Dr. Duke's Blog

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Written by Dr. Duke

Created: 04 November 2011

The combination of a mediocre jobs report and the ongoing political drama in Greece left stocks trading weakly downward today. The vote of confidence for Papandreou is scheduled for 6 pm EDT today. Regardless of the outcome of that vote, I think this market remains paralyzed by European debt concerns for quite some time, at least through the end of the year. SPX lost $8 to close at $1253 after trading as low as $1240 earlier today. RUT closed at $746, down $5. Trading volume dropped to 2.9 billion shares of the S&P 500 today; trading on the NYSE dropped 19% and trading volume dropped 8% on NASDAQ.

The nonfarm payroll report was a bit disappointing for analysts; an increase of 80k nonfarm jobs were reported with an additional 104k private payroll jobs. Unemployment remained essentially flat at 9.0%, as compared to last month's 9.1%. Albeit weak, this jobs report underscores other recent economic data, suggesting a painfully slow economic recovery rather than the feared "double dip". I believe that economic data is the explanation for the S&P 500 holding support at $1220 this week, rather than falling back into the $1120 - $1220 trading range of the past 2-3 months. This results in what I am calling "a cautious bull market". There appears to be an undercurrent pushing this market higher, but it is being held back by the Euro Zone drama.

The volatility index, VIX, returned to 30%, which was the lower end of its trading range over the past three months. It will probably be difficult for volatility to remain below 30% until some confidence grows in the European debt bail-out plan. News out of the G20 Summit wasn't encouraging.

My Nov RUT iron condor continues to limp along with a P/L of -$4,380 with position delta = -$90 and position theta = +$439. The Dec condor stands at a P/L of -$1,320 with position delta = -$48 and position theta = +$104.

Have a great weekend.

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Written by Dr. Duke

Created: 02 November 2011

The markets bounced back from yesterday's disaster caused by Greek politics. SPX closed up $20 at $1238 and RUT gained $19 to close at $733. RUT completely recovered all of yesterday's losses while the SPX recovered a majority of the losses. Trading volume dropped off significantly with 3.1 billion shares of the S&P 500 trading. Trading volume dropped 29% on the NYSE and dropped 16% on NASDAQ. I would use yesterday's close on SPX at $1218 as the support level to watch as we continue watching this European sovereign debt comedy of errors.

Many analysts were watching for something new in the FOMC report and Bernanke's news conference, but those were pretty much non-events. The Fed doesn't foresee worsening economic conditions, but they see very slow recovery and remain committed to an easy money policy. ADP reported 110 thousand new private sector jobs in October, but this was below analyst estimates.

My Nov RUT condor stands at a P/L of -$3,940 with delta = -$23 and theta = +$306. That huge theta should start to work our position into the black. The Dec RUT condor stands at a P/L of -$1,060 with delta = -$31 and theta = +$97.

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Written by Dr. Duke

Created: 01 November 2011

Papandreou's announcement that he would seek a public referendum on the EU debt bailout plan sent markets tumbling both in Europe and here. Markets recovered somewhat as the day wore on. There appear to be two schools of thought: 1) Greek voters turn the rescue plan down and a global meltdown of banking follows, or 2) The EU tosses Greece out of the EU and Greece defaults and the markets have already priced that in. I am inclined toward the latter opinion, but I am certainly not a global banking expert.  SPX lost $35 to close at $1218, while RUT lost $27 to close at $714. The VIX popped up as high as 38% before settling back to 35%, for a five point jump from yesterday's close.

The area of about $1220 to $1230 is a congested support level first established back in early September after the August crash. The SPX struggled in that area for several days recently before breaking out to the upside. So far, that area of support is holding, but tomorrow may be a different day.

The ISM manufacturing index came out for October at 50.8, essentially flat from the previous month's 51.6. But the markets were completely focused on Europe and secondarily on the collapse of MF Global.

I removed the hedge on my Nov condor this morning. The spike upward in IV has hurt the P/L on both of the condor positions, but the position Greeks are actually pretty good. The Nov condor stands at a P/L of -$4,100 for 20 contracts with delta = +$8 and theta = +$244. The Nov 660/670 put spreads remain about one standard deviation OTM. The Dec condor stands at P/L = -$1020 with delta = -$19 and theta = +$95.

