but the pattern of the intraday trading looks rather bearish (the shooting star candlestick). I am concerned what Monday will bring.

Trading volume on the S&P 500 stocks remains below average and that is, at best, an unenthusiastic bullish signal. I think it shows a lack of conviction by the bulls.

I am picking at some trading opportunities, but I remain cautious. Whenever there is a doubt, I close the trade and preserve my cash.

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Written by Dr. Duke

Created: 30 June 2023

The Standard and Poors 500 index (SPX) gapped open higher this morning and took off to close at 4450 for the day, up 54 points or 1.2%. SPX opened the week at 4345, setting up a weekly gain of 2.4%. Today’s close technically broke the resistance level set by the high on 6/16, but we will have to wait until after the holiday next week to confirm that break-out. Trading volume ran below the 50-day moving average (dma) all week and barely touched the 50 dma today.

VIX, the volatility index for the S&P 500 options, closed today at 13.6%, down from 14.4% on Monday. This week’s volatility trend was almost identical to last week, starting at 14.4% on Monday and closing the week at 13.4%.

I track the Russell 2000 index with the IWM ETF, and IWM had a spectacular week, closing at 187.3, up 0.9 points or 0.5% today, but up nearly 4% for the week. IWM gapped open higher at the opening of trading three times this week. But that’s where the good news ends. IWM remains below its high from mid-June and almost 6% below its high from early February. We expect the small cap stocks of the Russell 2000 to lead both bull and bear markets, but it is running significantly behind in this latest rally in SPX and NASDAQ.

The NASDAQ Composite index closed at 13,788 today, up 197 points or +1.5% on the day and up 2.4% for the week. But NASDAQ couldn’t break its high from 6/16. NASDAQ’s trading volume ran below average all week with the single exception of Tuesday.
 
After last week’s dismal performance, it was surprising to see this week’s market essentially regain all that was lost last week. The reasoning seems a bit obscure to me. Powell spoke to Congress this week and he made it clear that the Fed isn’t through raising the discount rate. It almost seems like the market has its rose-colored glasses on and believe all is well.

Today’s big rally was set off by this morning's favorable PCE report which suggested that the inflationary forces are weakening – maybe. But notice today’s trading volume; it was very weak. That could be due to the beginning of a long weekend for many traders on Wall Street. It could also show a lack of conviction in this bullish rally.

I opened several trades on Thursday and that was rewarded today. But I remain nervous. I sound like a broken record but be cautious. Keep a cash cushion on the sideline.

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Written by Dr. Duke

Created: 23 June 2023

The Standard and Poors 500 index (SPX) closed today at 4348, down 34 points on the day or -0.8%. This decline began last Friday and continued during this shortened four-day week to post a 1.1% weekly decline. Trading volume ran below the 50-day moving average (dma) all week but spiked higher today.

VIX, the volatility index for the S&P 500 options, closed today at 13.4%, down from 14.4% on Tuesday. Today was the first day VIX has shown some life since June 13th.

I track the Russell 2000 index with the IWM ETF, which declined significantly this week, closing today at 185.2, down -1.5% on the day and down 2.5% for the week. The small cap stocks of the Russell 2000 really fell out of bed this week, gapping open lower every day this week. IWM’s 50 dma is running below its 200 dma and IWM's closing price today is trading just above the 200 dma at 178. This is the most negative signal for the current market.

The NASDAQ Composite index closed at 13,493 today, down 138 points or -1% on the day and lost 1.1% for the week. NASDAQ remains above its August 2022 high, but it gave up about half of that margin this week. NASDAQ’s trading volume was flat and slightly declining all week but spiked much higher today.

This was an ugly week for the markets. To my view, it seemed as though the market had ignored the obvious message from Powell last week that at least one more rate hike may be coming this year (and maybe two). That reality dawned on the market this week. The spike in trading volume both last Friday and again today suggest the large institutional traders are taking their profits from this latest rally.

The small cap stocks of the Russell 2000, as measured by the IWM, are really on life support. Traditionally these high beta stocks lead bull markets higher and bear markets lower. As SPX and NASDAQ were trading higher last week, IWM tracked sideways. As SPX and NASDAQ were declining this week, IWM was taking a loss approximately double that of its big brothers. That is a worrisome sign for the short-term future.

