Dr. Duke's Blog

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Written by Dr. Duke

Created: 11 July 2014

SPX closed up $3 today at $1968 and RUT traded down two dollars to close at $1160. Volatility pulled back a bit with the VIX losing a half point to close at 12.1%. SPX lost almost one percent of its value this week (0.8% to be precise). The broad support range of $1950 to $1960 was reaffirmed with SPX dipping into that range three times this week. Trading volume fell off significantly today - did I miss the memo of today being a holiday? Only 1.6 billion shares of the S&P stocks traded today. Trading was down 15% on the NYSE and declined 10% on NASDAQ.

The small cap stocks fared much worse than their blue chip cousins this week, with RUT losing 3.7% of its value. The support level at $1155 held; that support level was established in mid-April when RUT bounced back upward, only to be pulled back lower in May. RUT's 50 dma is at $1150, so this is a strong support area for RUT. The NASDAQ composite fared a little better than RUT, but still worse than SPX, closing the week down 1.4%. In many ways, this week seemed to be a replay of the pullback in RUT and NASDAQ from early March until mid-May. The SPX largely traded sideways while RUT and NASDAQ took it on the chin.

This divergence between the small cap stocks and the blue chips has many analysts worried. The small caps historically lead the bull charges, but also lead the bearish corrections. When traders are very bullish, they begin to invest in higher risk stocks to make the larger gains. And when traders start to worry, they seek protection in the blue chips. The question remains: are the small cap stocks the leading indicator for a correction? I find that question sufficiently worrisome that I left my hedges in place over the weekend, in spite of a relatively quiet and flat day in the markets.

We'll see... Enjoy your weekend.

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Written by Dr. Duke

Created: 09 July 2014

The S&P 500 index opened higher this morning and then chopped sideways until after the FOMC minutes were released at 2 pm ET. Then SPX strengthened a bit more to close at $1973, up $9. RUT traded weaker all morning, saw a little boost after the Fed minutes, but then gave most of it back by the close, ending at $1174, up $2. Trading volume declined markedly from yesterday with 1.8 billion shares of the S&P stocks, equal with the 50 dma. Trading decreased 12% on the NYSE and declined 20% on NASDAQ.

So what changed today? We had two strong down days and now a weakly up to sideways day. But what was the impetus to drive markets down in the first place? And what slowed the slide today? The standard answer on most financial news media was that traders took confidence from the FOMC minutes detailing the end of quantitative easing in October - really? No news there. That makes me wonder what happens when we get another weak economic report. This market has ignored all bad news for quite some time.

The only thing I can conclude is that a large number of traders are nervous and anxious to protect their gains by selling at the least bit of negative news, an ugly rumor, or even a frown from the boss. If those nervous nellies are encouraged by reading the Fed minutes, heaven help us when the next piece of bad news hits the wires. Maybe the crazy guy with the sign, The End is Near, is onto something.

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Written by Dr. Duke

Created: 08 July 2014

All of the major market indices traded downward today. In fact, the NASDAQ composite, Russell and the S&P 500 all gapped open lower this morning and continued lower through most of the morning. But all of the indices recovered some of their losses before the close. I think traders were just taking some profits off the table before Alcoa led off the earnings announcement cycle this evening. SPX lost $14 to close at $1964 and RUT closed at $1172 for a loss of $15. Volatility only picked up modestly with the VIX closing at 12.0%, up less than three quarters of a point. The initial reports from the Alcoa earnings announcement appear to be positive, so perhaps this two day slide will end tomorrow (or at least not accelerate). Trading volume popped up with two billion shares of the S&P 500 stocks trading today. This was one of the rare days where trading volume was above the 50 dma (just five times since the first of May).

RUT and the NASDAQ traded down more strongly than SPX. In addition, all of the indices bounced back somewhat in afternoon trading. Closing at the lows of the day would have been very bearish. SPX bounced off support at $1960. RUT traded down to $1169 in late June before heading higher to challenge its all-time high just a few days ago. Today's intraday low on RUT was $1167. For all of those reasons, I didn't join the "sky is falling" crowd today, but that didn't stop me from hedging my RUT July condor position - better safe than sorry. I can afford the insurance. We'll see if I need that insurance.

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Written by Dr. Duke

Created: 07 July 2014

The futures predicted a weaker start this morning, but I wondered if the weak start would hold. It seems like the bulls have been very successful at recovering and pushing higher nearly every day. But that wasn't the case today. SPC closed down $8 at $1978, a reasonably modest decline, but RUT took it on the chin, dropping $21 to close at $1187. The NASDAQ composite also fell off significantly with a loss of $34, closing at $4452. Trading volume gains and losses are deceptive after a holiday weekend because the last day before the holiday is frequently a shorter trading session, and that is augmented by a large number of traders on holiday. Trading in the S&P stocks came in at 1.6 billion shares, up from Thursday's weak number, but well below the 50 dma at 1.9 billion shares. Trading volume rose 1% on the NYSE and rocketed up 71% on NASDAQ.

