Dr. Duke's Blog

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Written by Dr. Duke

Created: 23 March 2015

Markets have to take pauses from time to time, and after Friday's huge move higher, a breather or pause should be expected. SPX closed at $2104, down $4. RUT dropped $2 to close at $1265. Volatility increased slightly with the VIX increasing about a third of a point to 13.4%. Trading volume spiked up Friday even more than would be normally expected for an expiration Friday. Hence, lower trading volume was to be expected today with 1.9 billion shares of the S&P 500 stocks trading. Trading volume on the NYSE declined 49% and volume dropped off 40% on NASDAQ.

Existing home sales were reported at an annualized rate of 4.88 million in February, up slightly from January's 4.82M.

My April iron condor on RUT at 1110/1120 and 1310/1320 closed today up 9.5% with position delta = -$73 and position theta = $81. Delta of the 1310 call is just under 9, so the pressure on the call spreads remains minimal.

By all measures, we are in a strong bullish market. However, the pattern of frequent "V-bottoms" is not likely to disappear, so keep your stops tight. Several of the stops on my directional trades are being hit as the market whipsaws, but there's not much you can do about that - whipsaws and V-bottoms are simply characteristic of this market.

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Written by Dr. Duke

Created: 20 March 2015

The markets traded up strongly today. SPX closed at $2108, up $19. Both RUT and NASDAQ gapped open higher, with RUT closing at $1266, up $11 and the NASDAQ closing up $34 at $5026. RUT set another all-time high today, and NASDAQ is nearing its all-time high at $5049. Trading volume on this expiration Friday would have been higher anyway, but I think the bulls stampeding increased it even more so. Trading in the S&P 500 stocks hit 3.4 billion shares; trading volume on the NYSE rose 87% and trading ran up 55% on NASDAQ.

There wasn't any significant economic data reported today, so I guess we are still riding the FOMC announcement euphoria. One of my newsletters headlined with something to the effect that the Fed has written a blank check - here is how you cash in. The IBD Big Picture technical indicator had not yet posted as I write this, but I suspect their "Uptrend Under Pressure" will shift to "Confirmed Uptrend" tonight.

SPX settled at $2099.02, up $9.60 from yesterday's close. The average move for 2014 was $8.74. RUT had not yet posted its settlement value at the time of writing and I can't hang around; I'm taking my honey out to dinner (yes, I am referring to my wife).

Enjoy your weekend.

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Written by Dr. Duke

Created: 18 March 2015

The Fed dropped the word, "patient", from their commentary about when interest rates will rise, and the market clearly liked what it heard. SPX ran upward $25 to close at $2100. RUT traded even higher to set a new all-time record at $1252, up $10. Accordingly, volatility contracted with the VIX dropping almost two points to a touch under 14%. Trading volume spiked higher with 2.6 billion shares of the S&P 500 stocks trading.  Trading volume rose 30% on the NYSE and was up 15% on NASDAQ.

I was surprised at the market's intense reaction to the FOMC announcement today. Removing the "patient' adjective would seem to suggest higher interest rates coming sooner, but traders didn't take it that way. The announcement included a downgraded assessment of the strength of the economy and projections of year end interest rates that were lowered from the last announcement. It now seems very strange that just a couple of weeks ago, the markets pulled back because of a fear that the jobs report was so favorable that the Fed would raise interest rates sooner. Trying to put the market on a rational basis that enables some predictability appears to be a difficult, if not impossible, task.

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Written by Dr. Duke

Created: 17 March 2015

Ho hum. I expected a slow day on the street today and I wasn't disappointed. SPX lost $7 to close at $2074, but RUT gained $2, closing at $1242. Volatility was unchanged with the VIX closing at 15.7%. Trading volume was anemic with 1.9 billion shares of the S&P 500 stocks trading. Trading volume was down 5% on the NYSE and up 1% on NASDAQ.

The only economic news for the day wasn't reassuring. Housing starts fell markedly in February, down to an annualized rate of 987k, down from 1081k. You might think this was weather related, but that was only part of the story; the decline was present across the country. Building permits held steady with 1092k in February, up a bit from last month's 1060k.

Tomorrow may be a volatile day in the markets with so much attention focused on the FOMC and the prospect of increasing interest rates. This topic has taken on "bogeyman qualities", with traders and institutions behaving as though the Fed will move interest rates from zero to 10% overnight and crash the economy. If you don't believe me, tune in to CNBC tomorrow afternoon and listen to the breathless commentary surrounding whether the word, "patient", is present in the announcement.

