Dr. Duke's Blog

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Written by Dr. Duke

Created: 16 June 2014

Think of this market as your dad sleeping off Thanksgiving dinner on the couch. SPX has had a huge run over the past month, so a little sideways consolidation trading isn't too surprising. SPX opened and ran up to $1941 this morning, but then dove down to $1931 just after noon. Then SPX just chopped sideways the balance of the day, closing at $1938, up $2. RUT behaved similarly, closing up $4 at $1167. Volatility rose just a touch with the VIX closing at 12.7%, up a half of a point.

Trading volume was light with 1.8 billion shares of the S&P 500 stocks trading, still well below the 50 dma. Trading volume on the NYSE rose 8%, but volume dropped 4% on NASDAQ.

The Empire manufacturing index from the New York Fed came in at 19.3 for June, up slightly from 19.0 in May. Industrial production for May reported at +0.6%, an increase over the previous month's 0.3% decline. Capacity Utilization rose slightly in May to 79.1% from April's 78.9% level.

We may see light trading tomorrow as well, since the FOMC announcement is due Wednesday afternoon.  I don't expect anything really new from the Fed announcement, but it is hard to predict the market's reactions. It isn't always rational (or at least doesn't match my rationale).

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Written by Dr. Duke

Created: 13 June 2014

For the past couple of weeks, it has seemed as though there was no end to this bullish run higher. Then the markets weakened on Tuesday and doubt set in. Thursday brought a significant decline and it appeared as though some degree of a correction had begun - perhaps just a slight decline and mostly sideways trading or perhaps the big, nasty correction so many have been predicting. But the bulls reasserted themselves today with SPX closing at $1936 for a gain of $6. RUT also strengthened a bit, closing up $3 at $1163. These aren't big gains, but it does tend to quiet the "sky is falling" crowd.

Expecting this bull market to continue straight up as it has for the past few weeks is silly. But predicting a severe market crash is an overreaction and ignores some obvious factors. First of all, corporate earnings have continued to grow; companies have been turning in reasonable results - it isn't boom city, but it isn't terrible by any measure. Secondly, and maybe more importantly, the Fed is still very much in this market, pumping in billions of dollars each month.

This discussion is meant to set up the question we are probably all thinking about: is the market going to continue up or correct back lower? I don't have the answer, but I have my own "best guess", for what it's worth. For the reasons cited above, I think the bulls have the edge. However, trees don't grow to the sky, and markets tend to ebb and flow in their progress, whether it is a bull or a bear market. By most measures, this market is fully valued, if not over-valued, so a little bit of a pause certainly would make sense. But this minor pause of the past three or four days may not last. After all, strong bull markets in the past continued higher long after everyone thought they were overbought. And this market has the Fed on its side. So my best guess is a slightly bullish to sideways market.

That is why Ihave been using diagonal spreads for the past several weeks; they seem to fit this market nicely. I also sold a call spread on RUT earlier this week to set up a new RUT condor. If RUT continues higher next week, I will sell the put spread; if not, I will wait.

Happy Father's Day to all of you out there. Enjoy the weekend.

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Written by Dr. Duke

Created: 11 June 2014

The markets traded down for the second day in succession, causing the doom and gloom types to restart their "sky is falling" commentary. But it does raise the interesting question of how high is too high? I would be one of the first to point out the obvious weaknesses in our economy: unemployment and underemployment remain very high, and there are empty commercial buildings on every corner. On that basis, one cannot justify this bullish market. But one can't ignore the fact that publicly traded companies, by and large, have been turning in reasonable earnings, and we can't forget the Fed. They are still pumping a lot of money into this market. This recent run in SPX may be just taking a breather, rather than setting up for the "big crash".

SPX closed at $1944, down $7. RUT also dropped off, closing down $6 at $1167. SPX hit its low for the day around $1940 just after 2pm ET, but then recovered much of its losses into the close. RUT traded in a similar intraday pattern. If you plot the Bollinger bands on SPX, you will see that this index has been running along the upper edge of the band for about two weeks, so taking a couple of days to rest wouldn't be unusual at all. Volatility rose a bit to 11.6%, still a relatively low level. Trading volume remains low with 1.7 billion shares of the S&P 500 trading today, almost identical to yesterday and well below the 50 dma at 2.0 billion shares. Trading volume on the NYSE and NASDAQ both dropped off by 1% today.

I closed the 1040/1050 put spreads in my June iron condor on RUT today for $0.08, resulting in a nice 23% gain for June. My motivation was two-fold. One the one hand, I am hedging myself just in case the sky is falling. On the other hand, I wanted to free up some capital for the possibility of entering a new July condor while we still have a reasonable amount of time left.