There wasn't any significant economic data reported today. The minutes from the last FOMC meeting will be released on Wednesday.

It seems like all indicators continue to be bullish for the market. In my opinion, we have a very weak economy, but the slight improvements we are seeing are being lauded everywhere. So today's pull back probably isn't anything more than a temporary slowing in the overall bullish trend. But I remain cautious. Trade bullishly, but protect yourself.

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Written by Dr. Duke

Created: 30 June 2014

Not much was going on in the markets today. SPX closed down one dollar at $1960, but traded throughout the day in a very narrow six dollar range. A little more action was happening with the small caps with RUT trading down to $1185, before recovering to close up $3 at $1193. The NASDAQ composite had solidly broken out to new highs last week and continued that push higher today, gaining $10 to close at $4408, another all time high. Can NASDAQ pull the blue chips higher? Volatility is roughly flat with a rise of three tenths of a point on the VIX at 11.6%. Trading volume returned to normal after Friday's activity associated with the Russell rebalancing. Trading volume in the S&P 500 came in at 1.8 billion, a half million shares below the 50 dma. Trading declined 15% on the NYSE and dropped 31% on NASDAQ.

The Chicago PMI may have thrown a little cold water on the market today, coming in at 62.6 for June, down from last month's 65.5. Pending home sales spiked up 6.1% in May, a big improvement from April's 0.5% increase. Economic data abound the rest of the week with the ISM manufacturing and services indices, the ADP private employment report, construction spending, factory orders, and, finally, the big daddy of economic reports: non-farm payrolls on Thursday morning (the exchanges are closed on Friday).

For now, it appears the bulls and bears are pretty evenly matched with SPX trading largely sideways for the past couple of weeks. Many analysts have been expecting a pullback or correction, but so far, no amount of bad news has been able to give the bears the upper hand. All we can do is trade what we see.

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Written by Dr. Duke

Created: 26 June 2014

The bears appeared to be in control for a short time this morning. SPX traded as low as $1945 before recovering to close at $1957, down only $2. RUT followed suit, closing down $2 at $1181 after hitting an intraday low at $1172. Volatility is unchanged with the VIX closing at 11.6%. Yesterday I was surprised at the market overlooking the first quarter GDP debacle; this morning it appeared some traders had second thoughts, but it didn't take long for the bulls to reassert themselves. Shorting this market is dangerous work.

Initial unemployment claims were essentially unchanged this week with 312k, down from last week's 314k. But the continuing unemployment claims increased from 2.56 million to 2.57 million.

My July iron condor on SPX started 5/21 with spreads at 1760/1770 and 1950/1960. I hedged with Aug 1050 calls on 6/2 and closed the hedges on 6/11 for a net gain of $1,200. I closed and rolled the 1950/1960 calls to 2000/2010 on 6/6. Today I closed the 1760/1770 put spreads for a dime. This position is now roughly at break-even. I will sell new put spreads and push the position back into a profitable state either tomorrow or next week.

The last three days of price action appear to be establishing the area of $1945 to $1950 on SPX as support. Unless the bears can hold a close below that level, the bullish trend must be assumed to be unchanged. Perhaps a sideways consolidation is the most bearish price action possible in this market. But be careful, it could all change in a blink of the eye. Large and fast price fluctuations have become the new normal.

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Written by Dr. Duke

Created: 25 June 2014

Wow! First quarter GDP was revised downward to an annualized rate of -2.9%. I was surprised by the first estimate at -1.5%, but I assumed the revisions would take it back higher. It seems like the FOMC's downward revision of GDP for this year to +2.3% might have been too optimistic. If the GDP number wasn't enough, durable goods orders declined 1.0% in May, down from the positive 0.8% gain in April. But the bulls just shrugged it all off and traded higher from a just a few minutes after the open. Ignoring such a dreadful GDP report is truly amazing!

It is true that bull markets often behave just this way, continuing higher even in the face of negative news. But unfortunately, it never ends well. The euphoria will end, but it is hard to predict when or what will trigger the run on the exits. In the meantime, all you can do is trade what you see.

