Dr. Duke's Blog

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Written by Dr. Duke

Created: 18 November 2014

I ended yesterday's blog with these comments, "My rational analysis of the markets and the economy cause me to be more pessimistic about the prospects of continued market highs. RUT's declines of late appear to support that thesis. But every time I think I have built a solidly reasoned case for the market's direction, the market seems determined to prove me wrong." As predicted, SPX came out of the gate running and tacked on $10 to close at $2052. RUT came to life as well, gaining $6 to close at $1170. Today's close on SPX was a new all-time high, but RUT continues to lag behind its most recent September high around $1185. It doesn't have to make sense; it just is.

Trading volume was mixed with 1.9 billion shares of the S&P 500 trading, flat with yesterday and below the 50 dma. Trading increased 8% on the NYSE, but decreased 3% on NASDAQ. Volatility was essentially unchanged with the VIX at 13.9%.

The Producer Price Index (PPI) for October increased 0.2%, up a bit from last month's 0.1% decline. I keep wondering where inflation is hiding; a lot of money has been pumped into this economy.

I added to the hedges on my December position today. With the additional hedges, my December condor's current P/L at -6% should remain about constant if SPX continues higher. Everything tells me the market is going to pull back, but I can only play what the market gives me, and it continues to rise. The FOMC minutes will be released tomorrow; it is anybody's guess whether that could move the market. Sometimes analysts fix on a single word and it moves traders one way or the other.

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Written by Dr. Duke

Created: 17 November 2014

SPX's price trend is clearly flattening, but it is still rising, just at a slower rate. Consider today's price action. SPX opens at $2038, trades down to $2034 and then up to $2043, and then closes at $2041, up nearly $2 on the day. This certainly isn't the large gains of a couple of weeks ago, but it just steadily rises. RUT's price trend is marked in its contrast with SPX. RUT has traded downward for the past three days, closing today at $1164, down $10. Should we ignore RUT's divergence? I don't think that would be wise.

Volatility opened higher this morning with 14.7% on VIX, but ended the day at 14.0%, about three quarters of a point higher than Friday's close. So volatility isn't very high, but it hasn't settled into very low levels after the October correction.

The markets have been trading at low volumes for the past several sessions, with 1.9 billion shares of the S&P 500 stocks trading today. Eleven trading sessions have passed since the trading volume of the S&P 500 exceeded the 50 dma. Trading on the NYSE declined 2% today and trading on NASDAQ decreased 4% from Friday's levels.

The New York Fed's Empire manufacturing index for November reported a result of 10.2 on their survey, up significantly from October's 6.2. Industrial production declined from September's +0.8% gain to a negative 0.1% loss for October. Capacity utilization declined a bit from 79.2% to 78.9% in October.

My rational analysis of the markets and the economy cause me to be more pessimistic about the prospects of continued market highs. RUT's declines of late appear to support that thesis. But every time I think I have built a solidly reasoned case for the market's direction, the market seems determined to prove me wrong. We'll see.

BTW, the answer to Friday's "big event" in last week's blogs: it was Prince Charles' birthday. He and I are the same age. That is the source of the nickname, Duke. The first blog reader with the correct answer has opted for a free copy of my forthcoming book, Time Is Money, which should be on Amazon before year-end.

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Written by Dr. Duke

Created: 13 November 2014

The rise in unemployment claims was blamed for today's slowdown in the market, but the signs have been there for several sessions. A period of sideways trading is natural and healthy for a market that has been on such a stellar run higher for the past several weeks. SPX closed at $2039, with a one dollar gain, but RUT traded off by $11 to close at $1175. It appeared as though RUT had broken out above its September highs yesterday, but today's trading firmly pulled it back below that resistance level.

Volatility rose with the VIX gaining about three quarters of a point to 13.8%. Trading volume remains low, but rose a bit from yesterday's levels with 2.1 billion shares of the S&P 500 stocks trading (but the 50 dma = 2.2B). Trading volume increased 7% on the NYSE and trading on NASDAQ rose 6%.

Weekly unemployment claims rose twelve thousand to 290 thousand from last week's 278 thousand. Continuing unemployment claims rose by 36 thousand to 2.39 million claims. JOLTS job openings decreased by 118 thousand to 4.74 million in September.

Guesses continue to come in, speculating about tomorrow's big event. The winner gets a free book!

Final hint: it is the origin of my nickname.