The VIX finally came to life today, although it only rose 4%. Many analysts see a low level of volatility as a sign of an impending correction, but it also may be viewed as an overall lack of anxiety.

Keep a close eye on your investments. Be prepared to increase your cash levels if warranted.

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Written by Dr. Duke

Created: 16 June 2023

The Standard and Poors 500 index (SPX) closed today at 4410, down 16 points on the day or -0.4%. SPX broke the August 2022 high on Monday and closed the week with a gain of 2.4%. Trading volume ran barely above the 50-day moving average (dma) all week, but spiked higher to 4.0 billion shares today, much higher than the 50 dma at 2.4 billion shares.

VIX, the volatility index for the S&P 500 options, closed today at 13.5%, down from 14.4% on Monday. This low reading for the VIX is surprising, given the sell off this afternoon.

I track the Russell 2000 index with the IWM ETF, which traded sideways this week, closing today at 185.9, down 1.5 points or -0.8%. IWM opened the week at 185.2, for a weekly gain of 0.4%. The small cap stocks of the Russell 2000 have been trading sideways for the last eight trading sessions. These high beta stocks are not leading this market. That is not a good sign.

The NASDAQ Composite index closed at 13,690 today, down 93 points or -0.7% on the day, but rose 2.7% for the week. NASDAQ remains well above its August 2022 high, broken last week. NASDAQ’s trading volume grew steadily all week, spiking today to 8.1 billion shares versus the 50 dma at 4.8 billion.

SPX and NASDAQ have now both broken out above the August highs from last year. Trading volume has run above average on both indices this week and spiked dramatically higher today as the markets sold off during the last three hours of trading. This trading volume spike on a price decline is a classic distribution day, suggesting the large institutional traders were taking their profits.

However, market volatility, as measured by the VIX on the S&P 500, remains at very low levels. The sell off this afternoon suggests some fear on the part of the large players, but they aren’t hedging themselves (which would lead to a higher VIX). Maybe they are already hedged? I closed some positions this morning for nice gains rather than wait another week to add to the profits. This afternoon’s sell off suggests I may have been prudent to take some risk off the table.

My closing remarks are the same as last week. I continue to watch this market very carefully. The party could end quickly.

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Written by Dr. Duke

Created: 09 June 2023

The Standard and Poors 500 index (SPX) closed today at 4299, up 5 points on the day or +0.1%. SPX closed the week at a gain of 0.4%. Trading volume has returned to its track under the 50-day moving average (dma).

VIX, the volatility index for the S&P 500 options, closed today at 13.8%, down 10% for the week. We haven’t seen volatility this low since January of 2020, just before the Covid lockdown correction. Should we be concerned?

I track the Russell 2000 index with the IWM ETF, which closed today at 185, up 1.5 points or +0.8% on the day. IWM closed the week with a gain of 2.3%. The small cap stocks of the Russell 2000 are now moving more in line with the S&P 500. It has traded strongly higher over the past two weeks, including two gap openings higher, but it remains well below the highs of February.

The NASDAQ Composite index closed at 13,259 today, barely up on the day but up almost two percent for the week. SPX and NASDAQ have now broken their February highs, but NASDAQ solidly broke out above its August 2022 highs this week. NASDAQ is leading this latest market rally. However, NASDAQ’s trading volume fell off significantly this week, closing the week with 3.5 billion shares traded versus the 50 dma at 4.6 billion.


NASDAQ’s price action has been much stronger and steadier since early May, having now broken the August highs from last year. The S&P 500 is threatening those highs but has not managed to break through as yet. Trading volume on both indices is weak. This bullish trend is a welcome relief but a lot of money is waiting patiently on the sidelines.

Market volatility, as measured by the VIX on the S&P 500, is now at lows unmatched since January of 2020, just before we slid off the Covid shutdown cliff in March. Low levels for VIX certainly show large institutional investors complacency, but we don’t have any clear signals of a strong, “risk on” posture either. It would take very little to crush this rally, e.g., another bank failure?

My trades are doing well; the Flying With The Condor™ service is up 26% on the year, and the trading group meeting last evening reviewed 12 positions we had opened since the previous meeting in May. One contract entered in each position would be up $1,114 over the past month.

However, I will continue to watch this market very carefully. The party could end quickly.


