Dr. Duke's Blog

Details

Written by Dr. Duke

Created: 22 December 2011

Markets opened higher this morning and then climbed a bit higher around noon and didn't give any of it back as the afternoon wore on. SPX gained $10 to close at $1254 and RUT gained $5 to close at $746. SPX is nearing significant resistance at $1260 - $1270 with the 200 dma at $1259. That will be a critical level to monitor. VIX dropped again today, closing at 21.2%, seeming to suggest that most traders have accepted that Santa has arrived. Trading volume dropped at 2.7 billion shares of the S&P 500. Trading volume dropped 12% on the NYSE and 19% on NASDAQ.

Several media sources highlighted the drop in initial unemployment claims to 364k, just four thousand less than last week - I suppose we are desperate for good news. Continuing unemployment claims dropped from 3.63 million to 3.55M. Third quarter GDP grew 1.8% and the University of Michigan consumer sentiment indicator rose slightly from 67.7 to 69.9.

I will be watching SPX as it tries to break out above the 200 dma tomorrow; if it manages to close above $1260, I may believe in Santa Claus after all.

Details

Written by Dr. Duke

Created: 21 December 2011

Our markets opened lower this morning and traded lower until around noon when the buyers started picking up the bargains and actually recovered all of the losses before the close. SPX closed the day at $1244 with a small $2 gain. RUT gained $2 to close at $740. Trading volume was flat to slightly downward with 3.0 billion shares of the S&P 500 stocks trading today; this is down from yesterday and below the 50 dma. Trading was flat on the NYSE and up 4% on NASDAQ, propelled by trading in the tech stocks after the disappointing Oracle earnings report.

Existing home sales for November came in at an annualized rate of 4.42 million, up from last month, but well below the five million expected by analysts. Early softness in the market was attributed to an ECB report that suggested several European banks would be in need of additional funding.

Today's market action can be considered bullish, in my opinion. SPX traded down as low as $1230 before recovering to end the day with a small gain. However, there is strong resistance in the $1260 to $1270 range, including the 200 dma at $1260. IBD moved to a market rating of "Confirmed Uptrend" yesterday, which surprised me. Certainly yesterday's move was impressive, but it takes more than one day to define a trend. So my view of this market remains that we are trapped in a narrow trading range until sufficient good economic data builds to eliminate the European debt worries or some surprising bad news pushes us over the edge. Of course, this is wonderful news for us non-directional traders, but tough for stock pickers. The VIX closed down at 21.4% today, a little surprising since the market traded down most of the day. In spite of the lower VIX, I still regard this market as an extremely volatile monster that can turn on a dime in either direction. Perhaps I am jaded from the wild swings we have seen this year, or maybe I have learned a valuable lesson.

Details

Written by Dr. Duke

Created: 20 December 2011

The stock markets opened up strongly this morning and steadily rose to close near their highs of the day. SPX rose $36 to close at $1241 and RUT tacked on $30 to close at $738. The talking heads cited the favorable Spanish bond auction and the favorable housing starts data for this rally. Housing starts for November came in at 685k, up from last month's 627k. Building permits also rose to 681k from the previous month's 644k. These are good signs, but hardly extraordinary. If this is the long awaited Santa Claus rally, it would be expected to continue into the new year, but that would be surprising behavior for this market. Maintaining an upward or a downward trend for more than two or three trading sessions has been unusual this year. The European debt crisis is far from resolved and while our own economy is showing signs of recovery, it is a very slow recovery at best. So I have to conclude that this rally will last only until the next negative news item comes out of Europe.

Trading volume spiked up today with 3.1 billion shares of the S&P 500 stocks trading, although this is slightly below the 50 day moving average at 3.2B. Trading on the NYSE rose 7% and volume increased 14% on NASDAQ.

Well, let's see what Santa brings us for the balance of the week...

Details

Written by Dr. Duke

Created: 19 December 2011

The markets opened up weakly in the black today but began giving the gains back within a few minutes and slowly declined all day, closing near the lows of the day. SPX closed down $14 at $1205 and RUT lost $13 to close at $709. Trading volume dropped dramatically with only 2.7 billion shares of the S&P 500 stocks trading today. Volume dropped 39% and 38%, respectively, on the NYSE and on NASDAQ.