My April iron condor on RUT at 1110/1120 and 1310/1320 is delta neutral with delta = $1.50 per contract, and stands at a net gain of 7.3% with 30 days to expiration. We closed the March position last week, locking in a 9.5% gain.

Get your popcorn ready, tomorrow afternoon should be interesting. Or maybe it turns out to be a non-event. The market likes to fool us.

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Written by Dr. Duke

Created: 16 March 2015

The markets roared back once again - how many times is this "buy the dip" strategy going to work? It will be painful when it doesn't. SPX gained $28 to close at $2081. RUT wasn't quite as enthusiastic, but then again, it didn't fall as far either. RUT closed at $1240, down $8. Volatility contracted a bit with the VIX dropping almost a half point to 15.6%. But it wasn't a super-enthusiastic rally. Trading volume declined  across the board with two billion shares of the S&P 500 trading and trading declined 5% on the NYSE. Volume also declined 8% on NASDAQ.

The Empire manufacturing survey came in at 6.9 for March, down from February's 7.8. Industrial production increased 0.1% in February, somewhat better than January's 0.3% decline. Capacity utilization dropped off a bit in February, from 79.1% to 78.9%. Housing starts and building permits issue tomorrow and then the big kahuna, the FOMC announcement, on Wednesday. Did traders get a hint of that announcement and that set off the rally?

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Written by Dr. Duke

Created: 13 March 2015

Once again, we see the market whip higher one day and then give it all back the next. It wasn't quite that bad, but it does wear on you. SPX closed down $13 today at $2053, after gaining $26 yesterday. RUT lost $5 to close at $1232. Volatility rose a bit with the VIX closing up 0.6 points at 16.0%. At the worst of it today, SPX did in fact give back all of yesterday's gains, but it recovered somewhat in the last hour of trading this afternoon. Trading volume was flat to slightly higher with 2.1 billion shares of the S&P 500 stocks trading today. Trading volume was up 7% on the NYSE, but flat on NASDAQ.

The Producer Price Index (PPI) came in with another negative number for February, -0.5%. This was not quite as bad as last month's -0.8%, but this consistent string of low to negative numbers is beginning to alarm economists who fear a deflationary environment, similar to what Japan has suffered through for the past ten or fifteen years. This probably comes in on the delay raising interest rates side of the Fed's scorecard. The University of Michigan's consumer sentiment survey continues to be pretty high at 91.2 for March, down from 95.4 in February.

I closed my March iron condor on RUT at 1050/1060 and 1290/1300 today, locking in a gain of 9.5%. Both spreads passed my Two Sigma Rule, but the swings of this market back and forth have me a little concerned, so I decided to lock in a nice gain and go to cash. My April position stands at a net gain of 5% today, but this position has more room for adjustments if they prove necessary, so I am more comfortable with that position.

Have a nice weekend. It is actually teasing us here in Chicago with almost warm weather - not really, but at least the snow is melting and I can see the sun.

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Written by Dr. Duke

Created: 12 March 2015

The divergence between SPX and RUT yesterday appears to have been an early warning signal for the return of the bulls, but I wouldn't bet the farm on it just yet. SPX gained $26 to close at $2066, just barely above the upper edge of the January trading range. RUT popped up $21 to $1237. And the VIX dropped one and a half points to close at 15.4%. So everything appears to be on the bulls' side, except trading volume. Trading in the S&P 500 stocks was slightly better than yesterday at 2.2 billion shares, right at the 50 dma. Trading volume was down 1% on the NYSE and up 2% on NASDAQ.

I expected retail sales to push this market one way or the other, but I was wrong. Retail sales came in this morning down 0.6% for February, slightly better than January's 0.8% decline. Initial unemployment claims decreased to 289k from last week's 325k, but that is roughly where it has been running for several months now. Continuing unemployment claims decreased five thousand to 2.4 million, essentially unchanged.

Today's pop in the indexes pushed my March condor on RUT to an almost perfectly delta neutral stance (+$4 on 20 contracts). The net P/L at the close was +11%. I will likely close the position tomorrow to free up capital for another position. The April condor  is up 5% with position delta of -$19 on 20 contracts.

The PPI and the University of Michigan consumer sentiment data come out tomorrow, but those aren't normally market-moving events.

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Written by Dr. Duke

Created: 11 March 2015

I was surprised to see SPX and RUT move in opposite directions today. SPX closed lower by $4 at $2040, but RUT actually traded higher, closing at $1216, up $7.  The VIX increased by a couple of tenths to 16.9%, so there wasn't much change there. Trading volume fell on all fronts, with 2.1 billion shares of the S&P 500 stocks trading today, below the 50 dma of 2.2B. Trading volume declined 7% on the NYSE and declined 3% on NASDAQ.