All eyes on Europe... again.

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Written by Dr. Duke

Created: 31 October 2011

Lingering concerns about Europe and BF Global's bankruptcy appeared to worry traders today. But it could have been simply a case of many institutional traders selling to capture profits for their month-end numbers. In any case, SPX shed $32 to close at $1253 and RUT closed at $741, down $20. The VIX bounced back up to 30%, reflecting some fears about a possible turn back down to test previous lows. Trading volume fell off a bit, with 3.3 billion shares of the S&P 500 trading. Trading volume rose 4% on the NYSE and fell 3% on NASDAQ. Today's price action took the SPX back well below its 200 dma; this is a significant level because many institutions trigger their trading off the 50 and 200 dma.

I removed the hedge on my Dec condor this morning, but left the Nov hedge in place. Both positions remain underwater, but the Greeks of both positions are in good shape. The November position delta is +$18 and position theta = +$200. Delta and theta for the Dec position are -$39 and +$89, respectively.

I have to run; goblins are at the door!

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Written by Dr. Duke

Created: 28 October 2011

Trading was very sluggish today with lower volume and virtually no direction. SPX closed at $1285, up less than a dollar. RUT closed down $4 at $761. There wasn't much economic news to chew on today. The University of Michigan consumer sentiment survey came in at 60.9, up a bit from the previous reading of 57.5. Trading volume was markedly down across the board with 3.4 billion shares of the S&P 500 stocks; trading was down 30% on the NYSE and down 35% on NASDAQ. The VIX actually opened up higher this morning at 26% but moved downward through the day to close at 24.5%. All signs appear to point to this rally having sustaining power, but the proof will come next week. We will have plenty of potentially market moving news events: the FOMC meeting and announcement, Bernanke's news conference, the G-20 Summit, and the non-farm payrolls report.

I rolled the 780/790 call spreads in my Nov RUT condor to 790/800; this position remains underwater with a P/L of - $3,590 with delta = -$27 and theta = +$119. My Dec condor at 560/570 and 830/840 is hedged and stands at a P/L of -$1400 with delta = -$11 and theta = +$50.

Have a great weekend. Be sure to take time to smell the roses.

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Written by Dr. Duke

Created: 27 October 2011

The late Harry Caray of Cubs baseball fame here in Chicago made "Holy Cow" one of his trademarks. And it certainly would apply to today's market. A deal was reported out of Europe this morning to address the European sovereign debt issues and the market went ballistic. SPX gained $43 to close at $1285 while RUT closed up $38 at $765. SPX sliced through its 200 dma at $1274. The only sign of weakness was giving back about $10 in the last few minutes of trading. The VIX gapped down at the open and closed at 25.5%, the lowest level since early August when the market collapsed. Trading volume surged with over 4.9 billion shares of the S&P 500 trading. Trading volume was up 27% on the NYSE and was up 32% on NASDAQ.

Third quarter GDP grew at 2.5%, a nice increase over the second quarter's anemic 1.3% growth. That helped calm some recession fears. Unemployment remains stubornly high with 402k new unemployment claims, flat from last week. Continuing unemployment claims dropped by 96k to 3.6 million.

The market's surge forced me to re-establish my hedges on the November iron condor (I wish I had left the hedges in place from Monday); I also rolled the put spreads up to 660/670. This adjusted our Greeks to an acceptable range with delta = -$19 and theta = +$96, but we remain underwater.

Market analysts have been almost unanimously surprised with the extreme strength of today's rally with several analysts predicting a pull back in coming days. But getting in front of this freight train could be dangerous.

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Written by Dr. Duke

Created: 26 October 2011

Traders were focused on the European Union Summit today, and the markets gyrated back and forth as a result. No clear plans were forthcoming, so traders took varying positions. The markets opened positively but then sold off. But buying resumed in the afternoon and the markets closed with modest gains. SPX gained $13 to close at $1242. RUT closed at $727, up $14. Trading volume was up with 3.7 billion shares of the S&P 500 trading (50 dma at 3.6B). Trading was up 9% on the NYSE and was up 20% on NASDAQ.

