Dr. Duke's Blog

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Written by Dr. Duke

Created: 07 May 2014

Wow! I keep thinking I will become accustomed to this new level of price volatility we have now been seeing in the markets for many months. Once again today, I was on the verge of major surgery on several positions and then the market does an about face. SPX traded as low as $1860 before turning higher to close for a ten point gain at $1878. RUT behaved similarly, but traded down even more strongly to $1093 before recovering to close a dollar higher at $1109. The VIX rose a bit, but ended the day about a half point lower at 13.4%.

Trading volume spurted higher today with 2.4 billion shares of the S&P 500 trading. Volume rose 12% on the NYSE and increased 33% on NASDAQ. So we had a strong bounce back from the intraday lows on higher volume - a good bullish sign.

The charts are interesting. RUT continues to trade much weaker than SPX. RUT had been treating the 200 dma as support until yesterday when it decisively broke that support level, closing at its low for the day - a very bearish chart. Today's price action was interesting on two fronts: 1) the intraday low was right at the low of the February correction, and 2) today's candlestick is the classic hammer, suggesting a strong support level defined by the end of the lower shadow. This candlestick suggests that the bottom has been found to this latest pull back. The NASDAQ composite was trading similarly, hitting an intraday low about $20 above the long term support level around $4000, but bouncing higher to close at $4068. This recent weakness was almost exclusively driven by RUT and NASDAQ; SPX has held up relatively well. Today, SPX broke the 50 dma at $1865 before bouncing back higher to close at $1878, whereas RUT broke its 200 dma yesterday and remains below that level today even after a strong bounce back higher.

Fortunately, both of my iron condor positions remain profitable after all of these market gyrations.

Sorry I missed my blogs for the past two days. My schedule has been exceptionally busy. My wife is recovering from retinal surgery and that has added a few responsibilities to my list. But the worst of that is behind us. She received an excellent check up today.

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Written by Dr. Duke

Created: 02 May 2014

The jobs report came in with 288 thousand jobs and the unemployment rate dropped to 6.3%. The market popped on the news; SPX jumped very close to all-time highs at $1891 within the first 45 minutes of trading. But then we looked closer at the numbers, and the market pulled back.

SPX closed down $3 at $1881, but RUT gained $3 to close at $1129 (RUT is still trying to dig out of its hole). The VIX contracted a bit more to 12.9%. Trading volume also dropped with 1.9 billion shares of the S&P 500 stocks trading. Trading volume fell 6% on the NYSE and dropped 10% on NASDAQ. The underlying reason for the declining unemployment rate is what has driven it lower for the past several years - the Labor Force Participation Rate continues to fall. With this report, it hit a 36 year low at 62.8%. The true unemployment rate continues steady at about 11%.

So why didn't the markets collapse as so many have been predicting for so long? First of all, corporate America has figured out how to cut people and other costs and continue to make money in the midst of this recession. And let's stop kidding ourselves; this is a recession. Millions of people are not only out of work, they have given up looking for work. Food stamps recipients are at all time highs. Secondly, the Fed is still supporting this market through quantitative easing and extremely low interest rates. This provides a floor for the market, but it doesn't give traders much reason to be very bullish.

My May iron condor on RUT at 1060/1070 and 1210/1220 stands at +3% with delta = +$49 and theta = +$149 on 20 contracts. Now that we are down to the last two weeks, theta will start to really kick in for this position. We would be even more profitable if not for repeatedly hedging our put spreads. My June iron condor on RUT at 1040/1050 and 1220/1230 is already at +5% with delta = +$9 and theta = +$75 on 20 contracts. This position is nearly perfectly delta neutral.

Enjoy your weekend. Unfortunately, we are still dealing with 40 and 50 degree weather here in Chicago. And I received my property tax bill today; remind me. Why do I live here? Inertia?

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Written by Dr. Duke

Created: 30 April 2014

The FOMC announcement after its meeting has become even more prominent and scrutinized since the beginning of quantitative easing. Today was no exception with lots of special programming on CNBC and every guest being quizzed about the Fed and the tapering of the QE program. The announcement was a yawn - same ole, same ole. The tapering continues at the rate of a ten billion dollar reduction after each fed meeting and interest rates will remain effectively at zero for the foreseeable future. Many thought this morning's shocking GDP number for the first quarter, +0.1% as compared to the fourth quarter +2.6%, might cause the Fed to blink. But they chalked it up to winter storm effects and moved on.

The markets were basically trading sideways before the announcement and nothing really changed after the announcement. SPX gained $6 to close at $1884 and RUT also gained $6, closing at $1127. The VIX dropped about a third of a point to 13.4%. SPX has been testing resistance at $1885 for several sessions now, so I will be watching for that break-out to confirm a bullish trend. On the other hand, RUT has been testing support at its 200 dma at $1113 for several sessions. I will be surprised to see SPX break through $1885 and begin to challenge the 2014 highs. This market's recent price action just seems to be choppy and sideways. The Fed should continue to serve as a base of support for the market, but it may be difficult to generate a new leg upward until the fall. The old "Sell in May" Wall Street adage may be starting early this year.