There wasn't much economic news today, but financials seemed to lead the market weakness, but it wasn't clear what news precipitated that move. Band of America shares dropped below $5 today. I used to think of $5 stocks belonging to some little company few had heard of, but no more.

I closed the 970/980 put spreads in my January iron condor on SPX; with the earlier close of the 1350/1360 call spreads, that locks in an 11% gain.

The Santa Claus rally is remaining elusive so far. Maybe this will be one of the "exception" years.

Details

Written by Dr. Duke

Created: 16 December 2011

The bulls just can't seem to make their case. They had a couple of opportunities this week, but the runs to the upside fizzled out each time. This morning, the markets opened up in the black and traded upward, but it didn't last. SPX traded as high as $1231 before falling back and closing at $1220, up $4. RUT followed suit, running to $731 and then closing at $722, up $6. This was quadruple witching week, with expiration of the index options, index futures, stock options, and single stock options. Consequently, trading volume spiked with 4.1 billion shares of the S&P 500 changing hands. This is the first time in December that trading volume on SPX has broken the 50 day moving average; it only broke the 50 dma three times in November. Trading on the NYSE was up 48% and volume jumped 44% on NASDAQ.

Economic data was in short supply today. the CPI rose 0.2% in November and Fitch downgraded several large European and international banks, including BAC and GS. They also warned of possible downgrades for several European countries.

RUT settled at $721.85 and SPX settled at $1225.05. Thus, the remaining 560/570 put spreads in my December iron condor expired worthless, confirming a gain of $2,000 on 20 contracts or 12% on the capital at risk. That brings the 2011 track record for the Flying With The Condor™ to +39%. The Jan SPX iron condor stands at a net gain of $2,100 with the 970/980 put spreads remaining open. I will probably close them next week and make room for a new condor for the January expiration month.

I have kept a spreadsheet of the Thursday closing prices and the settlement prices for SPX and RUT for the past five years. That data is the basis of my Two Sigma Rule for closing positions before expiration week. The average difference between Thursday's close and the settlement price on Friday for SPX is $8.40 and $6.02 for RUT for the eleven months of 2011. That works out to approximately one half of a standard deviation for the overnight move, on average. But averages can have some outliers hiding in the data; thus, the Two Sigma Rule on the Friday before expiration week is a safe guideline.

Enjoy your weekend.

Details

Written by Dr. Duke

Created: 15 December 2011

The markets were caught today between fears of the next shoe dropping in Europe and some improved economic data here at home. SPX gained $4 to close at $1216 and RUT closed at $716, up $8. Trading volume dropped from yesterday with 2.8 billion shares of the S&P 500 stocks trading. Trading volume dropped 10% on the NYSE and dropped 2% on NASDAQ.

Initial unemployment claims came in at 366k, down from last week's 385k, while continuing unemployment claims held steady at 3.6 million. We seem to be steadily holding the initial claims number below 400k - a welcome trend. The PPI for November increased 0.3%  and capicity utilization remained flat at 77.8%. The Empire Manufacturing Index increased to 9.53 for December from last month's 0.61. All in all, this wasn't resoundingly good news, but it wasn't bad either.

I chose to close the 1350/1360 call spreads in my Jan SPX iron condor today. I was able to take them off for a small gain and basically lock in a reasonably high probability gain for this position. The SPX Jan 970/980 put spreads are far OTM and should expire worthless unless we have a global meltdown of some kind. Assuming the put spreads expire worthless, that will result in a 13.5% gain for this condor - not a bad start for 2012.

Details

Written by Dr. Duke

Created: 14 December 2011

Italy's latest bond auction further reinforced the traders' concerns over European debt with bond yields reaching 6.5%. The dollar strengthened against the Euro and US stocks dropped again today, although on only slightly higher volume. SPX closed down $14 at $1212 and RUT lost $10 to close at $708. Trading volume in the S&P 500 was slightly up at 3.2 billion shares, still below the 50 dma. Trading volume was flat on the NYSE and up 2% on NASDAQ.

No significant economic data were released today, so the fears about the European debt crisis leading to a global recession appear to be driving the pessimism.

