Dr. Duke's Blog

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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.

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Written by Dr. Duke

Created: 21 March 2014

The tug of war between the bulls and the bears appears to be pretty well balanced. Today's market action reinforced that conclusion with SPX hitting a high of $1884 within a few minutes of the open this morning - a new high for the year. But the bulls couldn't hold that high for long. SPX has slowly traded off all day to close at $1866, down $6 on the day. RUT traded to its intraday high at $1208 later in the morning, but this was short of intraday highs set in early March. RUT also traded off all afternoon, closing down $5 at $1194. Trading volume was higher today, not unusual for a triple witching expiration Friday. Preliminary numbers put NYSE volume up by 91% and NASDAQ up by 34%. Volatility rose a half point with VIX closing at 15.0%.

There was no economic news to push stocks one way or the other today, and that may have contributed to today's largely sideways to slightly weaker trading.

I closed the RUT 1200/1210 call spreads in my March iron condor yesterday; assuming the 1120/1130 put spreads expire worthless this weekend, that will net out to a 40% loss for March - ouch! But my RUT April 1270/1280 call spreads have already gained 11%; I am waiting for a good opportunity to enter the balancing Apr put spreads and further boost the income from this position.

I am writing this blog early today because I have to pick up my wife from the airport later. So I do not have the trading volume for the S&P 500 stocks and the settlement value for RUT has not yet been posted. SPX settled at $1893.30. RUT probably settled near $1200 but we'll see.

Enjoy your weekend.

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Written by Dr. Duke

Created: 19 March 2014

The FOMC announcement and the first news conference for the new FOMC Chair, Janet Yellen was the big news today. The markets basically treaded water all day, waiting on the FOMC announcement. The announcement wasn't surprising: The reduction of Fed stimulus continues and interest rates will continue to be near zero for the foreseeable future. No really new news could be found there. But the news outlets focused on the markets' spike downward for a few minutes during Yellen's news conference. It was a tempest in a teapot, but I suppose it made for "exciting new commentary". I find it fascinating that many people apparently expect the Fed to predict where all economic data will fall, and on what date, and therefore what action the Fed will take at that time.

SPX dropped as low as $1850 this afternoon, but rebounded to close at $1861, down $11. RUT traded off by $9 to close at $1196. Volatility increased a bit with the VIX closing up a half point to 15.0%.

Trading volume rose with 2.1 billion shares of the S&P 500 stocks trading today, but it remains below the 50 dma of 2.4B. Trading on the NYSE rose 17% and volume increased 3% on NASDAQ.

SPX has hit highs of $1874 three times in the past five sessions and pulled back. That appears to be a moderately strong resistance level. But breaking out above $1880 would be the definitive signal of a resumed bull market. We remain at a tipping point for the markets.

My RUT Mar 1170/1180 and 1200/1210 iron condor remains on the edge; I am only trying to moderate the loss at this point.

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Written by Dr. Duke

Created: 18 March 2014

To my surprise, Putin played nice this morning and the markets were relieved and rallied almost non-stop all day. SPX gained $13 to close at $1872. RUT traded even more strongly, closing up $17 at $1205. But trading volume was weak with 1.8 billion shares of the S&P 500 trading (the 50 dma = 2.4B). As expected, volatility dropped off with VIX losing a little more than a point to close at 14.5%.

RUT's stronger behavior over the past few days seems to suggest the classic "risk on" trade is in play. Of course, that is fuel for those pointing to a bubble and a needed correction. But so far, those bears have been run over.

The real estate market continues to heal; housing starts for February came in flat at 907 thousand. Building permits surged from January's 945k to 1,018k in February. The Consumer Price Index (CPI) came in flat at +0.1%. That sure doesn't compute for me. It seems like all of my personal budget costs are higher, from food to fuel. But the CPI suggests prices have only risen 1% over the past 12 months. It isn't surprising that one of the articles in the news today was titled, "Feds Claim CPI Up Less Than 1%". I think we have lost faith in our government telling us the truth. Maybe like 6% unemployment?

Tomorrow's big market event is Yellen's first news conference. It is likely to continue the stock market's love affair with the Fed.

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Written by Dr. Duke

Created: 17 March 2014

Crimea votes to secede and Russia immediately recognizes the new country (with 20k troops on the border). And the markets rallied this morning - a little surprising. SPX opened this morning and hit its high for the day ($1862) within just a few minutes, but it didn't trade off much, closing up $18 at $1859. RUT gained $7 to close at $1188. Putin will speak to the Duma early tomorrow morning our time; that may be a market-moving event - hard to predict.