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Written by Dr. Duke

Created: 28 April 2014

These wild intraday market rides are becoming commonplace. But I am not becoming accustomed to these swings. SPX traded over $26 or 1.4% from today's high to today's low. RUT was even wilder with a 2.3% swing today. Amazingly, SPX closed for a $6 rise at $1869 after breaking down through its 50 dma at $1859 and trading as low as $1851 before recovering to close higher. RUT traded weaker than SPX once again and closed down $6 at $1117. RUT traded down through its 200 dma at $1112 and below its low from the last pull back. That wasn't a pretty sight; I was contemplating major surgery, but then it turned back higher. It takes a strong stomach to watch these extreme price swings. I was surprised to see that the VIX remained steady at 14%, unchanged on the day. Apparently those large institutional traders have nerves of steel.

Trading volume matched these huge price swings with 2.8 billion shares of the S&P 500 stocks trading; the 50 dma is at 2.3 billion and Friday's volume was 2.2 billion shares. Trading increased 20% on the NYSE and increased 12% on NASDAQ.

The only economic news of any import was the pending home sales report for March, which came in at an annualized rate of +3.4%, up significantly from the previous month's -0.5%. Most traders are watching for the announcement from the FOMC on Wednesday and Friday's jobs report. Today should have been a slow trading day as traders waited for those events, but it was wild - so what will happen when we have some real news? And I have long since given up predicting what will move this market. Will a strong jobs report unleash the bulls or the bears?

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Written by Dr. Duke

Created: 24 April 2014

During the month of March, SPX hit up against resistance around $1882 several times before breaking through on April 1st and set its closing high for the year the next day. Now it appears that $1882 to $1885 is again proving to be resistance for SPX to break out to new highs. SPX gained $3 to close at $1879 today, hitting $1884 intraday and pulling back. RUT lost $3 to close at $1144, well below the 50 dma at $1167. In terms of support and resistance, RUT is in "no man's land", unless you count the two day bounce back upward that ended April 9th at $1160. RUT continues to trade much weaker than SPX; it corrected deeper and has not bounced back with the strength we have seen in SPX.

Trading volume bumped up a bit today with trading in the S&P 500 stocks reaching the 50 dma at 2.3 billion shares. Trading volume increased 4% on the NYSE and increased 21% on NASDAQ. Probably much of NASDAQ's volume was in AAPL, NFLX and AMZN.

Durable goods orders increased 2.6% in March, up from February's 2.1% increase. Unemployment claims were a mixed bag this week with an increase of twenty four thousand in initial claims to 329k. But continuing unemployment claims dropped by sixty one thousand to 2.7 million.

Maybe the "Sell in May" historical trend has started early?

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Written by Dr. Duke

Created: 23 April 2014

The old saying goes, "Markets take the stairs up but the elevator down." For the last 18 months or so, we need to revise that saying to: "Markets now use the elevator in both directions." Consider the last pull back. SPX lost $75 or 4% in 7 trading sessions, but had recovered $64 or 85% of those losses in just 6 trading sessions (through yesterday). Today, SPX finally decided to take a breather, giving up $4 to close at $1875. RUT has been on a hot streak higher as well, but it lost about twice as much as SPX and has recovered only about half of that loss through yesterday's close. Today, RUT also cooled a bit, losing $9 to close at $1147. Volatility has remained about flat with the VIX steady at 13.3%.

New home sales tumbled for March, dropping from an annualized rate of 449k to 384k. This was in contrast to yesterday's flat numbers for existing home sales.

This earnings season has been modest thus far, not enough to get the bulls or the bears too fired up. But with the Fed continuing to pump money into the market and hold interest rates down, one has to give the nod to the bulls. It would be nice to see some significant improvement in the jobs market; we get the weekly unemployment claims tomorrow, but that number has a lot of noise in it and requires several sessions to confirm a trend. Lately, it has been moving roughly sideways - not worse, but not significantly better either.

Will AAPL push the market higher tomorrow? It looks pretty strong in after hours trading.

The period of May though October has historically been a pretty flat, sideways market. Most of the market's gains have come in the November through April period. Could we be seeing the beginning of a sideways, choppy summer or do we have some more upside zip left in this market?

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Written by Dr. Duke

Created: 22 April 2014

Markets continued their climb higher today. SPX tacked on $8 to close at $1880 and RUT gained $13 to close at $1156. Volatility remained unchanged with the VIX at 13.2%. Trading volume rose, but this is in comparison to the weak post-holiday trading yesterday. Trading in the S&P 500 stocks came in at 2.1 billion shares, higher than Monday's showing but well below the 50 dma at 2.3B. Trading volume fell 21% on the NYSE and dropped 20% on NASDAQ.

Existing home sales came in flat for March at 4.59 million (annualized).

SPX and RUT have been on a steep rise for the past five or six trading sessions. SPX traded as high as $1885 intraday, reaching the neighborhood of its closing high at $1891 on April 2nd. But RUT is way behind SPX in this race back higher, and has not yet even reached where it opened the year at $1161, much less its 2014 closing high of $1209. This primarily reflects the fact that RUT corrected over 8% in this most recent pull back, as compared to SPX pulling back 4%. But neither index has shown much hesitation in its race higher thus far. I was a little surprised at today's market strength given the escalating tensions in the Ukraine.

