Dr. Duke's Blog

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Written by Dr. Duke

Created: 10 October 2014

All of us parents know this question well - it happens on every trip in the car greater than twenty minutes. I thought of that question this afternoon as I watched this market drop farther yet.

You take your financial life in your hands when you walk away from this market for the last two hours of the day - sometimes it runs up huge; sometimes it drops like a rock. Today was the latter. SPX opened the day down just a touch and traded largely sideways. The VIX pulled back; everything appeared serene. It had me thinking that it's slowing; maybe the worst is over. But then SPX lost over twenty points in the last two hours of trading. SPX closed at $1906, down $22. RUT also closed down at $1053, down $15. The VIX popped up over two points to 21.2%. After trading as high as $1937 this morning, SPX closed at its low for the day - very bearish. Trading volume spiked upward, underscoring the bearish move. Over three billion shares of the S&P 500 stocks traded today; trading increased 3% on the NYSE and jumped 24% on NASDAQ.

If you are looking for the dire economic report that triggered this latest sell-off, forget it. There isn't one. As you know, I have been critical of this very weak economic recovery that I consider largely government induced. But the economy isn't rolling over into a recession. I'm unsure what's driving this decline; in these situations, all traders become technical traders. Fundamentals just don't explain it.

This market almost suckered me into selling some November put spreads today. Fortunately, I decided to give it more time to show its true character. This has been a very tough week in the markets. Traders need to be treated for whiplash.

I'm taking my girlfriend to dinner and a movie, leaving the market behind.

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Written by Dr. Duke

Created: 09 October 2014

I don't think I am alone in being bewildered by this market. I feel like a mouse in the middle of a sumo wrestling match. Today SPX lost $41 to close at $1928 and RUT traded down $29 to $1068. Let's review: SPX traded down $30 on Tuesday, then it traded up $34 on Wednesday. then we lost $41 today. "Good grief", said Charlie Brown. I'm not sure anyone has a good answer for it, but the facts are that more one percent moves in the stock market occur in October than any other month. But I think recent markets are setting records for the huge whipsaws back and forth. Thirty and forty dollar moves on the S&P 500 back to back, and in opposite directions, are largely unprecedented. This market is rattling even the institutional traders. Over 2.6 billion shares of the S&P 500 traded today. But just to keep the data bewildering, trading volume was down 2% on the NYSE and trading on NASDAQ dropped 9%.

The number of initial unemployment claims reported today at 287k, flat from last week's 288k. Continuing unemployment claims were down slightly at 2.38 million, up from 2.40 million.

I took the opportunity to close my remaining SPX Oct 2080/2090 call spreads for five cents. This closes the October position for a gain of 8.2%. I am freeing up cash for a new November position. Our current November trade is doing well, but I expect we will close it early some time after this market bounces. When we see the market bounce (that will be a risky call, given the price volatility), I will sell more November put spreads. Our current November put spreads are over one hundred dollars OTM.

Time to relax and call it a day...

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Written by Dr. Duke

Created: 07 October 2014

The markets opened weakly this morning but appeared to be just chopping sideways most of the day. Something changed around 2 pm ET. SPX closed down $30 at $1935 and half of that loss occurred in the last two hours of trading. But I can't find any news items that appear responsible. Several analysts blamed concerns over weaker European economies, but those reports came out yesterday and this morning. Why did everyone run for the exits this afternoon? RUT has been trading weakly all year and today was no different with RUT closing at $1076, down $18. RUT's 50 dma crossed below its 200 dma about two weeks ago and RUT is now $65 below its 50 dma and down 7.3% for the year. By contrast, SPX remains up almost 5%. RUT's close today was lower than any of this year's corrections, but SPX is still above the August low at $1910. Another day like today might change that.

Trading volume on the S&P 500 peaked on October 1st on the big drop that day and has steadily declined until today, when it spiked back up to 2.1 billion shares.  Trading volume rose 9% on the NYSE and rose 21% on NASDAQ. I may not understand the impetus, but a lot of traders were heading for the exits.

