Dr. Duke's Blog

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Written by Dr. Duke

Created: 03 October 2011

More negative news from Europe sent traders to hit the sell button. It strengthened the US dollar and that also pushed the equity markets lower. SPX lost $32 to close at $1099 and RUT closed at $610, down $35. Trading volume in the S&P 500 stocks spiked upward with 4.4 billion shares trading; this is above the 50 dma of 3.9B. Trading volume on the NYSE increased 11% and trading on NASDAQ jumped up 25%. We had positive economic news this morning with the ISM manufacturing index coming in at 51.6 for September, up  a small amount from August's 50.6. Construction spending was up 1.4% in August, as compared to a decline of 1.4% in July. But these data points were widely ignored. Every major market index booked losses. Many stocks hit 52 week lows.

Today's action broke the support levels that were set in the August crash and had been repeatedly tested, so this was significant. SPX broke through $1200 to close at $1099, and it closed at the low of the day - very bearish. RUT was even more bearish, closing at $610, well below the August lows at $650. For a couple of months we have been wondering if this was a correction in a bull market or the beginning of a bear market. Today's action strongly suggests the latter.

My Oct condor is unchanged with my holding only the 500/510 put spreads. I am still looking for the opportunity to re-position the call spreads.

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Written by Dr. Duke

Created: 30 September 2011

This is becoming all too familiar. Trading in Asia and Europe seemed to set the stage for our markets as they opened weakly and never made it into positive territory all day. SPX closed at $1131, down $29 while RUT gave up $19 to close at $644. This places RUT right at the lower end of the trading range of the past two months. SPX is close the lower end of the range at $1120. Next week will tell the tale: either the markets strengthen and bounce back upward, or break through support to make new lows and confirm a bear market trend. From my perspective, mediocre to poor economic news abounds, but it doesn't seem to me that much of anything has significantly changed from two months ago - D.C. has deteriorated into a Hatfield and McCoys soap opera, the European Union is in disarray about the sovereign debt crisis; but we knew that two months ago. It seems the general mood of traders has simply turned pessimistic. The Chicago PMI came in at 60.4 today, up from August's 56.5 and the University of Michigan's consumer sentiment survey came in at 59.4 for September, a small improvement from the previous 57.8. But traders ignored this data and sold the market. Even more disheartening, the markets sold off strongly in the last hour of trading. Trading volume declined from yesterday with 3.5 billion shares of the S&P 500 trading, below the 50 dma at 3.9B; but trading volume was up 6% on the NYSE, and down 11% on NASDAQ.

My October iron condor on RUT continues to limp along as a 500/510 put spread. I closed the call spreads and have been waiting for the market to strengthen so I could re-position the call spreads and eventually roll up the put spreads. But so far, I have been trapped. Fortunately, the put spreads remain over two standard deviations OTM, but I am starting to run out of time.

Next week should be interesting, but now we turn our attention to our families, chores around the house and healthy recreation. Have a great weekend.

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Written by Dr. Duke

Created: 29 September 2011

A friend of mine has an expression, "Nervous as a long tailed cat in a room full of rocking chairs". The current market environment is difficult to describe; recent volatility has set records. The market shifts by several percent in a matter of minutes based on unsubstantiated rumors. In short, it is a scary place to be. Today's market opened to a lot of good news. The German parliament voted to support the proposed European sovereign debt bailout structure. Initial claims for unemployment in this country dropped by 37 thousand to 391k while continuing unemployment claims dropped by 20k to 3.729 million. Second quarter GDP grew by 1.3%, beating expectations of 1.2% and the first quarter's 1.0%.

All of this positive news resulted in strong open to trading this morning; SPX traded as high as $1176 during the first hour of trading, but quickly started to give it all back, hitting a low of $1140 about 3 pm EDT. Then the markets rallied for the last hour of trading to post gains for the day. SPX closed at $1160, up $9 and RUT gained $11 to close at $663. Trading volume was up modestly with 3.6 billion shares of the S&P 500 trading; trading volume was up 8% on the NYSE and was up 19% on NASDAQ.

Directional trading in this environment is extremely difficult. Even stocks with stellar financials and future prospects, like AAPL, are being jerked around on a daily basis. I normally think of IBM as a slow and steady blue chip stock. During the month of September, IBM's share price has traded over a wide range, from $159 to $181. Implied volatility of IBM's options has been running around 30-35% since the August crash - a big change from the "good ole days" when it ranged around 15%.

So what's working now? Legging into iron condor spreads has been successful for me, but it is a dangerous business. Normally, I position both sides of my iron condor on the same day. If you can place your put spreads on a weak day when you believe the market has hit bottom and vice versa for the call spreads, you can end up with condor positions that are quite wide. For example, my Oct GOOG iron condor is placed at 480/490 and 580/590, $90 wide. But timing your entries is tricky. Probably the best advice in this market is to be much more picky than usual about your trades - there is nothing wrong with passing up opportunities and waiting for a higher probability play.

