Dr. Duke's Blog

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Written by Dr. Duke

Created: 16 March 2012

The markets largely chopped sideways today, albeit slightly in positive territory. SPX closed at $1404, up $2 while RUT lost $1 to close at $830. This was a new 2012 high for SPX but RUT is still mired down in the February trading range and has yet to match its 2011 highs. As you might expect for quadruple witching, volume spiked up with 3.7 billion shares of the S&P 500 trading. Volume jumped 58% on the NYSE and rose 21% on NASDAQ. VIX closed at 14.5%, so it remains at pretty low levels. One advantage of the low volatility is that you can buy protection for your stock portfolio at relatively inexpensive prices. Given this strong run by the bulls since mid-December, that may be prudent.

The consumer price index rose 0.4% in February, although most of the rise was due to energy costs. Capacity utilization remained essentially flat at 78.7% and the consumer sentiment survey from the University of Michigan dropped a bit to 74.3. So the latest economic news supports the message of the past few months: the economy is not roaring upward, but it isn't sinking either.

RUT settled at $833.17 for March, so the remaining 730/740 put spreads in my March iron condor will expire worthless tomorrow. This completes the March position with a 20% gain and brings the Flying With The Condor™ results to a year to date gain of 17%. The S&P 500 has been on fire this year, but it is only up 12%. My Apr iron condor on RUT stands at a P/L of +$1,680 with delta = -$10 and theta = +$60. The largest risk to this market at this time, in my opinion, is the prospect of a correction. Fortunately, this Apr position has its put spreads down at 700/710, so I feel reasonably safe. But that doesn't mean I relax - except on weekends.

Have a great weekend.

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Written by Dr. Duke

Created: 15 March 2012

SPX managed to close above that $1400 level everyone had been watching for some time this year. The bears have to be frustrated; anyone who has shorted this market is taking it on the chin. SPX gained $8 to close at $1403 and RUT closed up $8 at $831. Trading volume was down a bit from yesterday with 3.2 billion shares of the S&P 500 trading. Trading volume on the NYSE was down 3% and trading was up 1% on NASDAQ. RUT managed to close right at resistance; it has been trading in a range for the last 30 days or so and has failed to match its highs of 2011 while the SPX continues to march higher. VIX was largely unchanged at 15.4%.

Initial unemployment claims came in at 351k, a decline of 14k and continuing claims fell 81k to 3.3 million. The Empire manufacturing survey came in at 20.2, up from last month's 19.5 while the Philadelphia Fed survey reported 12.5, up from 10.2. PPI was reported as increasing 0.4%, which was a bit less than analysts expected, which is good in this case. I still marvel that inflation is so low with all of the printing of money going on.

My Mar condor will close out this weekend with the expiration of the 730/740 put spreads. The April condor on RUT is in good shape with a P/L of +$1,500 and position delta = -$19 and position theta = +$63 with 35 days to go.

The questions I am left with that have been bugging me for several weeks are: 1) Why is RUT lagging behind SPX? and 2) How will RUT and SPX get back in sync?

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Written by Dr. Duke

Created: 14 March 2012

After such a stellar performance yesterday, I expected some profit taking to pull the markets back a bit today, but that wasn't the case. SPX chopped along largely sideways all day and then weakened in the last two hours to close down $2 at $1394. RUT lost $8 to close at $823. RUT continues to trade weaker than SPX and this is a concern for me; it tells me this market isn't as strongly bullish as it appears. Trading volume bumped up a little today with 3.4 billion shares of the S&P 500 trading, but was basically flat to slightly down on the NYSE (-4%) and NASDAQ (-2%). Weak volume is the other odd aspect of this year's rally; does this suggest many traders and institutions remain on the sidelines? Or have a large number of individuals simply left the stock market?

The VIX popped up a bit today, closing at 15.3%, still quite low as compared to the past two or three years. This is a low level for the VIX, but remember: even if it is low, it can go lower yet. So I wouldn't trade this market bearishly based on the VIX. But the low levels of volatility do make buying put protection for your stock portfolio relatively inexpensive.

My April RUT condor is sitting perfectly delta neutral at a P/L of +$1,480 with delta = +$1 and theta = +$57.

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Written by Dr. Duke

Created: 13 March 2012

The bulls took charge from the opening bell today and then tacked on a strong surge during the final hour of trading to complete a huge bullish run. SPX gained $25 to close at $1396. RUT traded up $17 to close at $831. SPX is trading in territory that it hasn't seen since early 2008. Consistent with the strong gain, VIX dropped below 14% intraday and closed at 14.8%. By contrast, RUT has yet to even close near the highs of 2011.