No economic data of any significance was reported today. Tomorrow brings unemployment claims and retail sales. The PPI and the University of Michigan consumer sentiment numbers report on Friday.

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Written by Dr. Duke

Created: 09 June 2014

Leadership of this bull market passed to small caps and the NASDAQ last week, and that trend was still evident today. SPX gained $2 to close at $1951, but RUT gained $11, closing at $1176. Trading volume remains anemic with 1.7 billion shares of the S&P 500 trading today; trading volume on the S&P 500 has only touched the 50 dma twice since the first of May. Trading volume declined 2% on the NYSE, but rose 9% on NASDAQ. Volatility increased a bit, with the VIX closing up four tenths of a point at 11.2%.

No significant economic data were reported today; retail sales, the PPI,  CPI, consumer sentiment, and unemployment claims report later this week. The FOMC meets next week.

My June iron condor on RUT, positioned at 1040/1050 and 1220/1230, has been enjoying strong profitability during this bull run since the 1220 strikes are so far OTM. But the relentless drive of RUT higher caused me to close those call spreads today - better to lock in a 22% gain rather than risk losing much of those gains later. It seems reasonable and rational to assume this market will level out or pull back, but reasonable and rational aren't words we should use when discussing market price movement.

I noted that SPX, RUT and the NASDAQ composite all surged higher today, but pulled back a bit as the day wore on, leaving longer upper shadows on the candlesticks. This wasn't pronounced enough to call it a signal, but it may be an early sign of a slowing of the bulls' charge. It certainly wasn't enough to cause me to hold my June RUT call spreads any longer.

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Written by Dr. Duke

Created: 04 June 2014

SPX set another all-time high today, closing up $4 at $1928. RUT appears to have bounced off its 200 dma and closed at $1131, up $5. RUT has been down so long that the 50 dma is getting close to the 200 dma. Volatility rose a smidge with the VIX adding two tenths of a point to end at 12.1%. Trading volume remains low with 1.7 billion shares of the S&P 500 stocks trading.  Trading volume on the NYSE dropped 2% and trading fell off by 5% on NASDAQ.

The ADP private payrolls report came in weak at 179k, adding to speculation about a weak jobs report Friday. The ISM services index reported an increase to 56.3 for May from 55.2 in April.

The markets seem to be pausing, waiting for news from Europe's ECB tomorrow and the jobs report Friday. But you can see the bullish sentiment still controlling the price action. For the past four days, SPX has dipped down significantly, but has always closed higher - and managed a new high today. This is a dangerous market. If the jobs report or some other news seriously disappoints, it could get ugly very quickly. But so far the bulls have it well in hand.

My June RUT condor stands at a net gain of $4,060 on 20 contracts or +27%. Position delta = +$22 and position theta = +$97. Both spreads are far OTM at this point.

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Written by Dr. Duke

Created: 03 June 2014

The major indexes just wandered sideways today with SPX closing down $1 at $1924 and RUT losing $3 to close at $1126. The VIX rose slightly to close at 11.9%. Trading volume rose from yesterday with 1.7 billion shares of the S&P 500 trading, but this remains well below the 50 dma at 2.1 billion shares. Trading volume rose 12% on the NYSE and increased 3% on NASDAQ.

The only economic data reported today was factory orders, increasing 0.7% in April, but this was down significantly from March's +1.5%.

Both SPX and RUT traded lower intraday, but the bulls reasserted themselves and pulled the indexes back up before the close. SPX traded as low as $1919 before recovering to close at $1924. Similarly, RUT traded down to $1119 before recovering much of that loss, closing at $1126. This was typical of trading on SPX for the past three days and shows that the bulls still control this market. But this could also be the beginning of some sideways consolidation trading. These long lower shadows on SPX are what prompted me to hedge my July call spreads yesterday. That trading pattern often shows bullish strength.

We may see similar sideways trading tomorrow as traders watch for the ECB interest rate announcement Thursday and the jobs report Friday. But so far, all bad news has been successfully explained away by the bulls. We'll see.

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Written by Dr. Duke

Created: 02 June 2014

The S&P 500 index opened this morning down a bit, which I took as some reassurance of sanity in the markets. It just seems to me that the markets have been getting ahead of themselves lately. But by mid-morning, SPX had strengthened and closed the day slightly up ($1) at $1924. RUT traded up $6, closing at $1129. The VIX popped up a little on the opening of the market but then pulled back to close at 11.6%, up 0.2 percentage points. Trading volume dropped off markedly with 1.5 billion shares of the S&P 500 stocks trading. Trading on the NYSE declined 9% and trading on NASDAQ decreased 11%.