Volatility, as measured by the VIX, popped back up today, closing at 17.2%, up almost two points. That takes VIX back to the highs of the August correction. In fact, VIX only closed slightly above 17% in August.

Some observers probably thought I was being too conservative when I closed our October put spreads about ten days ago, but conservative looks good on a day like today. The October calls spreads on SPX at 2080/2090 are really far OTM now. I had thought my two sigma rule would close them on Friday, but it looks like we may let them expire worthless unless we get a strong bounce this week. My November condor on SPX at 1810/1820 and 2090/2100 is weathering the storm very well so far and remains modestly profitable (+4%). It is hard to imagine the 1810/1820 spreads being seriously threatened, but today's big drop has me thinking...

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Written by Dr. Duke

Created: 06 October 2014

It appeared on Friday as though the bottom of this correction was in. SPX displayed a classic hammer candlestick on Thursday and then traded strongly higher on Friday. The S&P futures were positive this morning and the markets opened higher. Everything seemed to be lining up. But then those pesky bears came back, pulling SPX down to close at $1965 for a loss of three dollars. RUT traded even more weakly with a loss of $10 to close at $1095. SPX tried to break out above its 50 dma at $1975 and traded as high as $1978 before being pulled back down. Volatility popped back up about one point to 15.5% on the VIX. Trading volume fell off from last week with 1.8 billion shares of the S&P 500 stocks trading; this is below the 50 dma at 1.9 billion shares. Trading volume dropped 8% on the NYSE, but rose 5% on NASDAQ.

There was no significant economic news to drive the market one way or the other. Maybe the markets needed some additional positive news after the jobs report to continue the buying.

This sideways to slightly lower sideways churn is good for my iron condor trades. My October position only consists of the SPX 2080/2090 call spreads, which are essentially worthless now with less than two weeks to go. Assuming they expire worthless, the October position closes for a gain of 8.8%. The November SPX position was entered earlier than I do normally, and consists of the 1810/1820 put spreads and the 2090/2100 call spreads. Both spreads are far OTM and the position currently stands at a P/L of +$1,140 on 20 contracts or +7%. Position delta on 20 contracts is delta = +$5 and theta = +$57. The position is delta neutral and theta will continue to build.

We will see the minutes from the last FOMC meeting on Wednesday; that could move the market. Trading sideways into the earnings announcement cycle may be the best alternative for this overbought market. It allows the various indicators, such as the average P/E of the S&P 500, to move closer to long term averages without a dramatic market correction or crash. In any case, this market is dangerous; keep a close eye on it.

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Written by Dr. Duke

Created: 01 October 2014

SPX lost another $26 today, closing at $1946. SPX has now broken a couple of key support levels. Is the low of the August correction at $1910 the next support level? SPX set a closing high at $2011 on September 18th. Today's close is a correction of 3.2% from that high. That doesn't seem like much of a pull back, but consider RUT - a completely different story. RUT closed down $16 at $1085 today. RUT passed the low set back in August yesterday and matched the low set in May today. The closing low on May 15th was $1096 and the intraday low was $1083. RUT's intraday low today was $1083 - precisely the same as on May 15th. Is that just a weird coincidence or is $1083 a strong support level for some reason? RUT's recent high was $1179 on September 2nd. Today's close represents an 8% drop from that high and a 10.2% drop from RUT's July 3rd high at $1208. It is safe to say that we are in correction mode; the current question is how far will it pull back? Will SPX continue to hold up relatively well?

Volatility has risen the past couple of days with the VIX hitting an intraday high today at 17.6% and closing at 16.7%. For the record, the intraday highs on VIX in the April/May and August corrections were 17.9% and 17.6%, respectively. The February correction was more severe with VIX hitting 21.5%.

Trading volume picked up a little bit today, but today's increases are off relatively large numbers from yesterday. Traders may not be flooding through the exits just yet, but the selling pressure is significant. Trading in the S&P 500 stocks came in at 2.5 billion shares (the 50 dma = 1.9B); trading on the NYSE was up 2% and trading volume rose 14% on NASDAQ.