As always, the talking heads had many theories about the driving force behind such a strong move today. It isn't quite so obvious to me - if it were, I would have loaded up on calls yesterday. JPM announced a quarterly dividend and some interpreted that as an indicator that the government's bank stress test had gone well (and good results were announced after the close). Maybe that report was leaked early and that drove the bulls. Bernanke's remarks didn't appear to have much effect on the markets; the Fed's observations were very similar to previous reports. Nothing was revealed about any plans for future quantitative easing programs or whether that is even a possibility. Retail sales gained 1.1% in February and that beat analysts' estimates. But that report came out early, so the cause for the last hour's surge is a mystery.

My Apr iron condor on RUT stands at a P/L of +$1,460 with delta = -$12 and theta = +$59. Today's move in RUT brings us back to the starting line for this position. The decline in IV also helps. Now the big question: will we see a bit of a pull back tomorrow after such a record day? We'll see. Fortunately, my delta neutral positions don't require me to predict that.

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Written by Dr. Duke

Created: 12 March 2012

The markets basically wandered sideways today on reduced volume. SPX closed unchanged at $1371 and RUT lost $3 to close at $814. Trading volume fell off with 2.2 billion shares of the S&P 500 trading; trading on the NYSE was down 11% and trading on the NASDAQ dropped 15%.

The FOMC meeting is tomorrow; perhaps traders are sitting on the sidelines, waiting to see if the Fed has another round of quantitative easing up its sleeve.

A surprising data point today came from the VIX that closed at 15.6%, down from Friday's close just above 17%. That is the lowest VIX reading since last July, just before the August crash. Hmm... that gives one pause, doesn't it?

My Mar condor position on RUT only consists of the 730/740 put spreads at this point, which are far OTM and will presumably expire worthless this coming weekend. That will close the March position for a 20% gain and bring our year to date return to 17%. The Apr RUT iron condor at 700/710 and 910/920 stands at a P/L of +$1,240 with position delta = +$17 and position theta = +$57 (20 contracts).

So we wait to see what Bernanke has to say. Most likely we won't see a big market move, but you never know. If he surprises traders, it could make a difference.

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Written by Dr. Duke

Created: 09 March 2012

The markets opened strong this morning on the news of the Greek debt swap deal being completed. Traders pulled back a bit this afternoon when it was announced that the Greek debt swap would qualify as a "credit event" for purposes of triggering the credit default swaps. SPX ran as high as $1375 before pulling back to close at $1371, up $5. The recent high close for SPX was $1374 on March 1. RUT closed up $11 at $817. This strong run by Russell put it back into its February trading range; although RUT still lags SPX, today's strong action helped close the gap. Trading volume was largely flat with 2.6 billion shares of the S&P 500 trading; trading volume was unchanged on the NYSE and was down 2% on NASDAQ.

The jobs report was viewed positively by most analysts with the addition of 227k jobs, although that was below last month's 284k increase. Unemployment remains at 8.3%.

I closed the 860/870 calls in the RUT Mar iron condor position today based on my two sigma rule. Assuming the 730/740 put spreads expire worthless next weekend, that will result in a gain of $3,410 on 20 contracts or a 20.2% return on capital at risk. This brings the year to date return on the Flying With The Condor™ portfolio to 17%. The Apr iron condor position at 700/710 and 910/920 stands at a P/L of +$1,320 with position delta = +$6 and theta = +$50.

Have a great weekend.

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Written by Dr. Duke

Created: 08 March 2012

The markets roared back today and have almost erased the damage done earlier in the week, although not much damage was done - certainly not anything worthy of being called a correction. SPX gained $13 to close at $1366, knocking on the door of recent highs in the neighborhood of $1375. RUT also gained, closing up $10 at $806. It is worth noting that SPX has further strengthened that support level at $1340 with this recent downward move, so be sure to mark that on the chart. I noted in an earlier blog that it was troublesome that while SPX was making new highs, RUT was being left behind. And this latest move is another parallel - RUT has not quite moved back into the trading range of $810 - $832 that it was caught in while SPX was making new highs in February. To trade as strongly as SPX has this year, RUT would have had to trade upwards of $865, the highs set in 2011. I am not a market statistician, but bull markets are normally led by the mid-caps, not the large blue chips. That is why this lagging RUT index has grabbed my attention. But the basic bullish nature of this market can't be denied - the pattern this week was one more indicator. The bears had their opportunity but couldn't make it stick. On the other hand, I don't see a bullish run resuming without RUT participating. Perhaps the result is a trading range for a "cooling off" period.

Trading volume was basically flat today with 2.5 billion shares of the S&P 500 trading. Trading volume on the NYSE was down 1% and volume was down 2% on NASDAQ. The only economic news of significance was the initial unemployment claims report which rose to 362k from last week's 354k. Continuing claims remain at 3.4 million. What does that say about tomorrow's jobs report? Briefing.com is predicting an increase of 250k jobs, probably based in part on the favorable ADP report earlier this week. But this market can probably withstand some negative news; so even a flat number may not cause any damage. We will also hear the final count on the participation in the Greek bonds deal tomorrow, but I am unsure what reaction that news will create; it seems like one day the market cares about Greece and the next day, it doesn't.