The small cap stocks continue to trail the blue chips, but appear to be making up some of that differential the past few days. The NASDAQ composite is somewhere in between. My concern about SPX continuing higher relates to the lagging small caps. Market extremes are usually met with extreme corrections. I still remember being at a dinner party during the holidays in December of 1999 and hearing people with absolutely no market experience talking about buying dot com stocks. That was a sign.

The ISM manufacturing index reported a value of 55.4 for May, slightly up from April's 54.9. Construction spending dropped off in April with a 0.2% increase, as compared to March's 0.6% gain. These are only two data points, but they are typical of what we have been seeing now for months and months - mediocre, flat to declining data. The bull market doesn't seem consistent with the hard economic numbers. The Fed's continuing stimulus, even at lower levels, is certainly part of the answer, but repeated all-time highs in the market worry me a bit.

We'll see what tomorrow brings...

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Written by Dr. Duke

Created: 30 May 2014

Traders watched the market basically chop sideways most of the day but then the market traded stronger into the close to set another all-time high for SPX, closing up $4 at $1924. RUT gained $6 to close at $1135. Volatility was essentially unchanged with the VIX at 11.4%. Trading volume spiked up today with 1.9 billion shares of the S&P 500 stocks trading, but volume remains under the 50 dma at 2.1B.Volume rose 17% on the NYSE and increased 8% on NASDAQ.

The Chicago PMI came in at 65.5 for May, up from last month's 63.0. The University of Michigan's consumer sentiment survey came in flat at 81.9.

This market strength in the face of mediocre economic data is somewhat perplexing. I suppose it is the classic "climbing the wall of worry". When I look at the last seven days of trading on SPX, I am impressed. Everyone I hear or read seems to be bearish - I suppose that is why the market continues higher.

I am staying in the Trump Tower in Chicago this weekend and it is very nice. I am sure I will enjoy my weekend; I hope you do as well.

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Written by Dr. Duke

Created: 29 May 2014

These bulls refuse to be stopped. First quarter GDP came in at a negative 1%. Most economists define a recession as two negative growth GDP quarters in succession. But that didn't faze this market. SPX traded up $10 to close at a new all-time high of $1920 and over half of those gains occurred after 2 pm ET. The bulls enthusiastically traded the market higher into the close. RUT was positive, but not quite as strong with a $3 gain to close at $1140. Volatility remains pretty flat at 11.6%, down a tenth of a point on the day. Today's bullish rampage occurred on reduced trading volume with only 1.6 billion shares of the S&P 500 stocks trading today; the 50 dma is at 2.1B. Trading volume declined 7% on the NYSE and dropped 4% on NASDAQ.

Initial unemployment claims came in at 300k, down from last week's 327k; the four week moving average is flat at 312k. Continuing claims decreased 17 thousand to 2.6 million.

Today's strong bullish performance in the face of the GDP report is a little disconcerting. This is the kind of excessive bullishness that leads to crashes. On the other hand, this bullish run has occurred pretty consistently on low trading volume. I may be wrong, but it seems like we are pushing the envelope. We'll see. In the meantime, I'm glad my short put spreads are far OTM. But the call spreads are being squeezed.

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Written by Dr. Duke

Created: 28 May 2014

The markets slowed a bit today after a solid four days of trading significantly higher. SPX lost $2 to close at $1910 and RUT closed down $6 at $1137. Trading volume remains weak with 1.7 billion shares of the S&P 500 stocks trading today, slightly lower than yesterday. Volume rose 1% on the NYSE and declined 3% on NASDAQ.

Volatility rose about two tenths of a point today with the VIX closing at 11.7%. I wouldn't bet the farm on this, but I find the VIX chart over the past three days interesting. It is only three days, but one could easily draw a slightly rising trend line for VIX, while SPX is also rising - a potential divergence in the making? I have seen this happen before, preceding a pull back on SPX. But I am not in the "sky is falling" camp. I think Fed support and solid corporate earnings will hold this market in at a least a sideways trend. However, after such strong trading for the past few days, a little pull back lower wouldn't be surprising.

GDP growth for the first quarter and unemployment claims will be reported tomorrow. The risk for the market would be a negative GDP number - that might spook some traders.

In the meantime, my RUT June condor at 1040/1050 and 1220/1230 stands at a net gain of $3,540 on 20 contracts or +23% with position delta = +$11 and position theta = +$100. We have a nearly perfectly delta neutral position with about 3 weeks until expiration. I have an internal debate at a point like this between closing early for a large percentage of the gains or allowing the trade to appreciate even further. As long as the trade remains delta neutral, I am inclined to let it run; a large one day move in either direction will cause me to push the exit button.