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Written by Dr. Duke

Created: 02 June 2023

The Standard and Poors 500 index (SPX) closed today at 4282, up 61 points on the day or +1.5%. SPX opened the short week at 4227, closing the week at a gain of 1.3%. For a significant change, trading volume managed to stay above the 50-day moving average (dma) all week. Is this the turn higher?

VIX, the volatility index for the S&P 500 options, opened the week at 17.6%, and closed today at 14.6%, down 17% for the week. We haven’t seen volatility this low since July of 2021.

I track the Russell 2000 index with the IWM ETF, which closed today at 182.02, up 6.4 points or 3.6% on the day. IWM opened the week at 176.7 for a 3% gain for the holiday shortened week. Normally the small cap stocks of the Russell 2000 lead bullish runs, but this index has a long way to go. IWM broke its 50 dma yesterday and broke out above the 200 dma today, but it must tack on a full 9% to return to its February highs.

The NASDAQ Composite index closed at 13,241 today, up 140 points or +1.1%. NASDAQ opened the week at 13,109, resulting in a nearly identical weekly gain of +1.0%. NASDAQ and the S&P 500 have broken their February highs, although NASDAQ is well ahead of SPX. Unlike SPX, NASDAQ’s trading volume was relatively low again this week, managing to break above its 50 dma only on Wednesday.

Price action in the markets has been choppy for the past several weeks and the broad market indices have been trapped in a sideways trading channel. The market’s attention was focused on the debt limit negotiations. The market celebrated the bipartisan deal, although the debt problem is just being kicked down the road.

I will be watching next week’s market action very carefully for any cracks in the new enthusiasm. Concerns about inflation, higher interest rates and the next bank failure may raise their ugly heads next week.

I am unsure that all is well in our economy, so I am going to be cautious about jumping on this bandwagon.

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Written by Dr. Duke

Created: 12 May 2023

The Standard and Poors 500 index (SPX) closed today at 4124, down seven points on the day or -0.2%. SPX opened the week at 4137, so the weekly result was similar at a loss of 0.3%. Trading volume continues to come in very low; volume ran well below the 50-day moving average (dma) all week.

VIX, the volatility index for the S&P 500 options, opened the week at 17.7%, and closed today at 17.0%, down 4.0% for the week. This level of volatility seems high for the pattern of the price movement itself. This makes me wonder if volatility is remaining moderately high due to fear of “another shoe dropping”, whether that be another bank collapsing or an interview with a FOMC member sounding hawkish.

I track the Russell 2000 index with the IWM ETF, which closed today at 172.7, down 0.4 points or -0.2% on the day. IWM opened the week at 175.3, so the loss for the week was larger at -1.5%. IWM is trading weaker than any other broad market index, trading well below both the 50 dma and the 200 dma and its February high at 199. Some analysts attribute this weakness to a large number of small and regional banks in the Russell 2000 that are under pressure after the failure of the larger banks over the past few weeks.

The NASDAQ Composite index closed at 12,285 today, up 44 points 
or +0.4%. NASDAQ opened the week at 12,232, resulting in an identical weekly gain of +0.4%. NASDAQ is the only broad market index to have broken its February high, although it barely held that level today. NASDAQ’s trading volume fell off again this week, remaining under the 50 dma all week.

I believe we are near a “fork in the road” moment. This week’s CPI and PPI reports gave us hope that the inflation growth rate may be moderating, but it is only a minor turn lower. It could easily reassert itself. Inflation concerns have been replaced with a fear of a contagious run on the banks leading to a serious recession or worse.

The price charts are generally chopping sideways, appearing indecisive about which way to go. I worry that a critical piece of bad news could trip this market into a serious fall lower. I still remember global markets pausing as they watched the Greek debt crisis unfold in 2015. Greece’s debt to GDP ratio was 125%. That is precisely where our politicians (in both parties) have left us, and, incredibly, they want to add more debt. It seems that no one wishes to get this house in order. Let’s just open another credit card!

I closed a group of profitable trades this week but didn’t replace them. This is a good time to keep your powder dry and wait for a better day.

Be patient, trade small, take profits early, and leave a large percentage of your cash on the sidelines.