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Written by Dr. Duke

Created: 12 November 2014

The markets continued their low volume, sideways to slightly higher march today. SPX lost one dollar to close at $2038 and RUT gained $7 to close at $1186. Interestingly, NASDAQ also broke out higher today. Both RUT and the NASDAQ composite have been trading sideways since Halloween, while SPX continued higher. That comparative price action has suggested a consolidation of prices was beginning for the markets, but today's price action reversed with SPX slowing and RUT and NASDAQ gaining. Trading volume bumped up today with 1.9 billion shares of the S&P 500 trading, but this remains well below the 50 dma. Trading volume increased 10% on the NYSE and increased 7% on NASDAQ. Volatility was nearly unchanged with a tenth of a point increase to 13.0%.

We didn't have any economic news of any significance today. CSCO announced earnings after the close and beat estimates. But their weak outlook is giving some traders second thoughts. That may weigh on NASDAQ stocks tomorrow.

Many of you have been messaging me with guesses about the "big event" coming on Friday. Hint: it is shared between two countries.

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Written by Dr. Duke

Created: 11 November 2014

Taking a look at the NASDAQ Composite or the Russell 2000 Index would lead to a clear conclusion: the market is in a consolidation phase. But SPX has continued to make new highs, closing today at another all-time high at $2040, up only a dollar, but it still keeps trading higher. RUT closed flat at $1180. Is SPX going to be pulled into a sideways consolidation phase by the other indexes, or drag them higher? Trading volume continues to be very weak with 1.6 billion shares on the S&P 500; the 50 dma is 2.2 billion shares. Trading volume was down 11% on both the NYSE and NASDAQ. Volatility continues to come in, with the VIX closing at 12.9% today.

There wasn't any significant economic data reported today. We will see retail sales, weekly unemployment claims, and the University of Michigan's consumer sentiment data later this week. I wouldn't expect any of those reports to trigger a big move either way. Maybe the slow, sideways trading on low volume continues.

I closed my SPX Nov 1810/1820 put spreads today for a nickel. That completes the November position for a net gain of $2,160 on 20 contracts or +12.9%.

The really big event comes on Friday. Bet you don't know what that is... I will send a book to the first person who answers correctly.

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Written by Dr. Duke

Created: 07 November 2014

Is this the pause that refreshes before the market seeks new all-time highs? Or are we going to consolidate sideways for a bit and work off this huge bullish drive of the past three weeks? Hard to say. SPX traded flat today, gaining less than a dollar to close at $2032. RUT gained a dollar to close at $1173. NASDAQ and RUT have both been trading sideways for the past several sessions while SPX just continued setting new record highs. If we go back to the charts when we were at the lows of this most recent correction, RUT and NASDAQ were the first indexes to recover and start posting positive gains. They led SPX out of the hole. Are they now slowing and leading SPX into a consolidation phase? Trading volume was down today with two billion shares of the S&P 500 trading; trading declined 5% on both the NYSE and NASDAQ.

The non-farm payrolls report came out before the bell this morning and posted 214 thousand new jobs, less than last month (240k) and less than what economists had predicted (250k). The unemployment rate ticked down a tenth of a percent to 5.8%. But the markets appeared to just yawn; they didn't trade strongly in either direction.

My November iron condor position only consists of the 1810/1820 put spreads at this point, so I am just watching those options decay. They are far enough OTM to be very safe (over four standard deviations), but I may close them soon just to free up margin for a new trade. The maximum return is 13.5% and we are essentially there. My December condor has been skirting along the edge of requiring hedging for the past week. Even though the market was flat today, I decided this morning to enter half of my normal hedge. That makes an ugly surprise on Monday less likely (more correctly, it will make the ugly surprise a bit less ugly).

Enjoy your weekend.

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Written by Dr. Duke

Created: 04 November 2014

One has to wonder what effect, if any, the election results will have on the markets. SPX appears to be slowing over the past two days, but any market needs a rest after such a torrid run higher. SPX closed down $6 at $2012 and RUT dropped $5 to $1165. But look at today's price action on SPX. It opened at $2016 and traded down as low as $2001 before recovering into the close. That price action tells me that there are still a large number of bulls who are waiting to step in and buy on any pull back. On the other hand, volatility has been edging up with the VIX opening Monday at 13.8% and closing today at 14.9%.

I watch for divergences between SPX and the VIX. Sometimes that gives us an early warning. SPX has traded slightly higher for the last three days with an open Friday at $2001 and a close today at $2012. That slightly bullish action on SPX together with a slight increase in volatility makes me think the market isn't quite sure which way the election will push prices.

Trading volume was mixed today with a slight increase in the trading volume of the S&P 500 up to its 50 dma at 2.1 billion shares. Trading on the NYSE increased 7% and trading volume decreased 5% on NASDAQ.