SPX opened at $1949 and traded lower for all of two minutes (two candlesticks on the one minute chart), but then it was higher all day long, closing at $1960, up $10. RUT closed up $9 at $1183. The VIX dropped a half point to close at 11.6%.  Trading volume was mixed, but basically flat from yesterday, with 2.0 billion shares of the S&P 500 trading. Trading volume rose 6% on the NYSE, but dropped 13% on NASDAQ.

Unemployment claims will be reported tomorrow and the Michigan consumer sentiment report issues Friday. And the bears continue to hibernate...

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Written by Dr. Duke

Created: 24 June 2014

The day started very positively on the back of several positive economic reports. But the major indices started losing strength around 11 am ET and just continued to decline, closing near their lows for the day. SPX closed down $13 at $1950, barely higher than its low for the day at $1948.  RUT traded in a similar pattern, losing $12 to close at $1173. Trading volume popped up with 2.0 billion shares of the S&P 500 stocks trading today; the 50 dma = 1.9B. Trading volume rose 13% on the NYSE and increased 15% on NASDAQ.

This morning the Conference Board's measure of consumer confidence hit its highest level since January 2008 at 85.2. New home sales rose 18.6% in May to an annualized rate of 504k, up from 425k. The Case-Schiller housing price survey turned in a positive 10.8% increase for April, but that was a decline from March's +12.4%. This economic data bolstered the case for the bulls during this morning's trading session, but then it seemed like it slowly fell apart. I am inclined to think many traders were primed to take their profits, and ran for the exits as the market hit new highs. But several market analysts attributed the market's weakness to the continuing crisis in Iraq.

The question for tomorrow's open is whether the selling spreads.

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Written by Dr. Duke

Created: 23 June 2014

This bull market is getting a little long in the tooth, but the bulls remain in charge. Even bad economic news is discounted. The bears have been unable to take advantage of any bad news. Perhaps a large part of the bulls' case is simply the Fed support. As long as billions of dollars are being pumped in every month, it is hard to make the bear case. In addition, one has to consider investment alternatives; where can you put your money to work? It could be argued that equities are the only game in town.

SPX traded slightly down essentially all day, but recovered to close unchanged at $1963. RUT lost $3 to close at $1185. Volatility remains low and unchanged with the VIX coming in at 11.0%, up only a tenth of a point. As one might expect after quadruple witching on Friday, trading volume fell off with 1.7 billion shares of the S&P 500 stocks trading today. But if one excludes Friday's spurt, 1.7B is back in line with recent months, running just under the 50 dma. Trading volume on the NYSE fell 56% from Friday and NASDAQ dropped off 31%.

The only significant economic news today was the annualized rate of existing home sales for May at 4.89 million, up from April's 4.66 million. Tomorrow brings Case-Schiller, consumer confidence, and new home sales. Wednesday brings the third revision of first quarter GDP. A surprise in GDP could move the market, but this bull market completely ignored the first estimate of a negative 1.5% growth. I remain cautious, but one has to play this market from the bullish side until we see it crack.

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Written by Dr. Duke

Created: 20 June 2014

Quadruple witching resulted in a surge of trading volume with 2.8 billion shares of the S&P 500 stocks trading today.  Trading on the NYSE was up 42% and trading volume on NASDAQ increased 35%. This level of S&P trading volume has only been exceeded three times this year. SPX gained $3 to close at $1963 and RUT closed up $4 at $1188. Volatility rose a smidgeon with the VIX closing at 10.9%, probably the result of institutions hedging for the weekend.

There was no economic data of any significance reported today. I found one aspect of the FOMC announcement on Wednesday a little unusual. The committee said the economy is weakening a bit and lowered their GDP forecast to +2.3% for 2014. In light of the 1.5% decline in the first quarter, that forecast requires an average of quarterly growth rates over 3% - that strikes me as extremely optimistic. Perhaps Yellen is a politician after all.

The other disconnect from reality for the FOMC is on inflation. They don't think we have any inflation and have no concerns whatsoever. I'm not an economist, but I know I am paying more for food and gasoline. It doesn't feel like zero inflation to me. Perhaps it is similar to our fudging of the unemployment rate statistics. An unemployment rate of 6.3% really isn't too bad. During my lifetime, I have seen periods of solid economic growth with 6% unemployment. But this economy isn't healthy by any measure; just ask your neighbors and look at all of the empty commercial buildings. True unemployment is much higher than 6%.

SPX set another all-time high today. This bull market doesn't seem right to me. I just can't see the economic fundamentals to drive such exuberance. What worries me is this: history tells us that the higher and more frothy the market trades, the harder it falls. I would really prefer some sideways consolidation trading to cool things off a bit. But, you trade what you see, not what you think should be.

Have a great weekend.