Dr. Duke's Blog

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Written by Dr. Duke

Created: 10 April 2012

The S&P futures looked modestly positive or flat just before the market opened this morning, but trading turned bearish in a hurry. SPX lost $24 to close at $1359 and RUT closed down $19 at $784. Trading volume spiked up with 3.3 billion shares of the S&P 500 trading; trading volume increased 40% on the NYSE and increased 43% on NASDAQ. As always, there was no shortage of talking heads wanting to explain why the bears took charge today. Many cited the report of a trade surplus in China that resulted from weaker imports.That suggests a slowdown in China's economy; this factor, coupled with Spain's increasing bond yields, fed the fear of some traders that the global economy is slowing.

Take a look at the price chart of RUT. Today's downward price movement appeared to settle and bounce at the support level established in early March at about $785. Whether that support level will hold is difficult to predict. But it does tell me that if RUT opens below $785 in the morning, I will be very concerned about the market trading even lower before it stabilizes. The earning season kicked off this evening with Alcoa. Alcoa beat both revenues and earnings estimates and Alcoa was trading higher by 5% in after hours trading. Will that be sufficient to slow the bearish trading we saw today? We'll see.

My Apr iron condor on RUT dropped in value a bit, primarily due to the volatility spike upward today. At the close, it stood at a gain of $2,340 with delta = +$23 and theta = +$81. I hedged my May condor and it now stands at a net loss of $1,040 with delta = +$3 and theta = +$1. I hedged this position reasonably strongly to be sure this bearish truck doesn't roll over me tomorrow. You can see that in the delta neutrality of the position, but also in the small positive theta of the position. So I have given myself time to see if the market settles down or reverses without incurring outsized risk while I am waiting. Hedging yourself always beating waiting and hoping!

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Written by Dr. Duke

Created: 09 April 2012

Traders were disappointed with the jobs report Friday and stewed all weekend. The major market averages all fell today. SPX lost $16 to close at $1382 and RUT also lost $16 to close at $803. But trading volume was low. Trading in the S&P 500 came in at 2.3 billion shares, well below the 50 dma. Trading on the NYSE was down 4% and volume on NASDAQ was down 12%. The VIX popped up to 19% this morning, pulled back to 18%, but then increased into the close to 18.8% - not a good sign.

My Apr iron condor on RUT is up $2,460 with delta = +$5 and theta = +$100. My May condor stands at breakeven with delta = +$37 and theta = +$67. The bulls attempted to take back control late in the day, as they have so many times this year. But this time, the bears repelled them. Is this a changing of the guard? Many of the world markets were closed today and minimal economic data were reported, so today's weakness shouldn't be taken too seriously. But it still pays to be cautious and watch carefully tomorrow.

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Written by Dr. Duke

Created: 04 April 2012

Yesterday's market weakness after such a strong performance the previous day wasn't too surprising. But today's selling became serious. SPX traded down $14 to close at $1399 and RUT closed down $14 to close at $820. SPX dropped right after the market opened and traded sideways most of the day; some buying during the last hour recovered some, but not much, of the loss. Trading volume was basically flat with 2.8 billion shares of the S&P 500 trading. Volume on the NYSE was up 3% and trading was up 1% on NASDAQ. Most analysts attributed today's market losses to traders reading the FOMC minutes and concluding no further stimulus was imminent from the Fed. Are we that addicted to hand-outs in this country?

The ADP payrolls report cited 209k additional jobs in March, down a bit from last month's 230k. But this still wasn't a bad report. In a similar vein, the ISM Services Index came in at 56.0 for March, down a bit from the previous month's 57.3. Once again, the economic data wasn't signaling an economic boom, but we have certainly seen much worse data in the last couple of years. This week's jobs report on Friday will be somewhat unique in that the exchanges will be closed, so we may be seeing some risk aversion in today's selling in advance of that report; if so, we may see more selling or at least a flat market tomorrow.

Not too surprising, VIX rose on today's sell-off and rose as high as 17.4% this morning, but steadily pulled back after about 1:30 pm ET, closing at 16.4%.

SPX has set up a strong support level at about $1390 over the past five to six weeks, but we only traded down as low as $1394 today before bouncing back up a bit. So far, SPX has held support, but if we break $1390, this could get ugly.