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Written by Dr. Duke

Created: 05 May 2023

The Standard and Poors 500 index (SPX) closed today at 4136, up 75 points on the day or +1.9%. SPX opened the week at 4167, so today’s large gain wasn’t enough to save the week from a 0.7% loss. Trading volume was bouncing around the 50-day moving average (dma) this week and came in at 2.4 billion shares today, just below the 50 dma at 2.5 billion shares

VIX, the volatility index for the S&P 500 options, opened the week at 16.4%, rose to a peak of 21.3% on Thursday but then fell significantly today to close at 17.2%. Today’s close matches the low for 2022, but Monday’s intraday low for VIX at 15.5% marks the low for both 2022 and 2023.

I track the Russell 2000 index with the IWM ETF, which closed today at 174.45, up 4.1 points or +2.4% on the day. IWM opened the week at 175, so even today’s large gap opening and strong run could not push IWM into the positive column for the week. IWM remains well below both its 50 dma and 200 dma and is almost 14% below its February high. Keep in mind that we expect the small to mid-cap stocks to lead bull markets higher.

The NASDAQ Composite index closed at 12,235 today, up 269 points 
or +2.3%. NASDAQ opened the week at 12,210, resulting in a weekly gain of +0.2%. NASDAQ touched its February high of 12,270 today and pulled back a bit into the close. NASDAQ’s trading volume fell off dramatically over the last two days, closing at 3.7 billion shares today, well below the 50 dma at five billion shares.

The FOMC meeting was virtually all of the news that appeared to matter to traders this week. Wednesday’s announcement could be summed up as raising the discount rate another 25 basis points with only a hint at the Fed being prepared to end the rate hikes anytime soon. As the market waited on the fed meeting on Tuesday, the markets slid a bit and that slide continued after they read the announcement on Wednesday. After considering the news overnight, the market tumbled again yesterday, but woke up in a better mood today.

The death watch for the next banks to fail was somewhat surpassed by speculating about the FOMC this week, but the feds closed First Republic Bank on Monday and arranged its acquisition by J.P. Morgan Chase. This run on the banks is worrisome for the obvious reasons, but I am also concerned about the continuing trend of large banks becoming even larger.

The bulls do seem to be reasserting themselves, but it is hard to ignore the massive national debt while politicians in both parties refuse to make any serious attempts to get spending under control. It is difficult to imagine a bull market under these circumstances. In the meantime, the perennial "sky is falling" gurus are busy sounding the alarm.

I continue to leave a lot of capital on the sidelines and choose my trades very carefully. I close winners early just to avoid the next whipsaw in the markets.

Be patient and hedge yourself carefully.

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Written by Dr. Duke

Created: 29 April 2023

The Standard and Poors 500 index (SPX) closed yesterday at 4169, up 34 points on the day or +0.8%. SPX opened the week at 4132 for a weekly gain of 0.9%. Early in the week, we were heading for the bunker, but then it reversed course. One surprise this week was an increase in trading volume; it ran at or above the 
50-day moving average (dma) for the last four trading sessions. That was encouraging.

VIX, the volatility index for the S&P 500 options, opened the week at 18.2%, rose to a peak of nearly 20% on Tuesday but then fell significantly on Thursday and Friday to close at 15.8%.  One has to look back to November of 2021 to see a lower level of volatility.

I track the Russell 2000 index with the IWM ETF, which closed yesterday at 175.2, up 1.5 points or +0.9% on the day. IWM opened the week at 177.8, so the Russell 2000 index lost 1.5% on the week. And it remains well below both its 50 dma and 200 dma.

The NASDAQ Composite index closed at 12,227 yesterday, up 84 points or +0.7%. NASDAQ opened the week at 12,053, resulting in a weekly gain of +1.4%. NASDAQ is nearing its February high of 12,270. NASDAQ’s trading volume was mixed this week and was above the 50 dma on Wednesday and Friday.

We have experienced quite a roller coaster ride this week. The market appeared locked in a sideways channel last Friday and it looked as though we might break support and head lower on Tuesday and Wednesday, but the balance of the trading this week left the S&P 500 much closer to the February high around 4200. The spike in trading volume with Friday’s strong run was encouraging. However, next week’s market will most likely slow as traders look forward to the FOMC meeting and announcement on Wednesday.

My assessment of this market and my recommendations remain unchanged from last week:

“I remain cautious in this market. A small number of stocks are weathering the storm, but prices are very volatile. Being whipsawed in and out of positions is commonplace.”