Most market analysts attributed today's rally to short covering. But it didn't fade away in late trading, so that may not be the full explanation. It seems to me that both the bull and bear camps have good cases to make. The bulls have the Fed on their side and can point to reasonable market P/Es. The bears have the "too far, too fast" argument for a correction,  weak economic data, and, to counter the S&P P/E argument, the S&P 500 dividend yield is very low (average is 4.4% and we are at 1.9%). The Fed's stimulus programs may tip the scale for the bulls.

The Empire manufacturing survey reported 5.6 for March, up from February's 4.5. Industrial production increased in February from January's -0.2% to a positive 0.6%. Capacity utilization increased slightly in February to 78.8% from 78.5%.

Watch the S&P futures in the morning. I expect they will be moving, based on Putin's saber rattling or more conciliatory pose. Did you see the video of the Russian TV newscast with the anchor threatening to turn "the U.S. into radioactive ashes" with a photo of a mushroom cloud as a back drop? And you thought our right wingers were radical?

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Written by Dr. Duke

Created: 15 March 2014

I am late with yesterday's blog due to travel and other commitments.

In earlier blogs, I noted the declines in the Russell 2000 Index (RUT) as SPX traded sideways or higher, and said that could be the early warning signal of market weakness, or the “canary in the coal mine”.  Apparently, it was. 

SPX tried to rebound Friday morning after Thursday's big drop, but couldn’t manage to get back above $1850, closing down $5 at $1841. Friday’s intraday high on SPX was encouraging, but the fact that bulls could not hold those highs is a negative. Evidence for the bottom having been reached comes from RUT, closing higher by $5 at $1181. But traders have to be concerned about what may happen over the weekend in the Ukraine.

The volatility index, VIX, has spiked higher over the past two days, hitting its high for the week Friday afternoon at 18.2%. Perhaps more ominously, VIX closed at 17.8%, near its high for the day, another sign of traders’ concerns going into the weekend.

Global markets were all down this week, so it isn't surprising for our markets to also reflect that weakness. One technical indicator stands out on the SPX chart: the MACD crossed zero moving downward on Thursday. This signal last triggered on January 7th, and that turned out to be a leading indicator for the correction that culminated with an intraday low on February 5th.

Forget about the Ukraine until Monday morning. Enjoy the weekend.

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Written by Dr. Duke

Created: 13 March 2014

When I checked the futures this morning, it looked like we would see a modestly positive open, and that is exactly what happened. But that positive note only lasted about an hour before the slide began. SPX hit a low of about $1842 about 45 minutes before the close and then bounced a bit to close at $1846, down $22 for the day. RUT closed off $15 at $1177. As you might expect on a day like this, volatility spiked up almost two points, with the VIX closing at 16.2%.

Trading volume spiked upward today, reaffirming the big bearish day. Trading in the S&P 500 stocks increased to 2.4 billion shares. Trading volume increased 10% on the NYSE and increased 12% on NASDAQ.

Today’s price action in RUT and SPX was the classic “outside day” on the bar chart or a bearish engulfing pattern in candlestick analysis. Either way, this is a strong warning of a possible move lower. RUT’s slow decline from March 5th through the 11th was indeed the “canary in the coal mine”. Now the question is whether the bulls will just jump back in tomorrow and drive the market higher as they have done so many times over the past year.

Take a look at the RUT chart and March 3rd in particular. The price action that day was very similar to today's, trading to an intraday low and then bouncing to close at $1176 (today's close was $1177). But then RUT shot up over $22 the following day. So I will be watching the markets very closely to see if we are really entering a correction or if the bulls are going to pull another whip saw on us.

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Written by Dr. Duke

Created: 12 March 2014

SPX closed yesterday at $1868, just below support at $1870. Today SPX traded down as low as $1854 before rebounding to close at $1868 for a gain of one dollar on the day. Earlier today, I was watching the tape and thought, "support is truly broken". But later I had to conclude, "maybe not". Hence the title of today's blog, Clinging To Support. RUT posted a gain for the first time in six sessions, rising $4 to close at $1191. Volatility was largely unchanged with the VIX closing at 14.5%. Trading volume in the S&P 500 was flat at two billion shares. Trading volume on the NYSE dropped 4% and volume decreased 14% on NASDAQ.

The long lower shadow on the SPX candlestick suggests support was found in the neighborhood of $1850, the highs from December 31st and later in mid-January. So maybe we wander sideways for a while? Is that the form of the pull back this time?

I came across an interesting report on margin debt this afternoon. Stock account margin debt is now around $460 billion, exceeding the peak of approximately $380 billion set in 2000 and hit again in 2007. So we have yet another set of data confirming this bull market should be tired. But all of this data ignores one big difference as we compare past markets to today's market - the FOMC.

So maybe the bull has more life in him...