Dr. Duke's Blog

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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.

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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.

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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...

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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.

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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.

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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.

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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.

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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.

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Written by Dr. Duke

Created: 09 May 2014

This week's market reminded me of a drunk walking down the sidewalk, lurching back and forth, but managing to stay on the sidewalk. The bulls and bears each thought they had control at one point this week, but neither camp could manage to hold onto it. Today SPX closed up $3 at $1878 and RUT gained $10 to close at $1107. Volatility contracted a bit with the VIX losing a half point to close at 12.9%. Trading volume declined with 1.9 billion shares of the S&P 500 trading. Trading declined 11% on the NYSE and dropped 18% on NASDAQ.

The 50 dma continues to serve as support for SPX; it bounced off the 50 dma again today. But RUT is trading much weaker; it broke the 200 dma decisively on Tuesday and appears to be using the low from early February as its support level. RUT bounced off $1092 to begin its upward climb this afternoon, closing at its highs for the day. SPX has now spent three weeks trading in the narrow range of $1865 to $1885, while RUT has trended lower. Comparing the recent behavior of these indexes shows us how traders have been rotating out of the riskier small cap stocks into the blue chips. Some analysts interpret this as the leading edge of a major correction, but so far that has failed to materialize. SPX has held very steady while the NASDAQ composite and RUT have trended downward.

My May iron condor on RUT is in pretty good shape with a net gain of 5%; theta for this position is now up to $274 per day, so it will rapidly appreciate, assuming the big crash doesn't make a showing. My Jun position is in even better shape at +8%; we were able to position our June put spreads down at 1040/1050 and that has relieved much of the pressure this week as RUT broke its 200 dma.

Enjoy your weekend.

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Written by Dr. Duke

Created: 08 May 2014

I was leading a private coaching session this morning and missed the first couple of hours of market activity. Then I checked the indexes on my phone and saw nothing but green. Cool. That hammer candlestick on RUT yesterday was prophetic. But all of that changed over the course of the afternoon. SPX traded as high as $1889 but then declined to $1870 before recovering somewhat to close down $3 at $1876. RUT traded in a similar pattern, but weaker than SPX, to close at $1097, down $11. Volatility remained flat with the VIX unchanged at 13.4%. Trading volume fell off from yesterday with 2.1 billion shares of the S&P 500 trading; volume declined 8% on the NYSE and dropped off only 1% on NASDAQ.

So the same story we have been watching for several weeks continued today: SPX is trading sideways in a tight range just above the 50 dma, while RUT flirts with its 200 dma. It appears the rotation out of high tech and small caps into safer blue chips is continuing. The fact that SPX has held up so well seems to counter any predictions of a market crash scenario. The low levels of VIX reinforce SPX's relative stability. But RUT and the NASDAQ composite remain weak.

Is this the sideways to weak trend we will have to live with this summer? Is this the "Sell in May" trend?