Dr. Duke's Blog

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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.

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Written by Dr. Duke

Created: 17 September 2014

It seems like the market has developed a pattern of developing extreme anxiety before the Fed announcement and then nothing happens. We find ourselves wondering what were we anticipating? Is that all there is? SPX closed at $2002, up $3 and RUT gained $3 to close at $1154. Volatility is unchanged with the VIX at 12.7%. Trading volume was up modestly with 1.9 billion shares of the S&P 500 stocks trading. Volume rose 3% on the NYSE, but fell 5% on NASDAQ.

The consumer price index, CPI, came in at -0.2% for August, but that doesn't match my everyday experience. None of my food or fuel expenditures are lower.

The FOMC announcement was essentially unchanged from previous meetings. The reduction of the quantitative easing program continues ten billion dollars at a time and will be eliminated in about two months. There was no new language about increasing interest rates - that seemed to be the key point worrying the collective market. SPX shot upward after the FOMC announcement, coming within a few cents of matching the intraday high at $2011 set on September 4th. But then it pulled back to close at $2002. Don't let your guard down. The volatility following the Fed announcement in the past has extended into the next trading session. The tendency of this market is definitely bullish, but it remains very nervous.

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Written by Dr. Duke

Created: 16 September 2014

Talk about whiplash! Yesterday, SPX only lost one dollar and held support. But the NASDAQ composite lost $45 (1%) and RUT lost $14 (1.2%). That got my attention and I closed several of my directional trades. But today SPX roars back, closing at $1999, up $15, and RUT tacks on $4 to close at $1151. NASDAQ moved back into its trading range, closing at $4553, up $34. The strange part of these two days in the market is the upcoming FOMC announcement tomorrow afternoon. Normally, we would have seen a calm sideways market as traders waited for that announcement, but not so this time. I'm not sure what that means. At a minimum, it shows how nervous traders are, anxiously jumping on and off the bandwagon at the slightest news or rumor.

Trading volume rose a bit with 1.8 billion shares of the S&P 500 stocks trading. Volume rose 13% on the NYSE, but dropped 4% on NASDAQ.

Volatility popped up about a point yesterday, but the VIX lost 1.4 points to close at 12.7% today.  The only economic news was the PPI, flat at zero change, so that helps calm the inflation fears. Maybe that caused traders to be less concerned about the Fed moving up their time table for increasing interest rates.

So the Fed watch continues. It will pay to be cautious as this saga unfolds.

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Written by Dr. Duke

Created: 15 September 2014

As I considered the price charts of the major indexes this weekend, I concluded that the markets were just treading water ahead of the Fed's announcement this week. But today's price action makes me worry that there is more in the works. On the positive side SPX closed at $1984, down only one dollar. It traded down below $1980 earlier today, but it recovered into the close. It appears that SPX is holding support in the $1985 area. But then the news gets much worse. RUT lost $14 to close at $1147 while the NASDAQ composite lost $49 to close down at $4519. Until today, NASDAQ had been holding up well, so this weak performance in the NASDAQ and RUT is alarming. Either the Fed announcement is irrelevant or something else is in play.

Underscoring these concerns was the behavior of the VIX today; in recent days, it has commonly spiked higher intraday, but then pulled back before the close. Today, it closed almost a full point higher at 14.1%, very close to its intraday high at 14.2%. So I'm not the only one a little concerned about this market. The divergence of SPX from RUT and NASDAQ was marked today. SPX actually traded into the black around 2:30 ET, but then slowly declined to close in the red by only one dollar. By contrast, RUT and NASDAQ didn't show any life all day; their charts were pretty steadily headed south.

Trading volume was lower today with 1.8 billion shares of the S&P 500 stocks changing hands. Trading on the NYSE declined 3% but trading volume rose 11% on NASDAQ (everyone was selling NFLX and TSLA).

The Empire manufacturing survey came in at 27.5 for September, up markedly from 14.7. Industrial production fell off 0.1% in August, a change from July's +0.2% gain. Capacity utilization was essentially flat in August at 78.8% (79.1% in July).

I will be anxiously watching the futures this evening and tomorrow morning to see if this weakness continues.

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Written by Dr. Duke

Created: 12 September 2014

Looking at today's market action reminded me of an old joke illustrating the difference between optimists and pessimists. Both fell off the top of the skyscraper, but an observer heard the optimist as he flew past saying, "So far, so good".

SPX lost $12 to close at $1986 and RUT also lost $12 to close at $1161. But both indexes closed today near lows that were hit intraday several times this week. So, the proposition that we are just consolidating sideways and blowing off some of the bullish steam remains feasible. But the doomsday scenario folks are plentiful. And October, the month of crashes, is coming up shortly. Volatility rose a bit today with the VIX closing at 13.3%, up a half point. So today's drop didn't cause any panic, but we'll see what next week brings.

Have a great weekend.

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Written by Dr. Duke

Created: 11 September 2014

The markets continue to hold up rather well. SPX traded off a few points this morning but then recovered quickly - buying the dip still works! SPX closed up $2 at $1997 and RUT gained $7 to close at $1172. Trading in the S&P 500 stocks dropped a bit at 1.7 billion shares (the 50 dma continues to decline). Trading volume on the NYSE increased 3% but volume declined 6% on NASDAQ. Volatility is flat with the VIX unchanged at 12.8%.