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Written by Dr. Duke

Created: 28 September 2011

Traders sold off pretty strongly today, probably in anticipation of Germany's Parliament voting on the European bailout proposal tomorrow. It's hard to predict how the markets will respond if the bailout proposal fails to get through the parliament. Will we break through the bottom of this trading range? SPX lost $24 to close at $1151 while RUT lost even more, closing down $28 at $652. RUT had set a low end of the range around $650 but broke through to about $635 last Thursday, so today's close at $652 is near the low end of the recent trading range. By contrast, SPX is just below the midpoint of its recent trading range. Trading volume declined again today with 3.2 billion shares of the S&P 500 trading, well below the 50 dma. Trading volume was also down on the NYSE and NASDAQ, down 11% and 8%, respectively.

AMZN was one of very few stocks that posted gains today; they introduced their new tablet computer, Kindle Fire. They hope to compete with Apple's iPad, but the competitive landscape is littered with the corpses of the other wanna-be tablets. AMZN hit a 52 week high today at $230 and will announce earnings Oct. 20. That might present some interesting trading opportunities.

My Oct iron condor remains "half a man" with only the 500/510 put spreads. I missed the opportunity yesterday to get the call spreads in place. But with RUT's weakness today, I am glad to at least be safely OTM. Tomorrow's market is bound to be a roller coaster ride based on news from Europe. It will be interesting.

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Written by Dr. Duke

Created: 27 September 2011

Yesterday's rally continued this morning on an even stronger pace, but a Financial Times article this afternoon stopped the rally in its tracks. SPX had run as high as $1196, but pulled back over $20 in the last hour of trading to close at $1175, salvaging an increase of $12 on the day. RUT gained $15 to close at $680. Rumors, news, quotes, interviews and speculation on how the European debt crisis will be handled or mishandled are driving this market. Even our own politicians fumbling around has been pushed to the back burner. Placing directional trades in this environment is very difficult.

The Case Shiller Housing Price Index dropped 4% in July and the consumer confidence index remains essentially flat at record low levels. Traders obviously were not alarmed by this weak data, since the markets were moving strongly higher before and after these reports were publicized.

SPX has been trading in the range from $1120 to $1220. Today’s run took the index near the high end of the range before pulling back. Looking back over the past couple of months, it has taken about 5 to 6 sessions to trade from one end of the range to the other. It will be interesting to see if this upward trend has now ended after three days or whether it will continue upward in an attempt to break through resistance at $1220.

My Oct condor on RUT continues with only the 500/510 put spreads. I almost pulled the trigger to sell some call spreads this afternoon, but decided to wait – then the market collapsed. I may have missed my opportunity, at least for this week. But one thing is clear in this market. Trading delta neutral is much easier than trying to predict the next move of this skittish market.

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Written by Dr. Duke

Created: 26 September 2011

The markets opened weakly this morning but rallied strongly later in the day based on favorable news from Europe that plans were being formulated to handle the Greek debt crisis; however, no official press releases have confirmed that report. On the other hand, from a technical viewpoint, the major indexes had been testing the bottom of this trading range for the past three trading sessions. So, a bounce upward back into the trading range isn't too surprising. SPX gained $27 to close at $1163. RUT closed at $666, up $13. Trading volume dropped with 3.5 billion shares of the S&P 500 stocks trading today; volume also dropped on the NYSE with a 26% drop, but traded flat on NASDAQ.

New home sales for August came in at 295k, down slightly from the previous month's 302k. The Case Schiller Home Price Index comes out tomorrow and will be another measure of the state of the ailing real estate market.

My Oct iron condor position on RUT only consists of the 500/510 put spreads. As RUT strengthens, I will re-establish my OTM call spreads to complete the condor position.

The fear and anxiety in the markets has certainly not disappeared. So, don't let today's rally make you complacent. Between the Euro debt crisis, fears of a global recession and our own Washington debt squabbles, this market can turn on a dime at a moment's notice.

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Written by Dr. Duke

Created: 23 September 2011

SPX opened this morning and immediately tested the lows yesterday by hitting a low of $1121 before rebounding and then trading sideways all day. SPX closed at $1136 for a gain of $7. RUT gained $9 to close at $652. Thus far, it appears the bottom of this trading range on SPX from about $1120 to $1220 is holding. But the market is fragile. More bad news from Europe or Washington could send it lower. Trading volume was reasonably high, but dropped off from yesterday’s high levels. 4.1 billion shares of the S&P 500 traded today, still well above the 50 dma. Trading volume dropped 28% and trading on NASDAQ dropped 32%.