ADP's private employment report came out with an increase of 213 thousand jobs. The ISM manufacturing survey reported 56.6 for September, down from last month, but still a good number. Construction spending dropped off by 0.8% in August, down from July's +1.2% increase.

How low can it go?

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Written by Dr. Duke

Created: 30 September 2014

Are the markets at a tipping point and about to go over the edge? That seems to be the question on traders' minds. I haven't updated the calculations, but several weeks ago, I noted in one of my newsletters that the P/E ratio of the S&P 500 would be roughly back to the median of the historical range by simply trading sideways into October. So which is it to be? Will we correct and bring the market back in line painfully or simply wander sideways for a few weeks and blow off some steam in a more innocuous manner? If we look at the small caps, the answer appears to be that we are going over the cliff. Today RUT lost $16 to close at $1102 whereas SPX lost $6, closing at $1972. For the past few trading sessions, SPX appears to be setting up the area around 1965 to 1970 as a solid support level. But that could just be a temporary stop on the way lower. If we continue sideways for another week or so, we will be into the next earnings cycle, and then we could see the markets tip one way or the other, depending on the market's reaction to various earnings announcements - always hard to predict.

Today's market action occurred on huge volume, as the big funds made last minute changes to portfolios to "look their best" for the third quarter statements. Over 2.3 billion shares of the S&P 500 stocks traded today; volume was up 26% on the NYSE and was up 21% on NASDAQ.

Volatility rose less than a half of a point with the VIX closing at 16.3%.

The Case Schiller home price survey posted a 6.7% gain for July, down form June's +8.1%. The Chicago PMI dropped a bit in September with a 60.5 reading, down from 64.3 in August. The consumer sentiment survey from the Conference Board was up huge in August at 93.4, but came back to earth in September with a reading of 86.0. The consumer sentiment surveys from the University of Michigan appear to have less scatter in their data.

So the broad blue chip market is holding up well, but small caps continue to fall off. That is a concern. I don't regret my decision to close the put spreads in my October condors. RUT is now trading lower than it did at the bottom of the early August correction, and is over $50 below its 50 and 200 dma. But SPX is now solidly below its 50 dma, so RUT's weakness may finally be contagious. I think it pays to be conservative at this point. If in doubt, close or hedge.

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Written by Dr. Duke

Created: 25 September 2014

Once again, we are treated to extreme price volatility in this market. I have often pointed out the large numbers of reversals over the past couple of years in my newsletter - down $50 over a few trading sessions and then right back up $50 within a few days. SPX lost $46 on Monday and Tuesday, and then regained $15 of those losses yesterday. But today SPX gave up $32 to close at $1966 - what a wild ride. Are we having fun yet?

RUT lost $18 to close at $1110. Interestingly, both RUT and SPX were down 1.6% today. That's unusual; RUT has been trading much weaker than SPX all year. SPX sliced through support at $1980 and also its 50 dma at $1976. On a strong sell-off like we had today, one would expect increased trading volume as everyone rushed for the exits, but that didn't happen. Trading in the S&P 500 stocks has been consistent at two billion shares every trading day this week, whether up or down. Trading on the NYSE was up today, but only a half of a percent. Trading volume increased 10% on NASDAQ.

Volatility rose over two points today to 15.6% on the VIX. RUT is now down over 4% year to date and is now below the August 1st low of the last correction.

Initial unemployment claims were reported this morning at 293k, up from last week's 281k. Continuing unemployment claims rose seven thousand to 2.44 million. But neither of these numbers looked likely to have started a sell-off in the markets. However, the durable goods orders report was a surprise, dropping 18% in August. This was in contrast to September's strong +22% growth. Perhaps that sparked the profit taking. Tomorrow brings another estimate of second quarter GDP (why can't we just get it right and report it once?). Will a good GDP number start another "buy the dip" run higher? We'll see.

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Written by Dr. Duke

Created: 24 September 2014

The markets opened this morning and decided to test us with SPX breaking support at $1980 in the first hour of trading. But then the "buy the dip" crowd took over and away it went. SPX closed up $16 at $1998 and even RUT was up with a close at $1129, gaining $10. Volatility dropped off by more than it spiked up yesterday with VIX closing at 13.5%, down 1.4 points today. Trading volume was pretty flat with two billion shares of the S&P 500 trading today. Trading rose 6% on the NYSE and dropped 4% on NASDAQ.