My April iron condor on RUT stands at a P/L of +$2,620 with delta = +$7 and theta = +$30. Both spreads are over two standard deviations OTM at this point with 16 days to go to expiration. We'll see what tomorrow brings; the drop in VIX toward the end of the day was encouraging, but that could change overnight.

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Written by Dr. Duke

Created: 03 April 2012

Today's market action was a bit unenthusiastic after yesterday's strong push that opened the new quarter. Stocks traded steadily downward all day, but bounced a bit in the last hour of trading to recover some of the losses. SPX closed down $6 at $1413 and RUT closed at $835, down $6. Trading volume was up slightly from yesterday with 2.8 billion shares of the S&P 500 stocks trading today. Trading volume on the NYSE was up 5% and trading on NASDAQ was up 1%. The VIX closed at 15.7%, so it remains in the channel of about 14-17% of the past couple of weeks. We appear to be firmly in a bullish market, but the enthusiasm is waning. The good news is that as long as we basically trade sideways, the likelihood of a severe market correction becomes much smaller.

Traders were sitting on the sidelines much of today, waiting on the FOMC minutes to be released. Markets dropped after that release at 2 pm this afternoon, probably because there did not appear to be much discussion of another round of quantitative easing happening anytime soon. But after further reflection, traders moved in and pushed the major indexes back to close the day near where they were before the release of the minutes. Tomorrow will see the ADP payroll report and the ISM Services Index.

My April iron condor on RUT stands at a P/L of $2,500 with delta = -$5 and theta = +$51. The put spreads are far OTM and the call spreads are nearly two standard deviations OTM, so this position is sitting pretty at this point (a technical term). It has been an unusual month in that no adjustments have been required thus far. But the month isn't over yet.

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Written by Dr. Duke

Created: 30 March 2012

The markets opened weakly this morning, but recovered quickly. SPX gained $5 to close at $1408 while RUT lost $2 to close at $830.  Trading volume was weak with 2.7 billion shares of the S&P 500 stocks trading; volume was up 2% on both the NYSE and NASDAQ. The VIX calmed down today, closing at 15.5% after being up as high as 17% yesterday. Yesterday afternoon's bullish recovery from the lows earlier in the day and today's slight rise underscores the basic bullish nature of this market. RUT continues to trade in the sideways channel established in early February.

The University of Michigan Consumer Sentiment survey came in at 76.2 for March, up from 74.3 in February. However, the March value of the Chicago PMI dropped to 62.2 from the previous month's 64.0. All in all, today's economic data was basically neutral and not really market moving.

My April iron condor on RUT stands at a P/L of +$2,340 with position delta = -$3 and position theta = +$58 (20 contracts).

My working premise from earlier in the week appears to remain valid, viz., that this market's strong bullish run is basically working itself off via slow sideways trading, replacing the need for a significant correction.

Enjoy your weekend. Focus on the family and forget about the markets for a couple of days.

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Written by Dr. Duke

Created: 29 March 2012

The markets looked pretty weak this morning as SPX dropped as low as $1392, but then the bulls rode in to the rescue and pulled the major index averages back and nearly recovered all of the losses. SPX closed at $1403, down $2 and RUT closed at $832, down $2. Trading volume was basically flat with 2.8 billion shares of the S&P 500 stocks trading today. Trading volume on both the NYSE and NASDAQ were down less than one percent. One has to be impressed by the strength of this market; everyone keeps talking about a correction, but even when the market looks pretty weak, as it did this morning, the bulls return to the table. So far, the "correction" consists of slowing down and trading largely sideways for a time, giving all of the indicators time to catch up. Of course, it may fool me and go over the cliff tomorrow. I am always suspicious of those who confidently predict the future of the market.

GDP growth for the fourth quarter was revised to a 3.0% growth level which didn't surprise analysts one way or the other. Initial unemployment claims came down again at 359k but analysts were expecting a bigger decline. Continuing unemployment claims dropped 41k to 3.34 million. So we are slowly climbing out of the hole, but this has been the slowest recovery from a recession ever recorded.

My April iron condor on RUT stands at a net gain of $2,280 with delta = -$4 and theta = +$59 on 20 contracts.

The next area of risk for this market is the upcoming earnings season; if traders start seeing corporate weakness in those numbers, we could see the correction everyone has been predicting.