My RUT May 1060/1070 put spreads are gaining nicely in this run higher, but I have been unable to find a safe place to establish May call spreads as yet. RUT has been trading higher much too strongly. But I have a potential 8% gain with the put spreads alone and feel no rush to add call spreads to the position.

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Written by Dr. Duke

Created: 16 April 2014

The markets opened strongly this morning, and for a change, remained strong throughout the day. SPX traded up through its 50 dma and closed at $1862, up $19. RUT gapped open this morning and closed up $12 at $1132. For the record, that only happened because I closed my April put spreads yesterday.

Volatility continued to pull back with VIX losing one and a half points to close at 14.2%. Trading volume fell off from yesterday's highs with 2.2 billion shares of the S&P 500 stocks trading today, falling just below the 50 dma at 2.3B. Trading volume dropped 15% on the NYSE and decreased 23% on NASDAQ.

The question for us to consider: Is this pull back over?

1) How far have we corrected? We are down 4.0% on SPX and 8.1% on RUT on a closing basis. By comparison, the February pull back was 5.7% and 7.4%, respectively. Many analysts will argue this was not an adequate correction, given recent market bullishness.

2) Today's gap open higher was accompanied by decreased trading volume - not reassuring.

3) SPX built strong support at $1815 on Friday, Monday and Tuesday. Tuesday's price action was particularly bullish; SPX traded down to $1816, but then traded 27 points higher. RUT behaved similarly, bouncing off the 200 dma on Friday, Monday and Tuesday. Both indexes gapped open higher this morning.

4) The FOMC beige book appeared to give traders encouragement. Yellen has committed to holding interest rates low even after the economy begins to recover. And don't forget that the Fed is still pumping $50B per month into this economy.

My take is that this pull back is over, but I am not so sure we will see the "straight up" type of bull run we saw so many times in 2013. I am remaining cautious for one other critical reason. Throughout 2013 and so far in 2014, this market has displayed huge price volatility - the price action where we have seen the markets trade fifty points downward and then recover those fifty points within just a few days. For that reason, I am looking at sideways to slightly bullish trades, but I remain cautious.

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Written by Dr. Duke

Created: 15 April 2014

The markets opened upward this morning, then collapsed to hit lows around 1pm ET, and then turned around and proceeded to steadily climb all afternoon. SPX closed at $1843, up $12 and RUT closed up $4 at $1119. The VIX lost a half point, closing at 15.6%. Trading volume rose strongly today with 2.5 billion shares of the S&P 500 stocks trading. Volume jumped 18% on the NYSE and rose 27% on NASDAQ. I am tempted to conclude that this afternoon's steady climb had that strong volume underscoring the move, but I'm unsure that any of the normal rules apply to this market. A strong march upward with increased volume and a drop in volatility would normally be a bullish sign, but this is a fickle market.

SPX traded down as low as $1816 before rebounding. This is the third day for SPX to find support around $1816. Also note that SPX closed above the old support, now resistance, at $1840 - that's a positive sign. RUT broke down through its 200 dma, but bounced upward. Again, RUT has spent the last three days treating the 200 dma as support. All of this adds up to support for this market and an end to the recent pull back. But I remain cautious.

The CPI for March was released with an increase of 0.2%, and the Empire manufacturing survey collapsed in April to 1.3 from March's 5.6. Such a large move makes me wonder if there was an error somewhere. The NAHB housing market index remained steady at 47 for April, up one point.

For those of you trading am settlement options like SPX and RUT, don't forget that the exchanges will be closed this Friday, so tomorrow is the last day you can trade those positions before going into expiration. The settlement prices will be determined on Thursday this week.

I took advantage of RUT's strength this afternoon and closed my April put spreads. RUT may trade higher tomorrow and make me regret that, but I decided safer was better. Actually, I have been kicking myself for not closing them last week, but that's another story.

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Written by Dr. Duke

Created: 14 April 2014

Retail sales reported an increase of 1.1% for March, a nice improvement from the 0.7% increase in February. This boosted the market open this morning; the bears attempted to pull the market's gains back down this afternoon, but weren't entirely successful. SPX closed up $15 at $1831. RUT closed at $1115, up $4. Volatility fell off  a bit with the VIX dropping one percentage point to close at 16.1%.

SPX opened Friday at $1831, traded down and closed at $1816. This morning, SPX opened at $1818, just above Friday's close, and closed today exactly at Friday's open, $1831. So we have one more example of the market almost precisely recovering the previous day's losses the very next trading day. These whiplashes make it difficult to hedge positions. I hedged my condors Friday and then sold those hedge options this morning.

RUT traded down today and bounced off the 200 dma at $1106 before recovering to close above Friday's close. Again, RUT is trading weaker than SPX. Judging from what I hear on CNBC and read in verious places, the tone of most analysts has turned markedly bearish from just a few weeks ago when everyone was signing from the bulls' hymnal. Is that the clue for a reversal?