It's almost time to go watch the election returns.

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Written by Dr. Duke

Created: 03 November 2014

Today's markets had one of those slow days with minimal progress in either direction on lower than average volume. That has been unusual lately as the markets just shoot higher day after day. SPX closed unchanged at $2018 after trading as high as $2024. RUT dropped off $3 to close at $1170. The VIX added almost three quarters of a point to close at 14.7%. Trading volume was down across the board with 2.0 billion shares of the S&P 500 stocks trading. Trading volume declined 15% on both the NYSE and the NASDAQ.

Today's candlestick on SPX was the classic doji, a sign of indecision or balance between the bulls and the bears. It wouldn't be surprising to see the indexes slow and trade sideways for a bit after such a strong rally over the last two weeks.

The ISM manufacturing index posted an increase to 59.0 for October from 56.6 in September. Construction spending was up slightly with a decline of 0.4% in September, up a bit from the -0.5% last month.

My November iron condor continues to build gains as the market heads higher. The remaining SPX Nov 1810/1820 put spreads are far OTM at this point with a little less than three weeks to go. My December iron condor on SPX is positioned at 1810/1820 and 2080/2090. Since we sold the put spreads on 10/21, our gains on that side have balanced recent losses on the call spreads so the entire position stands at a net loss of about 1%. If SPX continues higher, we will have to hedge our call spreads.

We have the jobs report coming up on Friday. We may see some more low volume, sideways trading days this week in advance of that report.

I sold the HLF 42/45 and 63/66  and the PCLN 1125/1130 and 1270/1275 iron condors today in anticipation of their earnings announcements (all with NovWk1 options). HLF looks like a winner at this point, but PCLN announces earnings in the morning before the market opens.

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Written by Dr. Duke

Created: 31 October 2014

The Bank of Japan announced stimulus measures for their economy last evening and our markets gapped open strongly this morning and traded steadily higher all day. SPX traded up by $23 to close at $2018 and RUT tacked on $18 to close at $1174. SPX closed at its high for the day. And this all occurred on higher trading volume with 2.5 billion shares of the S&P 500 stocks trading. Trading increased 22% on the NYSE and increased 18% on NASDAQ. Who knew the Bank of Japan held such influence? Maybe the market analysts didn't have anything better to cite for this huge bullish day in the markets.

The Chicago PMI came out for October at 66.2, up from September's 60.5. The University of Michigan's consumer sentiment report came in at 86.9 for October, up slightly from 86.4. These are solid numbers, but wouldn't account for the "buying with both hands" behavior we saw today.

SPX's close at $2018 set another all-time high. This straight up recovery from the intraday low on October 15th has to be a record. SPX has gained $197 or 11% in 12 trading days since October 15th - wow! Will this continue next week? Is the election connected to this in some way, e.g., a sell the news market on Tuesday? I don't know. Much of the time, the rationale for market movements day to day eludes me. The economic data remain pretty flat and unemployment remains stubbornly high, so it is hard to build a case for the exuberance we saw today. RUT remains way behind the large cap stocks. RUT's close today gets it within about $10 of its high from early September, but it is still way short of the all-time closing high at $1209 set back in March.

The 1810/1820 puts are all that remain of my November iron condor on SPX and they are now very far OTM. It is hard to believe that I was hedging those positions very strongly just a couple of weeks ago.

I will be glad when this election is over. I have yet to see or read any rational ads or articles dealing with the issues that face us - just smear tactics back and forth. Apparently the politicians don't give us credit for any critical thinking skills. Maybe we are getting what we deserve.

Enjoy the weekend.

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Written by Dr. Duke

Created: 29 October 2014

Today's FOMC announcement officially pronounced the end of the Fed's quantitative easing programs. All in all, the announcement was pretty standard fare. Of course, analysts are arguing whether the announcement was hawkish or dovish, or whether various phrases used in the announcement mean interest rates will rise in April or July of next year. It reminds me of a group of medieval soothsayers studying tea leaf residues.

The markets dropped quite a bit in the first few minutes after the announcement, but then stabilized. Apparently traders have decided the market can stand on its own. SPX lost $3 to close at $1982 and RUT also lost $3, closing at $1146. Trading volume was up a touch with 2.2 billion shares of the S&P 500 stocks trading. Trading on the NYSE increased 5% and trading volume increased 13% on NASDAQ.

Plot SPX with its Bollinger bands. It is amazing how quickly it has traveled across the band from the lower edge nearly to the upper edge in just a few days.

We won't know for sure how the market has reacted to the FOMC announcement until tomorrow. Everyone will be studying those tea leaves this evening.