New home sales increased 17k to 313k for September. But durable goods orders dropped 0.8% in September, a larger loss than the previous month's 0.1% decline.

My Nov iron condor on RUT stands at P/L of -$340 with delta = -$87 and theta = +$192. As it becomes more clear that a quick fix isn't coming out of Europe, will traders turn their attention elsewhere, or will we continue to "muddle along"?

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Written by Dr. Duke

Created: 25 October 2011

The markets traded back down today as some of the news from Europe wasn't reassuring. One finance minister meeting was cancelled and traders feared the scheduled summit might also be rescheduled. Some analysts also predicted that no firm solutions to the European debt are expected anytime soon. Perhaps the markets got a little ahead of themselves over the past couple of weeks? SPX dropped $25 to close at $1229 while RUT closed at $714, down $22. Today's drop on SPX returns us to the support level at $1230; it will be interesting to see if SPX opens below $1230 in the morning. If so, we may retest some of the recent lows. The price action on RUT was even more ugly today - RUT gave back all of yesterday's gains to place this index firmly back within the trading range of the past few months. Trading volume was flat on the S&P 500 with 3.3 billion shares trading; trading volume on the NYSE increased 9% while volume on NASDAQ dropped 6%.

Today's economic news was disheartening, but probably had minimal effect on traders who are preoccupied with Europe. The Case-Shiller housing price index dropped 3.8% in August and  consumer confidence numbers dropped to 39.8 for August from September's 46.4.

I removed the hedges on my Nov RUT condor position; it now stands at a P/L = +$200 with delta = -$61 and theta = +$183. So now we watch to see if we have returned to the trading range. Given the continuing uncertainty in Europe, it certainly seems logical to expect our markets to remain trapped in this trading range.

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Written by Dr. Duke

Created: 24 October 2011

Markets rallied again today, but on lower volume. SPX gained $16 to close at $1254 and RUT closed up $24 at $736. RUT has now closed for the first time outside the trading range formed since early August. SPX closed outside this trading range for the second time today, but the lower volume causes one to pause. The next resistance level is the $1260 low formed in June. The VIX dropped to 29%. This modest drop reinforces the fact that we still have several ticking time bombs in Europe. Overnight news from Europe could tank our markets very easily one of these days, so be cautious. Third quarter GDP data comes out on Thursday - that will be another test of this rally. You may scoff at my caution, but the lower trading volume suggests the large institutional players are on the sidelines of this rally, so I don't think I am alone with my concerns about this market.

Trading volume dropped off today with 3.3 billion shares of the S&P 500 stocks trading; trading volume was down 20% on the NYSE and was down 5% on NASDAQ.

I hedged my November condor on RUT and it stands at a P/L of -$950 with position delta = -$37 and position theta = +$116. Volatility on RUT remains at 40% so that keeps considerable pressure on  my call spreads as this rally continues. So, we hold our binoculars with one hand as we keep a close eye on Europe and hold our wallet with the other hand. Let's see what tomorrow brings.

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Written by Dr. Duke

Created: 21 October 2011

The markets traded up strongly for the first ten days or so in October but for the past several days, the major indexes seemed to stall at the upper end of the trading range we have been trapped within since August 1. This stall, in itself, was a new wrinkle to the pattern. Previous runs to the upper end of the trading range had just as quickly descended to the lower end of the range. SPX broke through the upper end around $1230 and forcefully closed near its highs for the day at $1238, up $23. RUT gained $16 to close at $712. RUT remains within the trading range of the past couple of months but SPX is in uncharted territory. Traders are still nervously watching Europe for any signs of the sovereign debt crisis being contained. News this weekend could easily undo today's nice bullish run outside the trading range. So we must remain cautiously optimistic. Trading volume bumped up a bit from yesterday with 3.7 billion shares of the S&P 500 trading. Trading volume on the NYSE was up 19% but trading volume declined 2% on NASDAQ.

RUT settled at $709.83, so the remaining 560/570 put spreads in our October iron condor position expired worthless, and that position logged a 9.4% return. The November iron condor on RUT stands at a P/L of +$440 with delta = -$61 and theta = +$163.

So now we pat ourselves on the back for making money in October and focus on enjoying our families and friends for the weekend. Try not to think about the markets until Monday morning.