Dr. Duke's Blog

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Written by Dr. Duke

Created: 08 August 2014

 This is a dicey market, and not for the timid. I have been watching the area of $1900 on SPX for its ultimate support; those are the highs from early April and mid-May. Yesterday's market appeared to be heading to challenge that support level, closing at $1910. SPX opened this morning and traded weakly sideways and gradually strengthened through the morning and really took off around 1 pm ET, running upward into the close and closing at $1932, up $22, only a few cents off the high for the day. RUT also traded higher, closing at $1131, up $12. Volatility pulled back a bit with the VIX dropping almost a full point to 15.8%.

Trading volume dropped off today with 1.8 billion shares of the S&P 500 stocks trading. Trading volume declined 6% on the NYSE and 5% on NASDAQ.

There wasn't any significant economic data released today to drive the market. Most of this week's price action was generated by global events in the Middle East and the Ukraine. The lack of predictability or even rationale for those events makes the market even more dangerous than usual.

Well, the weekend is here and I have a long list of chores around the house. It will help me relax and forget the market for a couple of days. Enjoy your weekend.

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Written by Dr. Duke

Created: 05 August 2014

The markets looked modestly weak at the outset this morning, but from about 11 am ET on, the market just continued to deteriorate with the most damage occurring after 1:30 pm ET. But the good news (stretching a little) is that the markets managed to recover some of the losses, so they didn't close at the lows of the day, as they did last Thursday. SPX lost $19 to close at $1920 and RUT closed down $3 at $1122. Since RUT has been trading much weaker than SPX for the past few months, perhaps today's stronger performance in RUT is another positive sign. The VIX tacked on almost two points to close at 16.7%. This level of volatility still strikes me as relatively low if we are really on the verge of collapse, as some would suggest.

Trading volume popped back up today with 2.2 billion shares of the S&P 500 stocks trading. Volume rose 15% on the NYSE and increased 14% on NASDAQ.

Factory orders for June came in 1% higher, an improvement from May's 0.6% decline. The ISM services Index reported out at 58.7 for July, up from 56.0. Before the market opened, several reporters said analysts were watching for the ISM number to see if the market would stabilize. Apparently, the improved ISM number wasn't enough. Some observers conjecture that increased tensions in the Ukraine were behind the afternoon weakness.

Today's close on SPX represents a pull back of 3.4% from the recent highs. This places us in the neighborhood of the April 4% pull back, but a little over half of February's 5.7% pull back. Since we seem to be struggling for an explanation of this spell of market weakness, I am inclined to think we will see a weaker pull back, but we'll see. If someone starts shooting down planes again...

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Written by Dr. Duke

Created: 04 August 2014

The markets opened weaker this morning, but then began a steady climb higher, with SPX closing at $1939, up $14 and near its high for the day at $1943. RUT gained $10 to close at $1125. Trading volume fell off from Friday with 1.9 billion shares of the S&P 500 stocks trading today; this is right at the 50 dma. Trading volume declined 21% on the NYSE and dropped off 18% on NASDAQ. Volatility pulled back with VIX closing at 15.1%, down nearly two points on the day.

There were no significant economic reports today, so why the big turnaround? Some analysts attributed it to the excellent earnings announcement from Berkshire Hathaway. The problem with that analysis is that Berkshire reported Friday. It took traders all weekend and up until about 11 am ET this morning to figure this out? I don't think so. We need a financial network where the talking heads aren't afraid to say, "I don't have a clue".

Let's recap the past few days. The Fed announcement Wednesday afternoon was a non-event - same old story; no news there and the market basically trades sideways. Then the market gaps open lower on Thursday and the S&P 500 loses about 2% of its value in one day. Why? Were traders afraid of the jobs report coming Friday? The jobs report wasn't stellar, but it was still a 200k plus number. But the market opens weakly on Friday and doesn't really go anywhere. The market opens this morning and wanders sideways and lower. And then it starts climbing to close near its highs for the day. Why? I don't know.

