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Written by Dr. Duke

Category: Dr. Duke's Blog

Created: 12 December 2013

Last Updated: 12 December 2013

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SPX closed down $7 today at $1776. But RUT climbed $2, closing at $1103. Maybe RUT was making up for some of its extreme move downward yesterday. In any case, SPX's move today broke a significant support level at $1780, and closed just above the highs set in late October. Many analysts have been saying that their bullish opinion on this market would only change if SPX broke support at $1780. Now, both SPX and RUT have broken the lower support levels of the sideways channel of the past few weeks. But tomorrow could tell a different story. Trading volume was pretty flat with 2.1 billion shares of the S&P 500 stocks trading. Trading volume rose 1% on the NYSE and dropped 2% on NASDAQ. The VIX rose only a tenth of a point to 15.5%.

Economic news was mixed. Retail sales came in unexpectedly strong with a 0.7% rise in November. But unemployment claims increased 68 thousand to 368k. Continuing unemployment claims rose by 40 thousand to 2.8 million. I have embedded a very telling chart from today's Investors Business Daily below the blog. The normal practice of the Labor Department is to exclude the unemployed workers from the count if they have given up looking for work, and this tends to result in lower unemployment numbers the unemployed "drop out". If one does include these workers into the total number of unemployed, the unemployment rate has been constant to about 11% throughout this recession. This correlates well with my perception, based on people I speak with in my neighborhood, at work and so on. The economic recovery we hear about is largely propaganda or naive ignorance.

My Dec RUT iron condor at 1030/1040 and 1150/1160 stands at a net P/L of +$3,390, or +21% with delta = +$4 and theta = +$167.

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Written by Dr. Duke

Category: Dr. Duke's Blog

Created: 09 December 2013

Last Updated: 09 December 2013

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As I expected, the enthusiasm from Friday was muted significantly today. SPX gained $3 to close at $1808, but RUT lost $2 to close at $1129. VIX dropped off about a third of a point to 13.5%. Trading volume was flat in the S&P 500 stocks, coming in right at the 50 dma at 2.1 billion shares. Trading volume on the NYSE declined 2% and volume dropped off 5% on NASDAQ.

In one report I read today, the percentage of bullish investment advisers was at the highest level of the year. That has been a reliable indicator of the tops of bullish markets in the past. When everyone thinks the market is going higher, we are often very close to the top of the trend.

It seems like almost all of the market commentary concerns the FOMC and when they might start reducing their stimulus programs. The majority of the Fed watchers are expecting the tapering to begin in March, but who knows?

Today's market action was pretty bearish, in my opinion. SPX toyed with the idea of a new closing high, but couldn't quite make it. However, Russell actually declined - not by a lot, but weaker than the S&P 500. This contrast of SPX and RUT that we saw today is not isolated. A similar pattern has repeated several times over the past few weeks.

My Dec iron condor on RUT stands at a net P/L of +$2,090 or +13% with position Greeks on 20 contracts at delta = -$96 and theta = +$128.

Another consideration for traders of this market: When will trading volume begin to dry up in anticipation of Christmas and New Year's? One might expect that to result in more sideways consolidation trading, but the bulls were very much in charge during Thanksgiving week, in spite of low trading volume. Stay tuned.

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Written by Dr. Duke

Category: Dr. Duke's Blog

Created: 10 December 2013

Last Updated: 10 December 2013

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Today was a mixed day on Wall Street with some stocks continuing their climb higher, but the broad market averages pulled back a bit. SPX closed down $6 at $1803, but RUT traded down even more with a decrease of $10 to $1120. Trading volume was mixed with two billion shares of the S&P 500 stocks trading, down just a bit from yesterday. Trading dropped 6% on the NYSE but increased 12% on NASDAQ. The VIX tacked on almost a half point to close the day at 13.9%.

SPX and RUT have both appeared to have set up a sideways trading channel defined on the lower end by the highs set in late October which were tested last week, and the upper end defined by the highs set the day after Thanksgiving. This corresponds to $1123 to $1147 on RUT, and $1780 to $1810 on SPX. Today's close on SPX at $1803 isn't too far from the high set at $1814, so SPX remains close to the upper end of that channel, but RUT's close at $1120 has broken the lower end of RUT's trading range. Yesterday's disparity in RUT trading down more strongly than SPX continued today. It would appear traders are taking some risk off the table and selling their higher beta stocks.

My RUT Dec iron condor continues to benefit from the sideways to downward movement of the past few days. The current P/L is +$2,820, or +18%, with delta = -$48 and theta = +$184 on 20 contracts. The FOMC meeting is next week. Will the markets just tread water until then?

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Written by Dr. Duke

Category: Dr. Duke's Blog

Created: 06 December 2013

Last Updated: 06 December 2013

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If you listen to the talking heads and gurus on CNBC, you would think that today's huge rally on the report of a reduced unemployment rate was very predictable. The reality is much different. The Non-Farm Payrolls report, aka the jobs report, cited 230k new jobs and a reduction in the unemployment rate to 7.0% from 7.3%. You might have reasonably thought that would revive the talk of the Fed tapering their stimulus programs and resulted in a market sell-off. After all, earlier this year, we had a rather sudden market pullback when members of the FOMC dared to even discuss the future possibilities of tapering at a time when the unemployment rate was quite a bit higher than it is now. It's the old marketing hype game: Sound confident as though this was all obvious and predictable and your loyal followers will increase in number. Unfortunately, it works.

At a recent trading conference, I picked up a handout from one of the speakers. He plotted the future price charts for the major stock indexes, gold, silver, and several prominent ETFs - about 8-10 in total. I placed that handout on my desk and marked the actual prices on each of the charts each month. At the end of three months, he was not only wrong on every chart, he wasn't even close. But he is selling subscriptions to his services.

SPX gained $20 to close at $1805, erasing about three of the past five days of declines. RUT was more subdued, rising $9 to close at $1131. Predictably, volatility decreased with the VIX coming in at 13.8%, down 1.3 points. SPX is now within striking distance of its recent intraday high of $1814, but the corresponding recent high for RUT was $1147, or $16 higher than today's close. So the high beta stocks were not leading today's big rally. That is why I didn't immediately run out and buy into a lot of bullish plays today. I will wait to see how next week develops.

The University of Michigan consumer sentiment report came out today with an increase from the previous result of 75.1 to 82.5 for Dec. But one has to be wary of these surveys. Just last week, the Conference Board's survey of consumer confidence didn't increase; it declined.

My Dec iron condor on RUT stands at a net P/L of +$1,350 or +8.5% with delta = -$81 and theta = +$180 (on 20 contracts). It will be interesting to see if this market rally follows through next week. I am doubtful.

Have a great weekend.