Dr. Duke's Blog

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Written by Dr. Duke

Created: 23 February 2011

The continued unrest in Libya and the Middle East cast a pall over the markets this morning, but traders were trying to buy the dip until oil hit $100 per barrel. That brought the sellers back into the market in strength. The S&P 500 Index hit $1300 in the early afternoon and found support there, closing at $1307, down $8 on the day. The Russell 2000 Index (RUT) appeared to be hurt by the prospects of $100 oil more than SPX today. RUT broke through support at $810, hit the 50 day moving average and bounced, closing at $800, down $13. Trading volume was up again today with 4.5 billion shares of the S&P 500 changing hands. Trading volume was up 2% on the NYSE and was up 10% on NASDAQ. The only economic news of any consequence today was positive: a 2.7% increase on existing home sales for January, but $100 oil and revolts in the Middle East held traders' attention. From my perspective, the panic that seemed commonplace in the markets yesterday was more subdued today with more traders expecting that the worst was over - of course, that could be wishful thinking. But there were glimmers of hope, e.g., the tech bellwethers, APPL and GOOG traded up $4 and $1, respectively. That isn't much more than a glimmer, but...

My PCLN Mar/Apr call calendar was closed for a 4% gain today; the big price drop over the past two days erased most of my profit. I was playing the volatility increase in front of tonight's earnings announcement, but the market collapse of the last two days wasn't part of the plan. The RUT iron condor position stands at a P/L of +$960, delta = +$45 and theta = +$180. This position is unbalanced with 20 call spreads at 875/885, 20 put spreads at 730/740 and 20 put spreads at 690/700. I will be looking for opportunities to close one of the put spread positions before I open the April condor.

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Written by Dr. Duke

Created: 22 February 2011

The unrest in Libya and the prospects of oil supply disruptions worried traders today and they sold stocks throughout the day to lock in gains and lessen their risk exposure.  SPX lost $27 to close at $1315 and RUT traded down to $822, a loss of $22. Solid support for both indexes stands at $1300 and $810, respectively. Traders will be watching those levels closely. The Conference Board's Consumer Confidence Index rose to 70.4 from last month's 64.8, and the Case Schiller Housing Price index dropped 2.4% for December; the confidence index value is the highest reading in about three years, but the unrest in the Middle East overshadowed everything else. Crude oil rose 6% to close over $95/barrel, but that was a bit lower than the $98 level hit in overnight trading.

Volatility (VIX) spiked up to 21% today - this was even higher than on "Egyptian Friday" a few weeks ago. The flight to safety was reflected in gold prices hitting just below $1407 mid-day before pulling back to about $1398. Trading volume jumped 13% on the NYSE and 7% on NASDAQ - not nearly as high as one might expect for a market like today - is this a positive sign? Trading in the S&P 500 stocks jumped up to 4.3 billion shares, above the 50 dma at 3.4B but below the volume traded on "Egyptian Friday".

I closed the Mar RUT 760/770 call spreads today for a small gain; I will now wait for an opportunity to close my put spreads at 690/700. This will effectively reposition my Mar condor on RUT to 875/885 and 730/740. The combined position now stands at a P/L of +$1120, delta = +$13 and theta = +$192. The question on traders' minds now is whether the unrest in the Middle East will trigger further market correction or whether this will be similar to the "Egyptian Friday" a few weeks ago with a pretty rapid recovery??

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Written by Dr. Duke

Created: 18 February 2011

Today's trading session started as has become typical for this market: stocks open and trade down on some negative news and then the bulls show up and buy the dip. But today, the bears surprised us and showed up in the early afternoon and took the market south. All of the major indexes rebounded and preserved some modest gains for the day. SPX closed up $3 at $1343 and RUT held onto an increase of less than a dollar to close at $835. The CBOE Volatility Index (VIX) reflected the roller coaster ride, opening at 16.6%, and dropping as low as 15.5% before rebounding and closing essentially unchanged from the open. Trading volume was up, as might be expected for options expiration, with 3.1 billion shares of the S&P 500 trading today, up slightly from yesterday, but still below the 50 dma at 3.4 billion. Trading on the NYSE was up 31% and also up 9% on NASDAQ.

My Feb GOOG 590/600 call spread and the Feb PCLN 390/400 call spread both will be exercised at expiration for their maximum profits of 31% and 38%, respectively. The GS Feb 155/160 put spread expired worthless for a 14% gain. This brings the trade recommendations from Dr. Duke's Trading Group to a 39% gain for 2011 and an 83% gain since this service began in April 2010. Check out our detailed track record.

My Mar condors on RUT remain essentially unchanged from yesterday. The position at 690/700 and 875/885 stands at a P/L of -$440 and delta = -$101 and theta = +$126. The condor at 730/740 and 860/870 stands at a P/L of -$880 with delta = -$137 and theta = +$136. The upcoming three day weekend should help these positions a bit, but next week may necessitate some adjustments or repositioning if this bull market continues without pause.