If I sound a little frustrated, it's true. I hedged my August condor positions Thursday. As the markets were trading weakly this morning, I decided to close half of my August put spreads to limit my downside risk and I left the hedge options in place just in case something crazy happened tomorrow morning. But then the market rebounds so strongly that I have to sell my hedge options lest I take too large a loss on them. Now I will be fortunate to nurse my August position to a small gain or a break-even. I admit that risk management that gets you out near break-even is good risk management. But that doesn't mean I feel good about it. This is a frustrating business. The next time some guru is telling you how he understands this market... Well, I will leave that to your discretion.

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Written by Dr. Duke

Created: 30 July 2014

Traders were anxiously waiting for something from the Fed that might move the markets this afternoon, but after some gyrations back and forth the markets ended virtually unchanged on the day. SPX closed unchanged at $1970 and RUT moved up $5 to close at $1147. SPX remains in the sideways trading channel of the past several weeks. RUT spent part of the day beneath the 200 dma, but managed to close above it.

The VIX traded up above 14% intraday, but closed unchanged at 13.3%. Trading volumes were mixed with 2.2 billion shares of the S&P 500 stocks trading, down slightly from yesterday, but still above the 50 dma. Trading increased 10% on the NYSE and decreased 10% on NASDAQ.

The big economic news was the first estimate of second quarter GDP at +4.0%, much higher than economists expected after such a dismal first quarter. ADP's private employment report came in at +218k, down from last month's 281k. That could suggest a weaker number from the Fed's job's report Friday morning, but the correlation of the two reports in the past is not very good. The FOMC announcement didn't offer any new insights. If the tapering continues, all quantitative easing programs should be removed by year end. Unless inflation spikes up, interest rates will remain low.

My August condor on SPX is doing well, as one might expect with the sideways trading of the past few weeks. That emboldened me to add a September condor on SPX, but I gave myself plenty of safety margin on the downside. Virtually all indicators are bullish, but I still worry about a correction. The divergence between SPX and RUT is troublesome to me. We'll see.

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Written by Dr. Duke

Created: 29 July 2014

The markets opened in positive territory this morning, but then turned downward, hitting a low just before noon ET. Then the classic "buy the dip" behavior began and everyone breathed a sign of relief. But someone gave the bear signal just after 2 pm ET, and the market traded off. SPX lost $9, closing at its low of the day at $1970. RUT has been consistently weaker than SPX, but today was an exception. RUT attempted to break out above the 200 dma, but could not hold it, closing up $2 at $1142.Volatility bumped up with the VIX closing up 0.7 points at 13.3%. Trading volume spurted higher, underscoring the market weakness. Trading in the S&P 500 was above 2.3 billion shares, well above the 50 dma. Trading volume increased 7% on the NYSE and increased 18% on NASDAQ.

A sideways consolidation would be healthy for this market and SPX has been trading in a tight channel for all of July. As long as the support range of $1950 to $1960 holds, we should be OK. A break below $1950 could be the beginning of something ugly.

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Written by Dr. Duke

Created: 28 July 2014

Last week's trading appeared to give the bears hope and the markets opened lower this morning. But that was the end of it. The bulls took over and drove the market higher with SPX finishing the day at $1979, up one dollar. RUT remains weaker than the blue chips, closing down $5 at $1140. The VIX popped up this morning as the market traded lower just after the open, but pulled back as the market recovered, ending the day just a tenth of a point lower at 12.6%.

Trading volume was lower on Friday's weak market, but volume picked up today with 1.9 billion shares of the S&P 500 stocks trading. This is right at the 50 dma. Trading volume was up 6% on the NYSE and up 4% on NASDAQ.

All of the technical indicators are on the side of the bulls. many analysts, including myself, have serious doubts about the economic underpinnings of this market, but the reality is that the bulls are dominating the market. Today's "buying the dip" was just one more example. Whether I think it makes sense is irrelevant. So I am trading the market from a bullish bias, but I am very cautious. A pull back or more serious correction remains very probable, and the longer this bull market runs, the more likely the occurrence of that pull back.

