Dr. Duke's Blog

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Written by Dr. Duke

Created: 08 April 2015

SPX displayed some extreme volatility just after the FOMC minutes were released this afternoon, but then it settled to about where it was before the announcement. SPX closed at $2082, up $6. RUT traded up $9, closing at $1263. Volatility dropped almost a full point with the VIX closing at 13.98%. Trading volume was modestly higher with 1.9 billion shares of the S&P 500 stocks trading. Trading on the NYSE was up 10% and volume was up 7% on NASDAQ.

SPX is locked in the trading channel from $2040 to $2090. One could place the upper end of the range at $2120, the high from early March, but resistance at $2090 is proving strong; SPX has been unable to hold $2090 several times over the past few days.

Many Fed observers were anxious to understand from the March minutes why the FOMC removed the adjective, patient, from the announcement discussing timing of the expected interest rate hikes. I think they were disappointed. It seems that the committee simply wanted to be free to address that question at each meeting based on the data. Once again, trying to read the tea leaves proved frustrating.

Alcoa reported mixed results on earnings after the close with the stock trading down a bit after hours. Perhaps most significantly, Alcoa raised their forecast of global aluminum demand from +7% to +9%. That is an encouraging economic data point since aluminum is used in many different industries.

Tomorrow brings the latest unemployment claims data; we don't have any significant economic data due for the balance of the week. The earnings reports more likely to move the markets begin next week with J.P. Morgan, Goldman Sachs, and others.

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Written by Dr. Duke

Created: 07 April 2015

SPX had traded up for the past two days and spent almost all of today's trading session in the black, but then dove in the last twenty minutes of trading to turn in a $4 loss, closing at $2076. RUT traded in a similar pattern, except that RUT fell out of bed just before 2:00 ET and lost $7 to close at $1253. So why did the market sell off this afternoon? As usual, determining a clear answer is difficult at best. Some analysts think traders began to look forward to the FOMC minutes being released tomorrow and Alcoa's earnings after the close tomorrow. My answer is more basic. I don't know anyone who is comfortable with this bull market; we know it is largely artificial and built on the Fed's unprecedented experiment. As a consequence, Joe Trader has some nice gains, but is very nervous that the party will end abruptly and perhaps badly. Hence, he sells whenever he even sees a twitch he doesn't like.

Trading volume was down today with 1.7 billion shares of the S&P 500 stocks trading. Trading on the NYSE declined 11% and was down 6% on NASDAQ. Volatility has remained nearly flat for the past three days with the VIX around 14.8%. It is interesting that this afternoon's sell-off didn't raise volatility even a few tenths of a point.

The only economic data released today was relatively positive with the JOLTS job openings report at 5.133 million for February, up from 4.965M.

My May iron condor on RUT at 1110/1120 and 1330/1340 stands at a net gain of 9% today and is delta neutral at a position delta of -$1.30 per contract. We still have 37 days left in this position, but it is developing nicely.

It will be interesting to see how earnings season plays out. The expectations are pretty low, due to the expected effects of a strong dollar. Perhaps the relative weakness in the market for the past month has that disappointment priced in.

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Written by Dr. Duke

Created: 06 April 2015

When I saw that anemic jobs report on Friday, I thought the worst about today's market open. And the futures were down early this morning, although not as badly as I feared. The markets indeed opened lower, but it didn't last long. Those poor bears were frustrated once again as the bulls bought the dip. SPX closed up $14 at $2081 and RUT added $5 to close at $1261. Interestingly, the VIX was flat at 14.7%. Trading volume was up with two billion shares of the S&P 500 stocks trading. Trading volume rose 5% on the NYSE and increased 6% on NASDAQ.

We start the earnings announcement cycle this week. Normally Alcoa is considered the opening of earnings season, although it won't be the first announcement this quarter. But it will be closely watched as always since aluminum plays a key role in so many industries. Many analysts are expecting a mediocre series of announcements because of the effects of a strong dollar on the multinationals. It is true that we have had a record low number of positive earnings guidance announcements this quarter and a relatively high number of companies guiding negatively. We'll see. More importantly, will it matter to the market?

I read an interesting note about our government's unemployment rate calculation today. If the labor force participation rate were the same today as it was in 2007, our current unemployment rate would be 10%. As people have given up on looking for work, that reduces both the numerator and the denominator of the calculation. Ten per cent unemployment fits my sense of the labor market; I know far too many people that have been out of work for a year or more. We have yet to recover from this recession. In fact, we are setting a record for the slowest economic recovery in history. Maybe we should try capitalism.