My Mar RUT condor stands at a P/L of +$3,390 with delta = +$9 and theta = +$109. The Apr position is also sitting pretty well delta neutral at a P/L of +$880 with delta = +$24 and theta = +$52. Tomorrow I will apply the Two Sigma Rule to the Mar spreads and determine whether the spreads need to be closed in advance of expiration week.

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Written by Dr. Duke

Created: 07 March 2012

The markets rebounded today, as though Greece's problems have been solved - happy days are here again. SPX gained $9 to close at $1353 while RUT closed up $9 at $796. Trading volume fell off with 2.6 billion shares of the S&P 500 stocks trading; trading volume dropped 16% on both the NYSE and NASDAQ. The key areas to watch on SPX are $1340 and $1375. If SPX breaks through $1340, we could see a serious correction; on the other hand, if SPX breaks the recent highs at $1375, then the bullish trend has resumed. If we compare RUT and SPX, the damage on RUT is far from erased and RUT has lagged behind SPX of late. RUT will have to trade back to $810 before it is even back in the trading range it occupied for most of February.

ADP's employment report moved up once again to 216k new jobs for February, up from the previous report of +173k. Could this be a prediction of an improved jobs report Friday?

My Mar RUT iron condor at 730/740 and 860/870 stands at a P/L of +$3,150 with delta = +$27 and theta = +$116. The Apr condor stands at a P/L of +580 with delta = +$30 and theta = +$50. On Friday, we will apply the Two Sigma Rule to our Mar position. As it now stands, we may have a rare event where both spreads are over two standard deviations OTM. Has this market resumed a sideways trading range pattern as it had late last year? Or is a nasty correction about to begin? Or will the bulls take charge once again? Who knows? All I can do is trade what the market gives me.

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Written by Dr. Duke

Created: 06 March 2012

The long awaited pullback occurred or simply continued today and analysts attributed it to concerns that an orderly default of the Greek bonds won't be able to occur. It appears that very few of the current bondholders have agreed to the terms of the bailout engineered by the ECB. It seems surprising to me that the attitude of traders appears to go hot and cold on whether a Greek default matters. Perhaps the talking heads just have to have some explanation for the decline. SPX lost $21 to close at $1343. SPX hit support at $1340 intraday, but bounced back up. RUT broke through its 50 dma and closed at $787, losing $17. Trading volume popped up with 3.0 billion shares of the S&P 500 trading; trading on the NYSE increased 23% and volume rose 11% on NASDAQ.

No significant economic data was released today. The VIX spiked up to 21% today. In the larger scheme of things, that isn't that high. VIX remains well within the range of the past month or two.

My Mar iron condor on RUT stands at a P/L of +$2,430 with delta = +$52 and theta = +$170. The call spreads are now over two standard deviations OTM and the puts are just inside two standard deviations OTM, so this position remains very solid. The Apr iron condor on RUT stands at a P/L of +$220 with delta = +$38 and theta = +$45. The Apr 700/710 put spreads are still well over one standard deviation OTM, but are starting to feel some pressure as RUT drops. So now we wait to see what traders worry about tomorrow.

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Written by Dr. Duke

Created: 05 March 2012

Stocks traded lower again today and it appeared early today that the bears were gaining control of this market, but stocks rebounded this afternoon to erase about half of the losses for the day. SPX closed down $5 at $1364 and RUT gained $1 to close at $804. There wasn't much economic data reported today. Factory orders fell 1% in January and the ISM Services Index came in at 57.3 for February, slightly up from January's 56.8. Trading volume was mixed with 2.5 billion shares of the S&P 500 trading today which was up a bit from Friday. Trading volume on the NYSE was up 1% and volume was down 4% on NASDAQ.

Although many analysts have been expecting a correction after the market's strong run this year, the last few days certainly don't yet qualify. SPX has yet to even threaten its strong support level at $1340. SPX traded down to $1359 this morning but then rebounded to close at $1364. Even though RUT traded down more strongly than SPX on Friday, RUT actually gained a bit today. The $800 level on RUT appeared to offer resistance in late January before it broke out higher; now $800 appears to be offering support. RUT traded down to $796 today before rebounding higher to close at $804.

My Mar condor on RUT stands at a P/L of +$2,830 with position delta = +$4 and position theta = +$176. The put spreads are over two standard deviations OTM and the call spreads are just under two standard deviations OTM. The Apr iron condor on RUT stands at a P/L of +$780 with delta = +$20 and theta = +$50. Both condors are "sitting pretty" at this point, delta neutral and making money. But that can change with a moment's notice.