Dr. Duke's Blog

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Written by Dr. Duke

Created: 11 April 2014

Today's trading capped off a rough week in the markets. Tuesday and Wednesday brought nice spurts back to the upside, and may have reassured traders that the worst was over. But Thursday dashed those hopes with a $39 drop, slicing through long-term support at $1840. Trading opened down again this morning, but markets tried to make it back into positive territory around mid-morning. That positive move was met by the bears with more selling, driving the markets lower once again. SPX closed today at $1816, down $17. RUT closed at $1111, down $16. Volatility rose just over one point today, with the VIX closing at 17%.

Several aspects of this week's sell-off aren't typical or expected. First of all, many blue chip stocks like IBM have held up rather well throughout this debacle. IBM opened the week at $192 and closed today at $195. If you have been watching the financial news and watching the major market averages, that is probably surprising. I haven't done the research, but I don't think I have ever seen a market sell-off as severe as this week's together with minimal increases in volatility. The VIX is still under 18% and spent most of the week under 16%. One other surprising aspect is that there doesn't seem to be a significant news or economic report that triggered the selling. Biotech, high tech, and the market darlings all took it on the chin with the largest losses by far.

From SPX's closing high on April 2nd through today's close, SPX is down 4%. While 4% is typical of last year's several pauses, most analysts look for pull backs on the order of 7-10% to qualify as a "correction". So, that leaves us with the question for Monday: Is the worst over or will the markets be trading lower next week?

Try to forget about the markets and enjoy the weekend. They tell us we may enjoy temperatures above 70 degrees for the first time here in Chicago . I had decided the ice age had started, but maybe I was wrong.

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Written by Dr. Duke

Created: 07 April 2014

IBD officially declared this to be a "market in correction" on Friday. The market apparently heard about that and complied today with SPX losing $20 to close at $1845. RUT traded even weaker on a percentage basis, losing $18 to close at $1136. Volatility finally popped up a bit to 15.6%, up 1.6 points, but this still isn't really in correction territory for volatility. At the low of the February pull back, VIX was over 21%, and VIX hit 18.2% just a couple of weeks ago on March 14th.

RUT broke support at $1147 today, the high from December. The next support level is the high from November at $1123, and then the grand daddy of targets for a correction would be the February 5th low at $1083. RUT now stands at a 6% pull back from its March 4th high. RUT traded down more strongly than SPX again today with a decline of 1.6%, compared to SPX's 1.1% decline. SPX has a strong support band at $1840 to $1850, and the 50 dma is at $1839. SPX landed right in the middle of that band today after trading as low as $1841. If it breaks through $1840 tomorrow, this could get ugly (or uglier).

We saw several short lived pull backs last year, but SPX and RUT ran more in parallel. This pull back has been principally in RUT and the NASDAQ thus far. And trading volume moderated today. Trading in the S&P 500 was about the same as Friday with 2.6 billion shares, but trading on the NYSE was only up 4% and trading volume on NASDAQ declined 3%.

So far, this has appeared to be a sell-off associated with taking profits in the high fliers of the past year. Heaven help us if we get some market-rattling news. Market psychology has turned.

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Written by Dr. Duke

Created: 04 April 2014

 The non-farm payrolls report, aka, the jobs report, was released before the market opened this morning, and it appeared to be roughly in line with expectations with +192 thousand jobs and the unemployment rate remaining unchanged at 6.7%. The S&P futures rose a bit and the market opened an hour later with the S&P 500 up about $7, hitting its high for the day at $1897 around 10:30 am ET. Then the other shoe dropped. All of the broad market averages began a steady decline for the balance of the day. SPX closed down $24 at $1865. But RUT was much weaker, closing at $1153, down $28. Early indicators were for a significant increase in trading volume with a 32% increase on the NYSE and a 29% increase on NASDAQ. But volatility didn’t increase as much as one might expect, with the VIX closing at 14.0%, up 0.6 points.

This raises the question: Is this the long awaited correction or is it just the expected round of profit-taking after such a strong bull market? I am inclined toward the latter view for the following reasons:

SPX lost 1.3% today, but RUT lost 2.4% - small caps were being sold preferentially.

SPX lost 1.3% today, but NASDAQ lost 2.7% - high tech winners and momentum stocks like NFLX were being sold preferentially.

SPX took a large loss today, but didn’t even attempt to challenge strong support levels at $1840 and $1850.

RUT hit $1150 as its intraday low today, well above the recent pull back low and the support level set by the late December high.

VIX was up less than one percentage point and closed just under 14% - the big institutional traders aren’t hedging very strongly, if at all.

IBM closed today’s trading at $192, only down one dollar in this market.

Today was full of red ink, but RUT has been trading weaker than the rest of the market for the past couple of weeks; it never did approach its all-time highs earlier this week as SPX was setting records. RUT has been showing us weakness in the small cap space; but the question remains whether the small cap sell-off leads to more general market correction. I am encouraged by VIX remaining low today and stocks like IBM showing relative strength. We'll see.