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Written by Dr. Duke

Created: 02 April 2015

The major market indexes traded higher today, but on weaker volume than normal. I suppose many traders took the day off to extend the long weekend. SPX gained $7 to close at $2067 and RUT closed at $1256 for a gain of $4. Volatility contracted with VIX losing less than half a point to close at 14.7%. Trading volume fell off with 1.8 billion shares of the S&P 500 stocks trading. Trading volume declined 13% on the NYSE and dropped 15% on NASDAQ.

The Challenger job cuts came in at +6.4% for March, but that was actually a big improvement from the +20.9% report for February. Initial unemployment claims dropped to 268k from last week's 288k, and continuing claims also decreased to 2.33 million. Factory orders grew 0.2% in February, but that was a welcome change from the 0.7% decline in January.

The non-farm payrolls report will be issued tomorrow morning, but the markets will be closed. I will be watching the S&P futures early Monday morning to get a feel for the impact, if any, on the markets.

Enjoy your long weekend.

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Written by Dr. Duke

Created: 01 April 2015

SPX dipped down to $2046 last Thursday, and then down to $2048 today before recovering to close at $2060, down $8. RUT closed essentially unchanged at $1252 (down one dollar). SPX has a solid support level at $2040 that goes back to the correction low in mid-March, so that is the line in the sand that many analysts are watching. We have two data points that suggest support is holding at $2040, but with this market's volatility, that could change at any moment. That mid-March correction low on the NASDAQ Composite was $4850 and that is where NASDAQ's intraday low hit today before recovering. RUT is trading even more strongly; its March high was $1243 and its low today was $1240. The small and mid-cap indexes are trading more strongly than the blue chips (SPX); that gives me some confidence that the market is finding support here. The fact that the VIX actually declined two tenths of a point, closing at 15.1%, appears to support this more positive interpretation. Trading volume picked up today with a 2% increase on the NYSE and volume was up 5% on NASDAQ. As of 5:00 pm CT, trading volume for the S&P 500 stocks was not yet available.

ADP's private employment report cam in a little weak at +189 thousand jobs, down from last month's +214k. But the correlation between ADP's report and the non-farm payrolls report, due Friday morning, has been sketchy. The ISM manufacturing index came out at 51.5, for March, down a bit from February's 52.9. Construction spending improved in February with a smaller decline at -0.1%, up from January's -1.7%. This set of economic data isn't strong, but it doesn't support a rationale for the market to turn downward either.

My May iron condor on RUT at 1110/1120 and 1330/1340 stands at a net gain of 7% today and is delta neutral at about one dollar per contract.

With the markets closed on Friday, we may see some reduction in trading volume tomorrow. One would think that might also be accompanied by some lazy sideways trading, but all historical norms are trashed by this market.

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Written by Dr. Duke

Created: 31 March 2015

Today was another one of those days. Just when we think the market is bouncing back, it trades off. SPX opened this morning at $2084 and traded sideways through early afternoon. If the market had closed around 1:45 pm ET, we would have had a flat day, but then it simply traded off into the close, losing $18 to close at $2068. RUT lost $5, closing at $1253 and the VIX moved up almost one point to 15.3%. The VIX struck me as behaving somewhat benignly on a 1% drop in SPX; maybe we are all becoming accustomed to this whipsawing price action. Trading volume was mixed with slightly higher trading volume in the S&P 500 stocks at 2.0 billion shares (up from 1.9B yesterday), and a 15% rise in volume on the NYSE; but trading volume was flat on NASDAQ.

The Case Schiller housing price survey reported an annualized rise of 4.6% for January, up slightly from December's +4.5%. The Chicago PMI reported at 46.3 for March, up from 45.8. And the Conference Board consumer confidence survey rose to 101.3 from 98.8. I saw a couple of news headlines for today's markets, claiming the market dropped on mixed economic data - really?

The markets will be closed on Friday, but the jobs report will be issued anyway, so that could be interesting. Layering on that report will be the possibility of another shoe dropping over the weekend in the Greece/Euro Zone negotiations. We may see traders taking off more vulnerable positions this week, and we may see the VIX move a bit higher as traders seek protection from events over the long weekend.