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Written by Dr. Duke

Created: 24 July 2014

The Standard and Poors 500 Index (SPX) made a new all-time high today, closing at $1988, up $1. This is the third day in succession that a new all-time high has been achieved (based on closing prices). In short, it remains a strong bull market. RUT is trading weaker with a close down $2 to $1156. RUT seems to be just trading along its 50 dma as SPX marches higher, but SPX's climb higher is slowing a bit.

Trading volume on the S&P 500 stocks was also above its 50 dma for the third day in succession. So these are the classic new highs on higher trading volume. Volatility is relatively low with the VIX at 11.8%, but it rose a bit today (about three tenths of a point).

Today's economic news was positive with initial unemployment claims declining 19 thousand to 284 thousand and continuing claims dropping by eight thousand to 2.50 million. New home sales declined modestly in June to an annualized rate of 442k from 406k in May.

I have not met anyone who is cheerfully trading this bull market. It seems that very few students of the market are comfortable with this bull market, including me. But what can you do? You have to trade what you see. I am having good luck with diagonal call spreads. The short call premium gives you a little breathing room in case of a pull back. I am also adding a put to some of these positions, rendering it similar to a collar trade. We may not see much action in the markets tomorrow. Next week brings a lot of economic data and more likelihood of some larger price moves one way or the other.

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Written by Dr. Duke

Created: 22 July 2014

SPX came out of the gate pushing higher this morning and basically traded sideways the rest of the day. SPX closed up $10 at $1984, just shy of its all-time high of $1985 on July 3rd. RUT has been weaker than SPX lately, but matched SPX's enthusiasm today, gaining $10 to close at $1156. As one might expect in the midst of all of this bullish euphoria, the VIX declined about six tenths of a point to close at 12.2%. I readily admit that I don't see the economic underpinning for this bull market at these levels, but you have to play what you see (but I suggest you hedge yourself just in case).

The Consumer Price Index (CPI) was reported today at +0.3% for June, down slightly from the +0.4% the previous month. The annualized rate of existing home sales was 5.04 million in June, up from May's 4.91 million.

Apple is down fifty cents in after hours trading following its earnings announcement. I think that's the smallest move after an earnings announcement from Apple I have ever seen. Apple is now a boring blue chip stock...

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Written by Dr. Duke

Created: 21 July 2014

If Friday wasn't sufficiently convincing, today's market action confirmed the strong hold on this market by the bulls. SPX opened this morning and traded lower, hitting $1966 around 11 am ET. But support is in the $1950 to $1960 range; it didn't even challenge support. SPX recovered most of those losses, closing at $1974, down $5 on the day. RUT closed at $1147, down $5. Volatility rose a bit with the VIX tacking on a quarter point to 12.8%.

No economic news of any significance was scheduled for today. CPI and existing home sales come out tomorrow.

There are certainly plenty of solid economic reasons for this market to not be this strong, but...

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Written by Dr. Duke

Created: 15 July 2014

The markets opened higher this morning, but the bears came to the table early and drove the markets lower.  SPX hit its low for the day around noon ET and then recovered a bit to close at $1973, down $4 on the day. RUT traded weaker than SPX (as usual), closing down $12 to $1154. For SPX, this remains well above support in the range of $1950 to $1960. RUT traded down through support at $1156 and the 50 dma at $1950 and bounced back to close just below the $1156 support level.

The VIX moved up slightly, about a tenth of a point, to close at 12%. Retail sales for June increased 0.2%, down from May's +0.5%. The Empire manufacturing survey moved up significantly for July to 25.6 from June's 19.3. Tomorrow brings the Fed Beige Book (minutes from the last FOMC meeting) and PPI.

Tomorrow's trading in RUT will be interesting; will RUT lead the market lower or bounce back higher?