Dr. Duke's Blog

Details

Written by Dr. Duke

Created: 07 December 2011

I grew up in an America where we were infamous for not having a clue about what was going on anywhere else in the world. How surprising it is now to find us knowing the names of Europeans involved in the ECB, finance ministers and other European leaders. Moreover, our markets have been hanging on every bit of news coming out of Europe. Today was no different. Our markets were basically treading water looking forward to the Euro Summit when news came out late in the afternoon that the G20 was considering some kind of lending program to assist Europe. That spiked the major market averages for a few minutes, but then most of those gains were erased into the close. SPX ended up with a $3 gain to close at $1261 and RUT gained less than a dollar to close at $746. Market trading volume was flat to modestly higher with 3.0 billion shares of the S&P 500 trading (3.3B is the 50 dma). Trading volume was up 14% on the NYSE and up 11% on NASDAQ.

More ominously, today marks the fourth session that the VIX has moved upward, closing today just under 29%. This marks a classic divergence with the VIX moving upward as the market averages track sideways. At best, it represents a great deal of uncertainty among traders as they hedge themselves against a possible down draft. At worst, it is predicting the down draft. I am inclined to think we will continue to trade largely sideways, but within a volatile trading range - in short, more of the same. My reasoning is simplistic. I don't see any clear and definitive solutions to the European debt crisis coming out in the short term; much like our own situation here, the political realities dictate a lengthy, contentious struggle.

My Jan SPX iron condor continues largely "as is" with a P/L of -$1140 with delta = -$50 and theta = +$95. So our position's theta/delta ratio remains strong, but the 1350/1360 call spreads are inside of one standard deviation OTM, so that is keeping our condor in red ink. Tomorrow and Friday we will likely see volatile moves in both directions for the markets as various news tidbits flow out of the Euro Summit.

Details

Written by Dr. Duke

Created: 06 December 2011

The markets opened and traded sideways most of the day. SPX made a run higher in the last hour of trading, but gave up most of that gain before closing roughly unchanged at $1258 (up only $1) and RUT was flat at $747. Trading volume also fell off with only 2.7 billion shares of the S&P 500 trading. Trading volume was down 11% on the NYSE and was down 12% on NASDAQ. The VIX rose slightly today to close at 28.1%.

No significant economic data was reported today. The market appears to be treading water while waiting on the Euro Zone summit later this week. But I will be surprised if we receive definitive news out of the summit.

My Jan iron condor on SPX stands at a P/L of -$900 with delta = -$49 and theta = +$89. Now we return to the Euro Zone watch...

Details

Written by Dr. Duke

Created: 05 December 2011

The markets opened very strongly this morning, suggesting that all Euro worries were now past us. But S&P warned several European countries, including Germany, that their bond ratings might be downgraded. That news pulled the markets back, but they remained in positive territory for the day. SPX gained $13 to close at $1257 and RUT closed up $12 at $747. The SPX ran as high as $1267 in the morning; the 200 dma stands at $1265. A close above the 200 dma would be a bullish sign. Trading volume was flat with 3.1 billion shares of the S&P 500 stocks trading today. Volume on the NYSE was up 2% and was also up 2% on NASDAQ.

It was interesting to note that the VIX actually rose today, a little surprising on a positive market day. The VIX has not declined as much as one might expect since this mini-rally began last week - there is still a lot of concern about the Euro Zone debt issues and how that may impact the US markets. The ISM Services Index declined a bit in November to 52.0 from the previous month's 52.9.

My Jan iron condor on SPX stands at a P/L of -$1260 with delta = -$55 and theta = +$97. The 1350/1360 call spreads are inside one standard deviation OTM now, but the theta/delta ratio is still healthy.

Details

Written by Dr. Duke

Created: 02 December 2011

The nonfarm payroll report, aka the jobs report, showed improvement this month with an addition of 120 thousand jobs, up from 100k last month. Unemployment fell from 9.0% to 8.6%, but the average work week is flat at 34.3 hours. So the data represents an improvement, but far from enough to remove the European problems from traders' minds. The market opened up positively and SPX hit $1260 by about 10 am ET, but then steadily gave it all back throughout the day. SPX closed unchanged at $1244; RUT gained $4 to close at $735. Another indication of the general levels of apprehension on the street was the VIX, which actually edged up a bit to 27.5%. So the drive behind Wednesday's huge market move remains a mystery to me. Trading volume today was basically flat with 3.1 billion shares of the S&P 500 trading. Volume increased 4% on the NYSE but dropped 10% on NASDAQ.