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Written by Dr. Duke

Created: 30 March 2015

Once again, the market takes a little tumble, but then it rockets back higher. The "buy the dip" game is still working like a charm. SPX tacked on $25, closing at $2086 and RUT followed suit with a $17 gain, putting that small cap index at $1258. Volatility contracted a bit more with the VIX closing at 14.5%, down six tenths of a point. Trading volume was pretty flat with 1.9 billion shares of the S&P 500 stocks trading. Trading volume contracted 3% on the NYSE, but rose 5% on NASDAQ.

SPX gapped open this morning and never looked back. RUT gapped open even more strongly, so small caps are again leading the way - a bullish sign.

Pending home sales surprised analysts with a 3.1% gain in February, up from a positive 1.2% gain in January. Tomorrow brings the Chicago PMI report.

On Friday I closed my April iron condor position on RUT at 1110/1120 and 1310/1320 for a debit of $0.38, resulting in a net gain of $108 per contract or +12.6%. This brings our year to date gains for the Flying With The Condor™ service to +11.2%.

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Written by Dr. Duke

Created: 26 March 2015

SPX opened weakly this morning and traded down to $2046 by 10:15 am ET. Then it recovered and traded up to $2067 (the 50 dma) by 2 pm ET, and closed at $2056, down $5. RUT closed down $2 at $1232. The VIX rose four tenths of a point to close at 15.8%. Trading volume was flat today with 2.3 billion shares of the S&P 500 stocks trading hands. Trading volume on the NYSE was unchanged, but was down 9% on NASDAQ.

We are becoming accustomed to these "mini-corrections". In March, SPX pulled back by 3.6% to a low on March 11th at $2040. In a matter of only a couple of weeks, we are back testing that support level. Today's price action, with the push down to $2046 followed by a bounce was reassuring for me. Perhaps the market is beginning the process of finding support at or close to $2040. One could interpret today's price action on SPX as bouncing off support near $2040 and then recovering to bounce off resistance at the 50 dma. In any case, I think we are observing a nervous market, trying to find its way. But tomorrow brings another revision to 4Q GDP; that could reassure the market or push it over the edge. Welcome to the brave new world of markets heavily influenced by central bank activity. It has never been easy to interpret the reasons for market trends, but it has become nearly impossible. I enjoy old westerns and today's traders are behaving like cattle during a thunderstorm out on the prairie. Will the next news event spark a stampede like yesterday's market rout?

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Written by Dr. Duke

Created: 25 March 2015

This morning's market looked weak, but didn't appear like anything serious was happening. However, it was as though the market sprung a slow, but steady leak that just continued to pull it lower all day. Before we knew it, we were looking at serious losses. SPX lost 1% or $30 to close down at $2061, and RUT even took it on the chin more strongly, closing down at $1234, down $30, but this was a 2.4% drop on RUT. The NASDAQ composite traded more like RUT, losing 2.4% or $118 to close at $4877. All of the major market indexes have been trading weakly for the past three days, but today was a significant shift. As one might expect on a day like this, trading volume spiked up with 2.3 billion shares of the S&P 500 companies trading. Trading volume rose 9% on the NYSE and increased 37% on NASDAQ.  Volatility popped up with the VIX increasing almost two points to 15.4%.

The only economic data reported today was durable goods orders for February, which were down 1.4%, a turnaround from the 2.0% gain in January. The market's extreme reaction to this data point reinforces what I have been saying for some time. The unprecedented quantitative easing and extremely low interest rates for a prolonged period of time have created a unique market environment. Wall street veterans have nothing in their past market experience to draw upon; this is new for veterans and newbies alike. No one feels like they know how this will play out. We haven't been here before. Consequently, we have a nervous market that sells to protect profits first and asks questions later. I think this is largely the cause for the V-bottoms and price volatility we have been experiencing for the past couple of years.

My April iron condor on RUT at 1110/1120 and 1310/1320 stands at a net gain of 11% if closed today, and the May position that we just opened last week is already up 4%. I have been nervous about the downside lately and have allowed myself more safety margin when selling the put spreads. On days like today, that feels good.

I close with the two questions on all traders' minds:

1) Where will this correction bottom?

2) Will the bulls buy this dip strongly just as they have for the past two years and create one more V-bottom?

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Written by Super User

Created: 25 March 2015

Thank you for a great, comprehensive set of classes. My intentions are to paper trade and utilise the skill that I have learnt from you. Could you send through the details of the trading platform that was used in your examples. Again, thank you.

Mike
Phoenix, AZ