Dr. Duke's Blog

Details

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.

Details

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.

Details

Written by Dr. Duke

Created: 27 May 2014

Traders returned from the long weekend in an optimistic mood. Trading volume remains relatively low, but all of the major market indexes rose. SPX closed up $11 to a new all-time high of $1912. RUT wasn't to be out-done, rising $16 to close at $1142; this close may be significant in that it is above the 50 dma at $1140; RUT broke down through the 50 dma on March 26th. RUT has been trading weakly for a long time. Volatility was roughly unchanged with the VIX increasing less than two tenths of a point to 11.5%. Both SPX and RUT gapped open higher this morning, a very bullish sign. Trading volume naturally increased from Friday's light holiday trading volume with a 16% increase on the NYSE and an 18% increase on NASDAQ. The S&P 500 stocks traded 1.8 billion shares today, an increase from Friday, but well below the 50 dma of 2.2 billion shares. So we are continuing to see a bullish market on low volume. But NASDAQ composite and RUT appear to have turned the corner and are now recovering. NASDAQ gapped open this morning and rose $51 to close at $4237. Unlike RUT, NASDAQ has left its 50 dma in the dust ($4017).

Durable goods orders increased 0.8% in April, but the March numbers were revised upward significantly, so analysts were encouraged that business appears to be investing in capital goods like manufacturing equipment. The Conference Board's consumer sentiment survey increased to 83.0 for May from 81.7 in April. Case-Schiller's housing price survey came in at an annualized rate of 12.4% for March.

The market's exuberance contributed to my SNDK diagonal spread needing to be closed today for a 22% gain; the stock price was running through my window of profitability, but a 22% gain in one week isn't too bad. My June iron condor position on RUT is now up 23% - very nice.

We'll see if this strong bullish move can continue. It doesn't seem likely to me, but maybe that assures us that the move will continue.

Details

Written by Dr. Duke

Created: 23 May 2014

SPX closed at a new all-time high, $1901, up $8. RUT finally broke out above the 200 dma at $1118, closing at $1126 for a gain of $12. That underscores the huge differences in SPX and RUT recently. SPX makes a new all-time high and RUT finally breaks out above the 200 dma - wow! As one might expect, the VIX dropped almost one percentage point to close the day at 11.4%, the lowest reading for 2014. Trading fell off to 1.4 billion shares of the S&P 500 stocks changing hands today, not too surprising before the long holiday weekend. Trading volume decreased 12% on the NYSE and dropped 16% on NASDAQ.

The only economic news for today was the report of new home sales for April, an annualized rate of 433 thousand, up from last month's 407k.

Now the question is whether the markets can hold these new highs next week. I am doubtful, but we'll see. I am not in the "sky is falling" camp, but I don't think we have sufficient economic recovery to justify a sky-high market either.

BTW, that SNDK spread I recommended on Monday is up 20% this week. You would have paid for your annual membership in The No Hype Zone in one week...

Enjoy the holiday, but remember its true meaning. Thank a veteran this weekend.

Details

Written by Dr. Duke

Created: 21 May 2014

This market is like an old fashioned see saw, back and forth between the bulls and the bears. Today it was the bulls' turn as SPX gained $15, closing at $1888. RUT didn't gain as much, closing up $6 at $1104. Volatility declined with the VIX closing down one point at 11.9%. That was the lowest close for the VIX all year. Trading volume fell off with 1.7 billion shares of the S&P 500 stocks trading. Trading on the NYSE declined 9% and trading volume dropped 4% on NASDAQ. Perhaps the exodus for the long weekend is already beginning.

The minutes from the last FOMC meeting were released today and investors were reassured that the discussions about raising interest rates were couched in terms of later in 2015. But that is what the Fed has been telling us all along, so there wasn't anything new in the minutes. It seems like Wall Street starts fretting about the Fed even more now that they have been much more transparent. We get the weekly unemployment numbers tomorrow, but those aren't likely to be market-moving.

So, will the markets sell off a bit tomorrow? It is the bears' turn...

Details

Written by Dr. Duke

Created: 20 May 2014

Almost on cue, the market Gods gave the baton to the bears today to wipe out yesterday's gains. SPX lost $12 to close at $1873. RUT closed down $17 at $1098. Significantly, both indexes remain above key support levels. SPX bounced off the 50 dma at $1868 and RUT bounced off the February low at $1093. RUT remains below its 200 dma. Trading volume increased today with 1.9 billion shares of the S&P 500 stocks trading, but this remains below the 50 dma at 2.2 billion shares. Trading on the NYSE rose 13% and trading volume on NASDAQ increased 12%. The VIX increased a half point to 13%.

For the past several weeks, RUT and the NASDAQ composite have traded much weaker than the SPX and the DJIA. NASDAQ closed down $29 today at $4097, but is still well above the 200 dma at $4007 and the solid support around $3998 established by lows in mid-December, early February and mid-April.

Market watchers blamed remarks by some of the FOMC members for the decline, and one has to wonder if someone will find something remarkable in the FOMC minutes that will be released tomorrow. I doubt that, but I didn't think that Plosser or Dudley's comments today gave us any new information either. Maybe it is another case of "we have to explain the market's move somehow".

The market continues to basically trade sideways in a pretty tight range. Trading volume should begin to decline later this week in anticipation of the long weekend.