There wasn't any significant economic data issued today, but we will get both retail sales and the weekly unemployment numbers tomorrow. A solid retail sales number could calm this market, but recent retail sales data have been weak.

Perhaps this mixture of a lower SPX with a higher RUT suggests an equilibrium being reached? If so, maybe we are back into the sideways trading range from January. But a weak retail sales number tomorrow could easily push us lower to test that 200 dma on SPX around $2002.

My March condor on RUT stands at a net gain of 6.2%; the delta of the short 1160 put is 8 today. It is borderline whether we will close the put spreads Friday with the Two Sigma Rule. If volatility expands, we will be closing the March put spreads; if not, we may be able to safely leave them open through the weekend.

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Written by Dr. Duke

Created: 10 March 2015

That jab in the nose hurt! SPX dropped $35 or 1.7% to close at $2044. SPX didn't even hesitate at the 50 dma at $2061. RUT lost $15 or 1.2% today, closing at $1208. $1210 was the high reached twice in 2014 by RUT and that level also served as resistance in early February before RUT took off to set new all-time highs. RUT's 50 dma is at $1203, but this market may give back more than that before it is done. Volatility is starting to heat up, with the VIX gaining 1.6 points today to close at $16.7%. That places us back in the range of volatility from the choppiness we endured in January.

Conventional technical analysis would conclude from today's price action that we are now back in that choppy range from January, roughly $1990 to $2065. The 200 dma is at $2001, just above that support level at $1900. Today's price takes us down 3.4% from the high on March 2nd. If you follow Fibonacci retracements, the 62% retracement level is at $2034 on SPX. I have not used Fibonacci much myself, but I have been surprised how often those numbers seem to arise. That $2034 level would be a 4% correction, similar to what we saw in mid-December and early January. In any case, all one can do is mark some points where positions must be adjusted or closed, watch what the market gives us each day, and take appropriate action.

The conventional wisdom for this correction appears to be the "unusually good" jobs report causing traders to expect increased interest rates from the Fed sooner than expected. I explained why I thought that unlikely yesterday, but I found a nice graphic illustrating the problem. In the chart below of the non-farm payroll numbers for the past 12 months, it is hard to see the February number as "unusually good". In fact, it's hard to identify a trend. But I received that headline on my phone from Yahoo Finance as the explanation for this market pull back, so it must be true.

My March iron condor position on RUT stands at a net gain of 2% (increased implied volatility pulled it back), and delta for the position equals +$57 and position theta = +$229. Delta of the short $1060 puts = 12, so we are pretty safe at this point. We will hit our two sigma rule Friday, so we may be closing the put spreads then if not before. The April condor is delta neutral (position delta = +$19 on 20 contracts) and is showing a small gain of 1% at this point.  Hold on for the ride!

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Written by Dr. Duke

Created: 09 March 2015

After all of the doomsday prophets on Friday, one had to wonder what might happen today. One day doesn't make or break a trend, but today's market action was encouraging. SPX traded as high as $2083 before settling back at $2079 for a gain of $8. RUT followed suit with a gain of $6, closing at $1224. Volatility was basically unchanged with the VIX closing down a tenth of a point to 15.1%. Trading volume was down from Friday's high numbers, with two billion shares of the S&P 500 stocks trading; the 50 dma is 2.2B. Trading volume dropped 16% on the NYSE and decreased 11% on NASDAQ.

Friday's sell-off was sufficient to push IBD to move from "Confirmed Uptrend" to "Uptrend Under Pressure". Watch their web site this evening to see if that moves to "Market in Correction" - probably not after today's small gains.

There was no economic news today, but I looked up the non-farm payroll data for the past twelve months. The conventional wisdom for Friday's sell-off was something to the effect that such an "unusually good" jobs report would cause the Feds to increase interest rates in June rather than September. When I look at the data, it is pretty choppy and I fail to see February's 295k as "unusually strong". We had 304k back in May of last year and 423k in November. The only thing positive about the February number is that it saved us from drawing a downward trend line from November through February (December was 329k and January reported 239k). I'm not convinced this is the definitive "last word" for Yellen's assessment of the economy. For now, remaining bullish appears to be the safer alternative. Whenever interest rates begin to rise, it will slow the economy, and that is precisely why I think the FOMC will be slow to take that step when we are still observing mixed data.