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Written by Dr. Duke

Created: 17 February 2011

The uptick in unemployment claims and a slight increase in the CPI sent stocks lower at the open today, but the buyers quickly took over and pushed the major indexes higher. SPX closed at $1340, up $4 and RUT gained $6 to close at $834. But the gains occurred on lower volume; trading in the S&P 500 dropped to three billion shares while trading on the NYSE dropped 4% and volume on NASDAQ was down 15%. Initial unemployment claims increased to 410k from last week's 385k while the number of continuing unemployment claims was essentially unchanged at 3.9 million. The Consumer Price Index (CPI) rose 0.4%, slightly higher than the expected 0.3%. On a more positive note, the Philadelphia Fed Survey hit a multi-year high at 35.9.

Today's increase on RUT wasn't kind to my March condors. The position delta and theta values on both condors are approximately equal, thus I am nearing the decision point to adjust and/or significantly reposition the spreads. The RUT 690/700 and 875/885 condor stands at a P/L of -$240 with delta = -$101 and theta = +$105. The 730/740 and 860/870 position stands at a P/L of -$800 with delta = -$135 and theta = +$131.

RUT has retaken the market lead. Earlier this year, RUT was trading pretty flat while SPX was gaining - the opposite of last year's pattern. But now RUT is gaining proportionately more than the SPX and setting new 52 week highs. Does this reinforce the bullish market trend? Historically small and mid-cap stocks tend to lead the early stages of the bull market. With everyone calling for a correction, this bull market may just continue to trample the bears.

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Written by Dr. Duke

Created: 16 February 2011

The Producer Price Index (PPI) increased 0.8% in January, down a bit from December. This appeared to calm some developing fears of inflation raining on the economic recovery parade. Housing starts also jumped up 14.6% in January, another encouraging piece of data; but building permits dropped 10.4%. The FOMC minutes were released this afternoon and didn't really contain any new information, so the markets didn't react. Concerns about the stability of the Middle East continue as the hot spot for this market; around noon, the report of Iranian war ships entering the Suez Canal caused some selling pressure. But the market shook that off and recovered to post gains for the day. It seemed to be another example of any dip bringing in the buyers for this market. SPX gained $8 to close at $1336. RUT also gained $8 to mark a new 52 week high at $828.

It is difficult to read the price charts for the overall market when you have to go back two and a half years to find the levels one might consider as resistance. SPX has been pretty consistently tracking along the upper edge of its Bollinger bands since early December - one more data point feeding the growing number of analysts expecting a correction. But the contrarians are often right on target - when everyone appears to be looking for a correction, the market may just continue higher. This underscores one of my personal investing principles. In both my directional trades and my delta neutral trades, I resist making bold price predictions. In my experience, that is very hard to do successfully. Take a current example: GS established a strong support level at $161 in late January. On 2/1/11, I sold the GS Feb 155/160 put spread on the premise that that support level was likely to hold even if we had a minor mishap (like the Egyptian riots). Contrast that position with buying an OTM call spread on AAPL, predicting its continued move upward. Everyone finds their own trading style, and mine is no better than another trader's - but it is important to find the style you find most comfortable and consistently apply it every day. Some traders are spinning their wheels searching for the Holy Grail or the "secret".

My March iron condors are in a reasonable position as time marches on. I tried to close the 690/700 puts today and take those gains, but wasn't able to get filled at a good price. If I treat these Mar options as a single position on RUT, the P/L = -$280, delta = -$192 and theta = +$249.  Most of that negative delta is coming from the 860/870 call spreads; I will look for an opportunity to close those spreads as well as the 690/700 put spreads.

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Written by Dr. Duke

Created: 15 February 2011

Disappointing retail sales data caused the markets to open in the red this morning and, unlike recent trading sessions, the markets didn't recover from the doldrums. SPX lost $4 to close at $1328 and RUT closed at $820, down $6. Retail sales dropped 0.3% in January, but analysts were expecting a 0.5% increase. The New York Fed Empire Manufacturing survey reported 15.43 for February, up from January's 11.92. Trading volume increased modestly from yesterday but remained below average. 3.0 billion shares of the S&P 500 traded, up a bit from yesterday but still below the 50 dma of 3.4 billion shares. Volume on the NYSE was up 12% and was also up 4% on NASDAQ.

Today's minor pull back was helpful to my two March iron condors on the Russell 2000 Index. My RUT Mar condor at 690/700 and 875/885 stands at a P/L of +$620 with a position delta = -$49 and position theta = +$92. My other Mar condor on RUT at 730/740 and 860/870 stands at a P/L = +$320 and delta = -$85 and theta = +$133. FOMC minutes, housing starts and the PPI numbers are released tomorrow; these all have the potential to move the market, especially the PPI with all of the debate about the Fed's monetary policy and inflation.