My Jan iron condor on SPX stands at a P/L of +$1,980 with delta = -$2 and theta = +$49, on 20 contracts. The theta/delta ratio is strong; in fact, I am tempted to close this position early and lock in a nice gain. Hmmm.. My directional trades are being run over by this market as my delta neutral trades are making money. It makes a good case for diversifying your strategies.

Details

Written by Dr. Duke

Created: 13 December 2011

The markets opened up pretty strongly this morning and stayed in the black until after the Fed announcement. SPX closed down $11 at $1226 and RUT lost $15 to close at $718. SPX was as high as $1250 early in the day, but gave it all back in the last couple of hours of trading. Trading volume picked up with 3.1 billion shares of the S&P 500 stocks trading, but that is still below the 50 day moving average. Trading increased 24% on the NYSE and increased 14% on NASDAQ.

The big news of the day was the FOMC announcement. The Fed made the most positive statements about the economic recovery it has made in quite some time (albeit still modest). But many were expecting a QE III program of some sort and were disappointed. Thus, the markets traded off pretty strongly late in the day. The VIX dropped to 23.3% this morning but then moved up in the afternoon to close at 25.4%. The morning reading was the lowest VIX has been since early August.

My Jan SPX iron condor at 970/980 and 1350/1360 stands at a net gain of $1,400 with position delta = -$8 and position theta = +$77. Today's downward move relieved the pressure on the call spreads, so this position is in pretty good shape. But in this volatile market, that could change quickly. The Euro Watch is still in full swing and any manner of news could swing this market one way or the other very easily.

Details

Written by Dr. Duke

Created: 12 December 2011

Every major market index was down today. It started early with Intel's lowering of its outlook and it appears that as traders reflected on the Euro Summit over the weekend, they lost confidence that anything of substance had been really decided. So the fear that the European debt issues will spread to cause global economic issues is alive and well. SPX shed $19 to close at $1236 and RUT closed at $733, down $12. Institutional money managers appear to be sitting on the sidelines; trading volume was flat to decreased today with 2.8 billion shares of the S&P 500 trading, unchanged from Friday. Trading volume was down 7% on the NYSE and was down 6% on NASDAQ.

Interestingly, the VIX actually declined today as the markets also declined - is this a bullish divergence? The last three trading sessions have been maddening, steadily retracing the same territory each day. We will hear something from the FOMC tomorrow, but it isn't likely to move markets.

My Jan iron condor on SPX stands at a P/L of +$600 with delta = -$40 and theta = +$99. The call spreads are just outside one standard deviation OTM, so this position is in reasonable shape. The risk is principally on the call spread side since the 970/980 put spreads are very far OTM and thus unlikely to present a problem. The 560/570 put spreads are all that remain of the Dec RUT iron condor position, so they will expire worthless this weekend.

It will be interesting to see if today's divergence in the VIX is foretelling a move back up tomorrow. Of course, given the see saw action of the last several sessions, it is the bulls' turn tomorrow.

Details

Written by Dr. Duke

Created: 09 December 2011

The markets apparently liked what they were hearing out of Europe today (although there was a paucity of specifics), and so the buying commenced. SPX gained $21 to close at $1255; ironically, SPX gave up almost the same amount yesterday as it gained today. At one time, that would be considered an unusual coincidence, but not for 2011; this kind of volatility has become the norm. RUT behaved similarly to SPX, gaining $23 to close at $745. The VIX trimmed back to 26.4%, about where it was a week ago, after nearly reaching 31% yesterday. In spite of today's big gains, trading volume declined with 2.8 billion shares of the S&P 500 trading today; trading at the NYSE was down 13% and volume was down 10% on NASDAQ.

Economic data was minimal today with the University of Michigan Consumer Sentiment survey coming in at 67.7 for December, up slightly from November's 64.1.

My Jan iron condor on SPX stands at break-even with delta = -$45 and theta = +$87 on 20 contracts. The RUT 560/570 put spreads are all that remain of the December position, so they will most likely expire worthless next weekend.

So the European Watch continues; the next market moving news may well be some credit rating downgrade this weekend or next week. I believe this market remains a risky place for directional trades; use tight stops.

We had our first snow today here in Chicago - I offer that for those of you in warmer climates so you can gloat. Enjoy the weekend.