So what are we to think about this market? Is the bull still alive or not? There are certainly many signs of slowing; many measures of value and sentiment seem to be nearing extremes. The percentage of NYSE stocks that are above their 200 dma dropped to 53% today. This is a lower percentage than either the August or the February corrections. SPX is being carried higher by a decreasing number of stocks - this is what analysts are talking about who mutter about weak market internals.

New home sales reported at an annualized rate of 504k for August, up from 427k in July. Tomorrow brings the weekly unemployment claims.

Be careful out there.

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Written by Dr. Duke

Created: 23 September 2014

The sky is falling! The doom and gloom folk are filling the air waves and the print media. SPX closed today at $1983, down $12. But the close on September 15th, a week ago yesterday, was at $1984, so let's not panic just yet. SPX is still within the trading channel of the past few weeks. The 50 dma is at $1976, so that is a good "line in the sand" to watch.

RUT is continuing to trade much weaker than SPX, and that does concern me. RUT closed at $1119, down $11. RUT hit a low of $1115 on August 1st, the most recent pull back in the markets, so today's close is nearing that recent low. RUT has also traded much more bearishly this week, gapping downward at the open both yesterday and today.

The NASDAQ composite has also fallen significantly during the last three trading sessions, but has held up much better than RUT. NASDAQ closed at $4509 today, down $19 on flat trading volume. Similar to SPX, today's close on NASDAQ was close to its close on 9/15 at $4519.

Trading volume doesn't appear to support the sky is falling case; two billion shares of the S&P 500 stocks traded today and that was flat with yesterday and only slightly above the 50 dma at 1.87 billion shares. Trading on the NYSE was down 2% and trading volume on NASDAQ was down 2%.

Volatility is starting to move higher. The VIX closed today at 14.9%, up 1.2 points.

My iron condor positions are holding up well. The Oct SPX position is up 11% with short puts at $1870. The Nov SPX position is up 7% with short puts at $1820. I allowed extra safety margin for these positions and that is paying off.

I will be watching this market closely, but I think it is early to get too excited. I am taking the opportunity to look for stocks that are holding up well in this down draft. IBD moved to "Uptrend Under Pressure" yesterday.

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Written by Dr. Duke

Created: 19 September 2014

After setting another all-time closing high yesterday at $2011, SPX decided to take a breather. SPX opened at $2013 and ran as high as $2019 before pulling back to close down one dollar at $2010. RUT, as usual, traded much more weakly, closing down $12 at $1147. It looks like traders are unloading their small cap stocks at every opportunity. Volatility is flat with the VIX unchanged at 12.1%. trading volume spiked up with quadruple witching to 3 billion shares of the S&P 500 stocks. Trading on the NYSE was up 107%, probably aided by Alibaba's IPO. Trading volume rose 64% on NASDAQ.

The risks of holding a European style index option into expiration was demonstrated today. SPX closed Thursday at $2011, and opened this morning at $2013. But the settlement price came in at $2022. That may have surprised some traders who were short those $2020 calls, thinking they had plenty of room when the market closed Thursday. I keep a spreadsheet of closing prices versus the settlement price for RUT and SPX. The average change between the Thursday close on SPX and its settlement price for 2014 is now $6.82; it was $3.68 last year, but 2014 brought two surprises, one in March with a $21 gap upward and today's $11 gap. As of my writing this blog, RUT's settlement price has not yet been posted, but the average change between the Thursday close for RUT and its settlement price for 2014 through August is $4.85.

My Oct iron condor on SPX at 1860/1870 and 2080/2090 stands at a net gain of 12%, and the Nov SPX iron condor at 1810/1820 and 2090/2100 is getting started, but is up 2%. If the bullish trend continues, I will close the October call spreads rather than give up any of the gains.  But it certainly doesn't look like much is going to stand in the way of this bull. Of course, that is what everyone says just before the crash...

Enjoy your weekend.