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Written by Dr. Duke

Created: 14 February 2011

Today was a slow day for economic data and the markets traded modestly higher on lower volume. All of the major indexes, except for the Dow, posted gains today. SPX closed at $1332, up $3 and the RUT tacked on $4 to close at $826. Both were new 52 week highs for these indexes. Trading volume was down from Friday with 2.9 billion shares of the S&P 500; volume dropped 14% on the NYSE and declined 5% on NASDAQ.

My RUT Mar condor at 690/700 and 875/885 stands at a P/L of +$300 with a position delta = -$70 and position theta = +$93. My other Mar condor on RUT at 730/740 and 860/870 stands at a P/L = -$160 and delta = -$104 and theta = +$127. I will need to reposition these condors soon if this market continues its trend higher.

Don't forget your Valentine...

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Written by Dr. Duke

Created: 11 February 2011

Mubarak's resignation boosted markets to new multi-year highs. SPX closed up $7 to $1329 while RUT closed at $822, up $9. RUT has not been at this level since October 2007. But trading volume dropped off from yesterday's highs. Trading in the S&P 500 dropped below the 50 dma to 3.3 billion; volume dropped by 7% on the NYSE and decreased 18% on NASDAQ. Volatility dropped to 15.7%, close to the lows of mid-January and late December. The bull market in equities has been fueled by the Fed and shifts of capital out of the bond market back into equities. The rise of commodity prices will eventually take its toll on corporate profits and eventually the FOMC will start to increase interest rates. But the street is littered with the bodies of traders who have tried to short this market. It is hard to argue with the logic of a correction being overdue, but so far this market just shrugs off bad news. Egypt is an excellent example; the situation in Egypt is far from resolved, but the market has continued to drive higher.

My Mar RUT iron condor stands at a P/L of +$260,with a position delta of -$59 and position theta = +$95. I established a second Mar condor for RUT earlier this week at 730/740 and 860/870, and that position now stands at break-even with delta = -$87 and theta = +$122. Both of these positions are beginning to be squeezed by this bull market. We'll see what next week brings.

Enjoy the weekend.

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Written by Dr. Duke

Created: 10 February 2011

Trading volume jumped up significantly today, but the overall market averages didn't change too much by the end of the day. SPX opened up well into the red this morning, but recovered early and traded sideways for small losses throughout the day. Then, in the last 15 minutes, it barely broke into the black, closing up one dollar at $1322. RUT traded similarly, but moved back into positive territory this morning and stayed there all day, closing up $3 at $813. CSCO's disappointing earnings announcement last evening certainly didn't help the tech stocks today; trading on the NASDAQ was up 31%. Trading in the S&P 500 was also up significantly, jumping to 3.8 billion shares, well above the 50 dma. Trading volume was up 10% on the NYSE. News out of Egypt near the close of trading regarding Mubarak's continued role in the government created some volatility as the market closed and it is unclear how that may affect the open in the morning as that news is analyzed. News reports on the reaction of the Egyptian people will be a critical part of that analysis. It is hard to predict the effect on the markets.

Initial unemployment claims fell dramatically to 383k, down from last week's 419k and well below the expectations of 410k. Continuing unemployment claims also dropped to 3.88 million from last week's 3.93 million. But that positive news didn't appear to move the markets.

My Mar iron condor stands at a P/L of +$200, delta = -$43 and theta = +$94. The call spreads are greater than one standard deviation OTM and the put spreads are over two standard deviations OTM, so this condor is in a pretty good position.

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Written by Dr. Duke

Created: 09 February 2011

The Dow was the only major index to post a gain today; the broader indexes all posted small losses. Markets opened up slightly down, attempted to move into positive territory by late morning, but then chopped sideways and lower the rest of the day. SPX closed down $4 at $1325 and RUT closed at $814, down $4 on the day. It appeared the markets were looking for something new from Bernanke's testimony before Congress, but nothing new was revealed, and it didn't appear to have much of an effect on the markets. Trading volume was up slightly with 3.1 billion shares of the S&P 500 trading today; this is still well below the 50 dma at 3.5 billion shares. Trading on the NYSE was up 6% and volume was up 6% on NASDAQ as well. Volatility jumped at the open but settled down to close under 16% at the close.

My Mar condor on RUT stands at a small gain of $140 with a position delta of -$37 and position theta = +$97. Is the market just pausing a bit or is the correction around the corner? It seems like too many analysts are preaching "correction" for that to actually occur. I trade both directionally and non-directionally, but one big advantage of non-directional trading is the freedom from predicting the market. That's a tough business.