Initial unemployment claims came in at 315 thousand this week, up eleven thousand over last week. Continuing unemployment claims rose nine thousand to 2.49 million (essentially unchanged). This increase in initial claims is pretty small and well within the range of scatter week to week in this number, but the S&P futures traded off this morning after this report was released. SPX opened lower at $1993 and traded down to $1986 by about 10:30 am ET, but then the steady  recovery began, and SPX rose the rest of the day, finally breaking into positive ground just 15 minutes before the close. The predictability of this "buying the dip" behavior is beginning to worry me. Whenever it becomes this obvious, the trading gods like to throw a wrench into the works...

I took advantage of the dip and sold my SPX Nov put spreads at a reasonable price; I sold the call spreads yesterday. It's early to enter November, but since I closed the September position early, I had capital laying around doing nothing. Don't you hate that?

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Written by Dr. Duke

Created: 10 September 2014

You could have made a lot of money this past year or so, simply by buying the dips on the major market indexes. And it happened once again this morning. One of these days, it won't work, and then it gets ugly. SPX opened up weakly this morning and traded lower for about the first hour of the session, but then started higher and ended up gaining $7 on the day to close at $1996. RUT behaved similarly, only its low for the day broke its 50 dma. RUT closed up $6 at $1165. Volatility spiked upward this morning with the VIX moving over 14%, but then it settled back as the market recovered, closing at 12.9%, down 0.6 points.

No significant economic data were released today. We will see the weekly unemployment numbers tomorrow, but they aren't likely to move the market.

The SPX hit a peak near $1990 in late July and that level appeared to be holding as a solid support level until yesterday when SPX closed at $1988. When SPX opened and traded down to $1983 this morning, I think many traders paid close attention (I know I did). But then the same old "buy the dip" thing happened once again. RUT continues to trade more weakly than the broad market, as represented by SPX, and that concerns me. One can certainly make the case that some sideways chop for a few weeks will return most valuation measures back closer to historical averages. But I fear that one of these days, the bulls won't be there to buy the dip...

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Written by Dr. Duke

Created: 08 September 2014

 The markets opened down a bit and sunk lower until around 2pm ET when they started to rebound and recovered much of their losses before the close. SPX traded down to $1996 before recovering to close at $2002, down $6 on the day. RUT gained $2 to close at $1172. Volatility popped up over 13% on the VIX this morning, but settled to 12.7% by the close. Trading volume in the S&P 500 stocks was down a bit at 1.7 billion shares. Volume was up 9% on the NYSE, but up only 2% on NASDAQ. The last three trading sessions on SPX have included this pattern of trading lower, but then recovering to close either at a gain, as it did Friday, or to minimize the loss, as it did today. I find this significant because it suggests the presence of a large number of traders who are willing to buy the dips in this market. On the other hand, not many traders are willing to follow this market much higher. At higher prices, they tend to take their profits. Maybe it will just wander sideways, caught between these two groups of traders and blow off some of the overbought steam.

I have closed my September iron condor position to lock in a nice 13.5% gain early. The October condor stands at a gain of 11% as of the close today. I may close it early as well and enter a November position earlier than my normal practice. The advantage would be collecting a reasonable credit very far out of the money.

There aren't many significant economic reports scheduled this week. Given that, this sideways trading may continue. The wild cards are in the Ukraine and the Middle East.

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Written by Dr. Duke

Created: 05 September 2014

The monthly jobs report was issued this morning and surprised analysts with a low +142 thousand jobs; virtually all of the analysts I heard and read were predicting another 200k+ announcement. The unemployment rate fell a tenth of a point to 6.1%. It is interesting to remember "the good ole days" when unemployment rates in the high five percent to low six percent range were considered normal; but we know this isn't a healthy, thriving economy. I have several friends who are still unemployed and many empty storefronts continue to be empty in my neighborhood. This latest tick down in the unemployment rate is the result of more Americans giving up their job search; so they don't "count", i.e., the labor force participation rate dropped again.

But the markets didn't blink. S&P futures were running around a negative $7 before the announcement and immediately began rising after the announcement. The S&P 500 index opened at $1998, yesterday's close, dropped to a low of $1990 for the first couple of hours, but then recovered and steadily rose all day and closed at its high for the day, $2008, up $10. How's that for a reaction to bad news? The Russell 2000 Index wasn't quite so positive, closing up $3 at $1170. Volatility fell off about a half point to 12.1%.

Trading volume was flat with 1.8 billion shares of the S&P 500 stocks trading. Trading dropped off 7% on the NYSE and declined 10% on NASDAQ. So we continue to see market gains on low trading volume. I interpret that as a sign of traders buying, but lacking conviction, so they only buy a few shares.

We continue to see a similar repeating pattern. When the market rises very much, traders get nervous and sell to preserve their gains. When the market pulls back, the bulls buy the dip. If this pattern continues, we could see a sideways choppy market for a few weeks. That could blow off much of the overbought steam in a very innocuous manner. On the other hand, one of these days, some bad news might actually be taken as bad news...

But let's forget about that for now and enjoy our weekend.