Enjoy your weekend.

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Written by Dr. Duke

Created: 02 April 2014

SPX set a new all-time high yesterday and set another high today, rising $5 to close at $1891. RUT  rose $4 to $1193. As I noted yesterday, RUT is lagging its big brother; for RUT to set a new high, it will have to trade above about $1210, still another $17 higher. So RUT has returned to the middle of its previous trading range, but SPX is in rarefied air. The VIX was unchanged today at 13.1%.

Trading volume dropped off today with 2.0 billion shares of the S&P 500 stocks trading. Trading declined 5% on the NYSE and increased 2% on NASDAQ. Trading volume in the S&P 500 has only exceeded to 50 dma twice since the beginning of March. We are trading higher, but cautiously.

ADP released their estimate of private payroll changes for March today at 191 thousand new private jobs. The other positive news was an increase in factory orders of 1.6% in February, as compared to the one percent decrease in January. That, of course, was good news for the market and helped continue the rally. It seems like the only thing that might slow this rally would be a dismal jobs report on Friday. For now, it's full speed ahead.

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Written by Dr. Duke

Created: 01 April 2014

The markets appear to have broken through the upper resistance levels to set new highs today; I will feel more confident about that statement if we hold these prices tomorrow. SPX closed up $13 at $1886, eclipsing earlier closes this year at $1878 and even the intraday highs around $1884. RUT followed suit with a large increase of $16 to close at $1189, but remains far from its earlier highs around $1209. Much more damage was done to RUT from March 24th to the 27th. RUT fell completely out of its consolidation trading range whereas SPX managed to hold support levels.

Volatility continues to fall with the VIX losing almost a full point to close at 13.1%.

Part of the market's enthusiasm probably came from the ISM manufacturing survey that rose in March to 53.7 from 53.2 and construction spending increasing 0.1% in February versus January's 0.2% drop. These aren't huge numbers by any means, but the sum effect of recent comments from Yellen and assurances that the Fed has the market's back are being taken as very bullish. It is hard to argue with that viewpoint. When I drive around my area and see the large number of vacant storefronts and evaluate the "real" unemployment data, I believe that tells a different story. We may be able to argue about the underlying economics, but I can't ignore the obvious bullish nature of this market.

The Apr 1100/1110 put spreads I entered on 3/24 have boosted my April iron condor to a gain of $3,440 or +22% on the capital now at risk (I closed the Apr 1270/1280 call spreads on 3/24). I opened my May position with the 1060/1070 put spreads on 3/28 and that position is now up 7%, so May is off to a good start. The question now is whether this market will ever pause long enough for me to sell May call spreads.

So now we continue to watch to see if this bull can continue. I may be skeptical, but I have to play what I see.

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Written by Dr. Duke

Created: 31 March 2014

The markets have been like a ultra-fast hockey match and my neck is getting tired trying to follow it back and forth. That is a little facetious because many of my trades benefit from this sideways trading range. SPX has looked pretty solid lately, but RUT's decline was a bit worrisome. But the markets were happy with Yellen's comments today and so all is well - but, really, did you learn anything new? All we can do is watch for a break-out in either direction and trade accordingly. SPX gained $15 today, closing at $1872. All of that gain was accomplished in the first thirty minutes of trading; then SPX just chopped sideways for the rest of the day. But RUT applied some big-time salve today, regaining $21 of recent declines, closing at $1173.

Volatility dropped off a bit (but it never rose very much) with the VIX closing at 13.9%, down a half point.

Now that we have Yellen's testimony behind us, we are looking forward to Friday's jobs report. But it is becoming clear (to me at least) that this market is most likely going to find a reason to trade higher regardless of the actual data in the jobs report. I can hear the cynics out there saying that this is exactly the way the market behaves just before it goes over the cliff. Maybe, but I don't think the economy is that bad. I don't think it is good by any means. And I am amazed at how the media have all donned rose colored glasses since Obama entered office. Remember the continuous stream of negative news stories about three dollar gasoline when Bush was in office?

I think this is an excellent environment for the classic diagonal bull call spread. And if you add a put, I think it is pretty safe from the possible correction event.

The bottom line: watch for SPX to break $1840 on the way down or breaking $1885 to make new all-time highs. In the meantime, play sideways to slightly bullish trades.

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Written by Dr. Duke

Created: 27 March 2014

The broad markets continue to basically trade sideways. SPX toyed with support at $1840, but bounced back and closed at $1849, down $4 on the day. RUT also lost $4, closing at $1151. But RUT has traded much weaker than SPX. RUT has sliced down through $1182, the high set in January, then through $1165, the high from December, and finally broke through the 50 dma at $1163. Today's candlestick on RUT had moderately large upper and lower shadows, suggesting some indecision between the bulls and bears. As long as support holds on the broader market as represented by $1840 in SPX, this may be a sign that RUT is beginning to find a bottom.