I missed writing my blog yesterday because I was busy preparing for my trading group meeting last evening. The strength of Wednesday's move, coupled with the possibility of a positive jobs report stimulating another strong move upward caused me to close the 830/840 call spreads in my Dec RUT iron condor yesterday for $0.19. Now it is apparent that was unnecessary, but it was the safe move. Assuming the Dec 560/570 put spreads expire worthless (a safe assumption), that locks in a gain of $2,000 on 20 contracts or 12% on capital at risk. That brings the track record for the Flying With The Condor™ service to a 39% gain for 2011. If one had invested in the S&P 500 at the beginning of the year, he would be underwater by 1% at this point. So I'm proud of my 39% gain. Ouch! My shoulder always hurts when I pat myself on the back too much.

Allow me to make one more observation: I only had three months this year when adjustments to my condor position were not required. Several months required five or six adjustments to salvage a gain or minimize the loss. It is easy to put on an iron condor position, but managing the position is the tough part. You can download the detailed track record in the Downloads section of this web site.

The Jan iron condor on SPX at 970/980 and 1350/1360 stands at break-even with delta = -$39 and theta = +$74. The call spreads are approximately one standard deviation OTM, so the condor is slightly pressured from the top side, but is generally in pretty good shape, unless we have a few more days like Wednesday. But the beauty of non-directional trading is that I will deal with that if and when it occurs. I don't need to see the future to be successful.

Given all of the apprehension surrounding Europe, it is hard to forget about the markets over the weekend, but try to do just that. You can't do anything about it until Monday anyway, so focus on the family and regenerating yourself this weekend. Enjoy!

Details

Written by Dr. Duke

Created: 30 November 2011

China started this huge tidal wave in the markets when it announced overnight that it was reducing the reserve requirements for their banks. Then news that our Fed was going to loan dollars to the European Central Bank poured more fuel on the fire. The result was one of the largest single day rallies in history. The Dow gained over $490 and broke through the $12,000 mark. This was the largest single day rise of the Dow since March of 2009. SPX gained $52 to close at $1247 and RUT gained $41 to close at $737. Trading volume was huge as well with 4.1 billion shares of the S&P 500 trading. Volume jumped 36% on the NYSE and was up 51% on NASDAQ. The VIX dropped about three percentage points to close at 27.8%. But before you pop the champagne, remember that the VIX dropped below 25% in late October before the November weakness set in.

Today's price action on SPX just sliced through several levels of resistance without any hesitation. The next possible resistance levels would be $1260 and then the October high at $1290.

Several economic reports bolstered this rally with the ADP employment report citing 206 thousand new jobs created on private payrolls - now the speculation starts about Friday's jobs report. The Chicago PMI jumped markedly to 62.6 for November from last month's 58.4. And pending home sales jumped over 10% in October.

My Dec iron condor on RUT stands at a P/L of +$2,080 with delta = -$4 and theta = +$52. The Jan SPX iron condor stands at a P/L of +$60 with delta = -$32 and theta = +$67. The 1350 calls are now inside of one standard deviation. Given how pessimistic traders were just a few days ago about the European sovereign debt situation, the strength of this rally is surprising. The next few days will be interesting to watch.

Details

Written by Dr. Duke

Created: 29 November 2011

Markets opened up strongly this morning, but chopped slowly sideways and lower as the day progressed. SPX ran up to $1203 before stalling. You may recall that $1200 was the peak hit in early and mid-September; SPX traded in the range of $1210 to $1225 in mid-October and $1220 was the support level for the bounce in early November. So this range of $1200 to $1220 may be difficult to break through decisively. SPX closed at $1195, up $3 and RUT lost $2 to close at $696.  Trading volume was down with 2.9 billion shares of the S&P 500 trading today; trading volume was down 4% on the NYSE and flat on NASDAQ.

Consumer confidence raised to a level of 56.0 for November, up from the 40.9 level of the previous month. But the Case-Schiller housing price index fell another 3.6% in September - will housing prices ever stabilize? In a separate interview, Dr. Schiller, of the Case-Schiller Housing Price Index, said that the principal factor holding down housing prices was the reluctance of banks to make residential mortgage loans; he maintains that banks have tightened their requirements even further than required by the bank regulators. And the weak housing market represents a significant portion of the unemployment in this country.

So our equity markets are caught between European sovereign debt worries and our own economic concerns here at home - unemployment, high national debt, and a deadlocked Congress. It seems unlikely that we will see equities pull out of this sideways march anytime soon.

My Dec condor on RUT stands at a P/L of +$1,840 with delta = +$8 and theta = +$77. The Jan SPX condor stands at a P/L of +$440 with delta = -$11 and theta = +$67. As a reminder, these condor are twenty contract positions, so the Greeks are proportional to the number of contracts. So you have to scale my Greeks accordingly to match up with your positions.