Details

Written by Dr. Duke

Created: 19 May 2014

The markets opened a little weak for a few minutes this morning, but then traded up all day with SPX gaining $7 to close at $1885. RUT also gained on the day, closing up $12 at $1114. Volatility was unchanged with the VIX at 12.4%. the NASDAQ composite tacked on $35, almost 1%. But before we hang too much on those numbers, it is important to note that trading volume dropped off with 1.7 billion shares of the S&P 500 trading today, well below the 50 dma of 2.2 billion shares. Trading volume fell 17% on the NYSE and decreased 9% on NASDAQ. We have a long weekend coming up, but it seems too early for everyone to be checking out. I think the safest conclusion is to say that we remain trading sideways in a narrow range. And this is consistent with the classic "Sell in May" pattern for the summer. Many focus on the "sell", but this isn't a period of decline; the typical historical trend has been sideways, range bound trading. Even if the bears take their turn tomorrow, I expect SPX will remain in the range of $1850 to $1900.

My Jun RUT iron condor at 1040/1050 and 1220/1230 stands at a net P/L of $2,340 on 20 contracts or +16% with delta = +$54 and theta = +$62. I also entered a diagonal call spread today on SNDK, long the Jun 90 call and short the MayWk4 92 call. SNDK has been in a strong bullish trend for quite a while and this has been reinforced after its recent earnings announcement. Diagonal call spreads work well with slightly bullish to sideways patterns. The next several weeks should be a good time for that class of trade.

This is going to be a slow week for economic data and trading will most likely slow as we approach the three day holiday weekend. I don't expect any fireworks.  So today's low volume sideways trading may be typical of the week.

Details

Written by Dr. Duke

Created: 16 May 2014

The markets bounced back a bit today, seemingly reaffirming the sideways trading range of the past few weeks. SPX gained $7 to close at $1178. RUT also gained $7 to close at $1103. Volatility backed off a bit with the VIX declining almost one point to 12.4%. Trading volume was flat to down from yesterday with 2.1 billion shares of the S&P 500 trading. Volume rose 1% on the NYSE and dropped 16% on NASDAQ.

SPX has been successfully using the 50 dma as support, bouncing off both yesterday and today. But the 50 dma is steadily rising, compressing SPX between its all-time highs and the 50 dma. Sooner or later, something has to give. RUT has been trading much weaker than SPX, trading way below the 200 dma. Over the past few days, it appears RUT is bouncing off the support set by the low in early February around $1093. The market is clearly weak, but the key question is whether the markets will consolidate and thereby relieve some of the excesses from the strong bullish gains of the past several months or whether we will see a stronger correction. I am starting to worry that it may be the latter.

The weakness in RUT worries me a bit, so I closed my May put spreads yesterday. SPX settled at $1870.76 and RUT settled at $1094.72.  The May call spreads will expire worthless, resulting in an 11% gain for my May iron condor position on RUT.

Have a great weekend.

Details

Written by Dr. Duke

Created: 14 May 2014

The markets pulled back a bit today, but on weaker volume.  The divergence between SPX and RUT continues. SPX closed down $9 at $1889 while RUT lost $18 to close at $1103. Volatility remains low with the VIX unchanged at 12.2%. Trading volume was weak with 1.7 billion shares of the S&P 500 trading. Trading volume declined 3% on the NYSE and declined 6% on NASDAQ. SPX continues to trade above its 50 dma, but RUT has now once again broken the 200 dma.

Yesterday, retail sales disappointed investors with a weak 0.1% gain in April after a 1.1% gain in March. Today, the PPI came in with a 0.6% gain in April, building on last month's 0.5% gain. Too little to run up the inflation flag yet, but it is worth watching. All in all, it is hard to explain the small cap weakness. The economic data are not strong, but they aren't weak either.

Ten year treasury yields broke support today and dropped to lows not seen since October. This may suggest a flight to the safety of treasuries. Maybe the small cap weakness seen in RUT is an early warning sign? I have been reluctant to give the bears a nod as long as the Fed is strongly supporting this market, but RUT's weakness the past two days has my attention.

Unless RUT opens higher tomorrow, I will be closing my May put spreads even though they are still over two standard deviations OTM.

Details

Written by Dr. Duke

Created: 12 May 2014

This market has been seeking direction for several weeks, but today it appeared the bulls were firmly in charge. But time will tell. SPX tacked on $18 to close at $1897, a new all-time closing high. RUT also traded strongly, up $26 to close at $1134. Both indexes gapped open this morning, a very bullish sign. But trading volume was down today with 1.8 billion shares of the S&P 500 stocks trading (the 50 dma is 2.2B). Trading declined 5% on the NYSE and decreased 6% on NASDAQ. Volatility continued its slow decline, with the VIX closing at 12.2%, down seven tenths of a point.

The price action on all of the major indexes was very bullish, but the lack of confirming volume is a concern. On the other hand, the declining VIX tells us that traders are not concerned about an imminent correction. These levels of the VIX are back to where we were in late December and early January.

We have watched the RUT and NASDAQ composite trade much weaker than SPX for several weeks, but that trend shifted today. RUT gained 2.3% today from Friday's close; NASDAQ gapped open this morning and gained 1.8% from Friday's close, but SPX only gained 1.0%. This is at least one data point suggesting the rotation from small caps and high tech to the blue chips may be nearing its end. The alternative explanation for recent market behavior was to suggest the small caps were leading the market into a severe correction. One data point doesn't make a trend, but today's market action is at least hopeful.

My iron condor positions are faring well. The May position on RUT stands at a net gain of 12% with delta = +$6 and theta = +$256 on 20 contracts. With just a few days to go, this position is delta neutral with both spreads over two standard deviations OTM. The RUT Jun iron condor stands at a net gain of 14% with delta = +$10 and theta = +$87 on 20 contracts. The position theta is much smaller because we still have 38 days to go until expiration. Time decay isn't ramping up too much as yet.

Watch for the bears to try to regain control in the morning.