Trading volume was up a bit, but mixed today with 2.5 billion shares of the S&P 500 stocks trading. Trading also rose in the NYSE by 8%, but trading volume declined 7% on NASDAQ.

Initial unemployment claims dropped by ten thousand to 311k and continuing claims decreased by 53 thousand, so that is encouraging. The third estimate of fourth quarter GDP came in a little higher at 2.6% (why can't we wait until we get it right and announce it once?). Pending home sales dropped 0.8% in February, a further decline from January's -0.2%.

The situation in the Ukraine doesn't appear to be improving, so I suppose that could push the markets lower. But if the stalemate continues, the markets may simply move on - hard to predict.

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Written by Dr. Duke

Created: 26 March 2014

Positive durable orders data this morning set the market off to the upside. When I first looked at my screens this morning, it was a rare moment: every Asian index was green, every European index was green and all of the U.S. futures were green. But that only lasted until about 1:00 pm ET, then a slow decline began. Late in the afternoon, it looked like the tide was turning back upward, but then the bottom fell out and SPX and RUT both closed at their lows for the day. SPX lost $13 to close at $1853, while RUT fared much worse, closing at $1155, losing $23 on the day.

For all of that carnage in the small caps, the VIX only increased about one point to 14.9%. The VIX is based on SPX options, so the sell off was in the small caps - classic risk off behavior. SPX also closed at its low for the day, but didn't come close to breaking support at $1850, whereas RUT broke support at $1165 and broke through the 50 dma at $1163, closing $8 lower at $1155.

A somewhat contrary indicator for all of this downward price action was trading volume; only 2.3 billion shares of the S&P 500 stocks traded today, still below the 50 dma at 2.4B. However, trading on the NYSE increased by 10% and trading volume increased 8% on NASDAQ.

The early market action was driven largely by the positive durable orders report which increased 2.2% in February, a big change from January's 1.3% drop. However, if you subtracted defense and aircraft, core business equipment spending dropped 1.3% in February.

The conventional wisdom tied the market losses to Western countries making noise about increasing the sanctions against Russia over Crimea and the Ukraine. The Ukraine bogeyman keeps spooking this market. But today, there was an absence of bulls coming in to buy the dip. Will they show up tomorrow, or is it time to start clearing out trades? The last Putin scare took SPX down to $1840 and RUT to $1173, so RUT has already set a lower low...

I will be watching those futures in the morning very carefully.

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Written by Dr. Duke

Created: 25 March 2014

The markets bounced back today, but it wasn't rip roaring. SPX gained $8 to close at $1866 while RUT closed unchanged at $1178. Volatility continued to drop with the VIX losing a little over one point to close at 14.0%.

Trading volume fell off from yesterday's average volume reading with 2.2 billion shares of the S&P 500 stocks trading. Trading volume dropped 7% on both the NYSE and NASDAQ.

The Case Schiller home sales price index came in at an annualized rate of +13.2% for January, down only slightly from the previous month's +13.4%. The Conference Board's consumer confidence survey for March came out at 82.3, up markedly from the February number of 78.3.

The markets opened strongly this morning with SPX trading as high as $1872 in the first hour, but then gave all of that back by noon, recovering in the afternoon to close modestly up for the day. RUT traded similarly but traded much lower by noon, so the afternoon recovery just brought RUT back to even for the close. SPX is trading within a narrow consolidation range of $1840 to $1880. A break-out above $1880 or down below $1840 would be a significant signal for traders. Recent candlesticks on SPX have long shadows, meaning that as bulls pushed prices higher, the bears pulled them back down, and as bears pushed prices lower, the bulls came in and pulled the prices up before the close. It is hard to tell which way this market may go, but the bulls and bears appear to remain pretty well balanced to date.

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Written by Dr. Duke

Created: 24 March 2014

 The markets opened in positive territory this morning, but almost immediately headed south and didn't hit bottom until late afternoon. SPX traded as low as $1850 and recovered a bit to close down $9 at $1857. RUT traded down harder, but recovered somewhat, closing down $16 at $1178. Trading volume was lower than triple witching Friday across the board, so that comparison isn't terribly useful. But in absolute terms the trading volume in S&P 500 stocks today was just slightly below the 50 day moving average.

I think the most significant data point I saw today was in volatility. VIX really didn't spike up as we might expect as the market traded off this morning. VIX opened at 14.7% and only moved to 16% before starting to soften, closing at 15.1%. In fact, thirty minutes before the close, VIX was very close to where it opened.

Earlier today, as the market traded lower, I took that opportunity to close my Apr RUT 1270/1280 call spreads for a 13% gain. Later in the day, especially after seeing volatility remain relatively low, I sold the Apr RUT 1100/1110 put spreads just above the 200 dma. If RUT rebounds, I will sell more call spreads.

As I watched RUT trade lower today, I couldn't help thinking about my losses last week on my RUT Mar 1200/1210 call spreads. This sell-off just came a couple of days late. Timing is everything.