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Written by Dr. Duke

Created: 28 March 2012

I hesitate to say there is a "normal" pattern to market price movement, but whenever the market runs hard to the upside, many traders start to get nervous and expect a correction. And the harder the run upward, the correction is feared to be even more severe. This market has indeed run hard to the upside, with the S&P 500 up 12% so far this year. But the expected correction has not occurred. Instead, we have seen a pattern of positive days and then just some slow sideways moves or slight declines. It has been just enough to burn off some of the market excesses. Today SPX pulled back $7 to close at $1406 and RUT closed down $6 to $834. But notice how the weak days never really threaten the solid support levels of the indexes. Trading volume bumped up today with 2.8 billion shares of the S&P 500 trading. Trading on the NYSE was up 12% and volume was also up 6% on NASDAQ.

The VIX closed virtually unchanged at 15.5%; it spiked up above 17% briefly this morning, but then pulled back. So volatility remains relatively low. Is that good? Or is it the lull before the storm?

Durable orders jumped up 2.2% in February - a big improvement over the 3.8% drop the previous month. But analysts had predicted an even higher gain, so that disappointment may have helped dampen enthusiasm on the street today.

My April iron condor on RUT at 700/710 and 910/920 stands at a net gain of $2,320 with delta = -$5 and theta = +$50 (20 contract position).

Have you noticed AAPL and GOOG? They are on quite a run - nothing new for AAPL. I bought some of the Jan 2013 AAPL $445 LEAPS calls back in January and that has been an exhilerating ride. I point this out because it is tempting to look in the rear view mirror and say "I should have bet the farm on those calls". But that is a good way to lose your farm...

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Written by Dr. Duke

Created: 26 March 2012

Bernanke expressed disappointment with the current level of unemployment this morning and traders interpreted that as a promise of another round of quantitative easing. So the bulls returned to the party and we ended up with a very strong day in the markets. SPX gained $19 to close at $1417 and RUT closed up $16 at $846. RUT gapped up strongly this morning, closing well outside of its recent trading range, but RUT still has a ways to go to match the highs of 2011. Surprisingly, trading volume didn't spike up amid the enthusiastic buying; 2.5 billion shares of the S&P 500 traded, slightly down from yesterday. Trading on the NYSE was only up 1%, but volume was up 12% on NASDAQ.

Pending home sales dropped 0.5% in February, but that didn't matter to today's market.

The VIX closed at 14.26%, down about a half of a point. Oddly, VIX was up earlier today as the market averages were hitting new highs.

My April condor position on RUT is up $2,100 with position delta = -$22 and position theta = +$62. Our 910/920 calls appear to be safely OTM even in this bullish environment. One might consider rolling up the 700/710 put spreads at this point, but with the prospects of a correction after such a strong run so far this year, that is probably a bit risky.

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Written by Dr. Duke

Created: 22 March 2012

Weak PMI data from China and the Euro Zone caused some concern on Wall Street this morning, so markets opened weakly and mostly chopped sideways all day. SPX lost $10 to close at $1393 and RUT traded down $8 to $821. Trading volume was weak with 2.7 billion shares of the S&P 500 trading; trading volume was up 7% on the NYSE and down 2% on NASDAQ. Support levels are holding amid these gradual declines; is this heading for a significant correction? Or is the market just slowly correcting over a longer period of time?

Initial unemployment claims came in lower by 10k at 348k and continuing claims dropped by 10k as well - small improvement, but improvements.

The VIX jumped up less on half a point on today's negative trading to close at 15.6%, still relatively low.

My April iron condor on RUT is up $1,920 with delta = +$8 and theta = +$60.

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Written by Dr. Duke

Created: 21 March 2012

Today's market opened up weak and then started to strengthen as the day wore on; so far, this is a familiar pattern of late. But then the markets sold off the last thirty minutes to log losses for the day. SPX lost $3 to close at $1403 and RUT was essentially flat at $830, gaining about half of a dollar. Trading volume was flat to slightly down with 2.6 billion shares of the S&P 500 trading. Trading volume was down 3% on the NYSE and was down 2% on NASDAQ .

Existing home sales came in essentially flat at 4.59 million in February as compared to 4.63M in January. Analysts continue to debate whether we have seen the bottom in the real estate market.

My April condor on RUT continues to build value with a P/L of +$1,980 with delta = -$11 and theta = +$60.

Many market pundits have been predicting a correction for some time now; perhaps the markets are basically trading sideways and allowing the overbought conditions to dissipate in a more tranquil way. Then again, maybe tomorrow it collapses... Stay on your toes.