Details

Written by Dr. Duke

Created: 28 November 2011

The markets bounced back strongly this morning based on positive news out of Europe, although most of it appeared rather tenuous. But the market was ready for some good news and the major indexes all posted huge gains. SPX gained $34 to close at $1193 and RUT closed up $32 at $698. Retail stocks were buoyed by early reports of Black Friday sales being up significantly. New home sales came in at 307k for October, up slightly from September's 303k. Trading volume in the S&P 500 stocks was up from last week at 3.0 billion shares, but still below the 50 dma at 3.4 billion shares.The volume data for NYSE and NASDAQ was up significantly, but that was in comparison to Friday's light session, so that wasn't meaningful.

SPX is now closing on the heavy congestion area of $1200 to $1220, where it hung up for several sessions in mid-October.

My iron condors are both almost perfectly delta neutral after today's bounce; the Dec iron condor on RUT stands at a P/L of +$1,820 with delta = +$8 and theta = +$70. I entered my Jan iron condor on SPX at 970/980 and 1350/1360; it stands at a P/L of +$700 with delta = -$4 and theta = +$54.

Will tomorrow see some profit taking after this huge rally? And, of course, we are still subject to the news and rumors out of Europe. That could push us dramatically one way or the other. So don't become complacent.

Details

Written by Dr. Duke

Created: 23 November 2011

Traders reacted negatively to several reports out of Europe: a disappointing bond auction in Germany, weak manufacturing data, and more. Markets will be open for half the day Friday, but many traders have left until Monday. Traditionally, this long weekend is seen as a time to rest and forget about the markets; but this year is different, traders fear what may happen in Europe while our markets are closed. Most of the broad market indicators suggest we are very oversold at this point after trading down strongly the past several sessions. SPX shed another $26 today to close at $1162 while RUT closed at $674, down $22. However, both yesterday and today, as the broad indexes dropped significantly, the VIX didn't rise much - down one point yesterday and up one point today. That is an interesting divergence that may point to higher prices next week. But who knows? If someone in Europe coughs, our markets will get pneumonia!

Initial unemployment claims are flat from last week, which is good, since we appear to finally be holding steadily below 400k. This week's claims came in at 393k. Continuing claims were up 68k at 3.7 million, essentially unchanged.

My Dec iron condor on RUT at 560/570 and 830/840 stands at a net gain of $840 with delta = +$24 and theta = +$99. We will see what happens next week. Unless some dire news comes out of Europe, I think we are poised for at least a short term rally. But let's forget about that and focus on family tomorrow. Happy Thanksgiving.

Details

Written by Dr. Duke

Created: 18 November 2011

SPX closed today almost exactly at yesterday's close. So support at about $1215 is holding thus far, with overhead resistance at $1290. Trading volume fell off today and the SPX opened and closed almost exactly at the same price, thus the classic doji candlestick, a sign of indecision or balance between the bulls and the bears. SPX closed at $1216, down less than a dollar; RUT gained $1 to close at $719. Given that next week is a shortened holiday week, continuing to trade sideways at lower volume may be what we can expect. Trading volume on the S&P 500 dropped to 3.0 billion shares; trading on the NYSE dropped 1%, but trading on NASDAQ decreased 21%.

RUT settled at $720.35. Thus, the Nov 660/670 put spreads and 790/800 call spreads expired worthless for a gain of $1,460 on 20 contracts, or 9% on the capital at risk. This brings the Flying With The Condor™ track record for this year to a 35% gain. The Dec condor position on RUT at 560/570 and 830/840 stands at a gain of $980 with delta = -$6 and theta = +$97. This is a great market environment for delta neutral trading, but directional traders are having a tough time.

Enjoy the weekend.

Details

Written by Dr. Duke

Created: 17 November 2011

Markets opened weakly this morning and the selling intensified as the day wore on. SPX lost $21 to close at $1216 while RUT lost $11 to close at $719. Trading volume rose again today with 3.6 billion shares of the S&P 500 trading hands, right at the 50 dma. Trading was also up on the NYSE and NASDAQ, 9% and 14%, respectively. The VIX rose over 36% but pulled back to close at 34.5%. SPX traded down as low as $1209 before recovering to close at $1216, just below the $1218 close about a week ago. Will support hold?

Economic data wasn't bad, so I don't think that was the underlying cause; the European debt crisis is overshadowing everything. Unemployment claims were once again under 400k, at 388k; continuing claims dropped to 3.6 million. Housing starts were flat at 628k and building permits increased from 589k to 653k. But the Philadelphia Fed survey dropped to 3.6 from the already weak 8.7.

I am allowing the 790/800 call and 660/670 put spreads of my Nov iron condor on RUT to enter expiration and expire worthless. Both spreads are over three standard deviations OTM. This results in a gain of $1,460 on 20 contracts or 9% on capital at risk. The Dec RUT condor position stands at a P/L of +$860 with delta = -$12 and theta = +$90.

So now we wait to see if the gloomy mood continues tomorrow; the SPX is now down over 3% for 2011. Those predictions of $1450 for year end are looking pretty optimistic.