At this point, it is clear that we are in a trading range, and have been in this range for several weeks. Technical analysts tell us that the longer one is in a trading range, the stronger the eventual break-out. The news or data item that tips the markets one way or the other will likely be from the European debt crisis, Washington’s deadlock, or some clear economic data signaling the next recession. Soon, we will have earnings announcements to add to the excitement.

My Oct condor remains unchanged with the 500/510 put spreads on RUT. Hopefully, good news comes out of Europe this weekend. But try not to worry about that until Monday. Enjoy the weekend.

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Written by Dr. Duke

Created: 22 September 2011

Traders focused on the FOMC statement I highlighted yesterday, "Moreover, there are significant downside risks to the economic outlook, including strains in global financial markets." Thus, the day began with heavy selling and the selling just intensified as the day went on. The only glimmer of hope came at the end of the day as SPX bounced off the August lows after breaking through those lows a few minutes earlier. SPX closed at $1130, down $37 and RUT lost $21 to close at $643. Traders are debating whether the principal driver for the bears is the fear of a recession or fear of a debt problem in Europe spreading globally.

Trading volume spiked upward again today with 5.6 billion shares of the S&P 500 stocks changing hands; trading volume increased 39% on the NYSE and increased 35% on NASDAQ. In August, SPX hit closing lows around $1120 and intraday lows around $1100. During the last hour of trading today, SPX broke through to $1114, before bouncing back to close at $1130. I will be watching the opening closely tomorrow morning with those levels in mind.

Initial unemployment claims came in at 423k, down nine thousand from last week. Continuing unemployment claims dropped 28k to 3.727 million. Leading indicators dropped to 0.3% for August from the previous month’s 0.6% value. So our economic indicators and corporate earnings data appear to be continuing roughly sideways to slightly positive. But the fears of a double dip are so widespread, it has almost become a foregone conclusion.

My Oct iron condor on RUT only consists of the 500/510 put spreads at this time and they are still quite safe in spite of this downturn. The worst case scenario will be a small loss for October, but the game is far from over.

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Written by Dr. Duke

Created: 21 September 2011

The markets chopped back and forth all morning anticipating this afternoon's FOMC announcement. When the announcement finally hit the wires, the markets dropped a bit and the standard analysis was that traders were disappointed with the Fed's Operation Twist. But operation twist was telegraphed plainly to the markets over the past few weeks; I think that news was “baked into” the market’s pricing. So the market sold off on the news (buy the rumor; sell the news).

I think the first reaction of analysts was to study all of the details concerning Operation Twist, but then they stumbled onto some unusual Fed language: “Moreover, there are significant downside risks to the economic outlook, including strains in global financial markets.” In my experience, the Fed has always used very obtuse and measured language that keeps everyone guessing the real meaning. But “significant downside risks” is pretty plain and strong language. That may be what led to the flurry of selling in the last hour of trading today.

SPX lost $35 to close at $1167 while RUT closed at $665, down $25. Trading volume spiked upward with 3.9 billion shares of the S&P 500 stocks trading today, well over the 50 dma. Trading volume was also up on the NYSE and NASDAQ, with increases of 32% and 13%, respectively. Today’s big drop took the major market averages back near the middle of the trading range we have been in for the past six weeks or so. Will we retest the lows of early August?

I took this opportunity to close the Oct 770/780 calls in my RUT Oct iron condor, leaving the 500/510 put spreads in play. I have been forced to hedge the call spreads several times over the past few weeks, so when I had an opportunity to close those spreads for a profit, I took it. Presumably, I will have an opportunity to reposition those call spreads farther OTM later this month. At that time, I will also roll the put spreads upward and confirm most of those gains.


So now we watch for clues: Retesting the lows? Breaking through to a full fledged bear market? Bouncing back and staying in this trading range?

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Written by Dr. Duke

Created: 20 September 2011

The markets traded up strongly today, but the bears pulled the market back during the last hour of trading. SPX traded up to $1220, a strong resistance level, and pulled back to close at a small $2 loss at $1202. RUT traded down $12 to close at $690. Trading volume was flat to down with 2.9 billion shares of the S&P 500, down from yesterday and below the 50 dma. Trading volume on the NYSE and the NASDAQ was up 1%.

Traders are focused on the FOMC statement due out tomorrow afternoon. In my opinion, there is an unrealistic expectation for the Fed to somehow pull the market out of this hole. Much discussion has focused on the expected "twist" program, but very few economists have an expectation that this would have much effect on the economy or the markets. Thus, my expectation is for the FOMC to disappoint the markets tomorrow. It is unclear whether this is priced in or not - perhaps today's sell-off was the anticipation of the announcement? In any case, it is hard to build a bullish case for this market.

My Oct iron condor at 500/510 and 770/780 stands at a P/L = -$1444 with delta = -$46 and theta = +$111. Now we return to Fed watching.