Dr. Duke's Blog

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Written by Dr. Duke

Created: 12 February 2014

After four intense days straight up, the markets took a breather. SPX was unchanged at $1819 while RUT tacked on another $3 to close at $1133. SPX delivered a classic doji candlestick, the sign of indecision. This often suggests that the bulls and bears are approximately equally matched; this could be a tipping point to break higher or lower, or it could presage a period of sideways consolidation. The good news for the bulls is that the break-out above the 50 dma appears to be solid. RUT came within a couple of dollars of its 50 dma intraday but pulled back to close lower.

Trading volume fell off with 2.2 billion shares of the S&P stocks trading; trading on the NYSE dropped 10%, but trading volume on NASDAQ edged up 2%.

There wasn't any market moving economic data today. Treasury reported that we are going broke at a slower rate (the deficit, or the increase in debt, is lower four months into the fiscal year). I suppose that's good news.

If you are looking for a return to the strong bull market of 2013, I think that signal will be SPX breaking out above the previous high at $1850. We are a long ways from that happening, but a three day spurt like we had recently would do the trick. But before I rule out further declines, I would like to see RUT solidly above its 50 dma. My best guess is for some sideways consolidation trading, but my crystal ball is a little smudged.

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Written by Dr. Duke

Created: 11 February 2014

SPX easily broke through the 50 dma and closed at $1820, up $20 on the day. The 50 dma also coincided with resistance set by the highs back in late November and early December, so breaking that level so convincingly was significant. RUT gained $10 to close at $1129. Volatility continued to decline with the VIX closing at 14.5%, down almost a full percentage point. Trading volume increased today, further underscoring the upward move. About 2.3 billion shares of the S&P 500 stocks traded today. Trading on the NYSE increased 11% and trading volume on NASDAQ increased 10%.

RUT corrected more strongly than SPX, so it is still well below its 50 dma at $1139. From peak to trough, RUT corrected 8.4%, as compared to a 6.1% correction on SPX.

FOMC Chair Janet Yellen made her official debut with Congress today and generally portrayed herself as in line with Bernanke's policies; she didn't appear to be signaling much change to the current path of the Fed. She said that the current slow reduction in the Fed's stimulus programs will likely continue, barring no significant economic deterioration.

Now the question is whether the markets will simply run back up, break through the earlier highs, and continue the bull market run? That seems unlikely, given the weakness of the economy, but there I go again with rational analysis. This sharp "V" pattern of  a sudden market decline followed by a sharp recovery reminds me of the several pullbacks of 2013. Last October, SPX dropped 5% in 15 trading days; the current decline took 14 days. In October, it only took six days to recover all of those losses. Today's close on SPX represents a recovery of 73% of the losses in this pullback in only four days. This just proves once again that it is hard to keep up with this volatile market (price volatility, not implied volatility). If you feel like this market is jerking you around, you aren't alone.

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Written by Dr. Duke

Created: 10 February 2014

 Last week's trading was certainly stressful. Monday brought a big sell-off and prompted talk of a mega-correction. Who would have guessed that we would have recovered  all of those losses and then some by the end of the week? By contrast, today's trading was slow and mostly sideways. SPX closed at its high for the day, $1800, up $3. RUT gained $2 to close at $1119. The markets mostly chopped sideways and really only moved into the black for about the last two hours of trading. Trading volume fell off from Friday's exuberance with 2.1 billion shares of the S&P 500 stocks trading. This is the first time SPX volume has fallen below the 50 dma since January 3rd. Trading volume dropped 9% on the NYSE and decreased 12% on NASDAQ.

I found today's slow sideways and slightly positive trading to be encouraging. After such a strong rally Friday, I was concerned traders would come in Monday a little scared that we had moved too far, too fast, and start selling to lock in gains. The pattern of trading today builds additional support for the case that this most recent downturn will be a pullback similar to the several we saw last year rather than a dramatic correction of 10% or more.

There weren't any significant economic reports today. Many traders are waiting to see how FOMC Chair Janet Yellen does tomorrow with the House and later in the week in the Senate. But it seems unlikely that we will be surprised by any of that testimony. After all, she has been the Vice Chair during all of this quantitative easing under Bernanke; a new direction isn't likely. But we will wait and see if there is a surprise.

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Written by Dr. Duke

Created: 07 February 2014

Yesterday I thought we were at a tipping point and could either bounce back upward and end the correction, or dip even lower. When I saw the weak jobs report this morning, I thought the worst. But the markets took off as though we had achieved full employment overnight! SPX gained $24 to close at $1797 and RUT closed up $13 at $1117. SPX closed just one dollar below today's highs. And volatility pulled back nearly two points with the VIX closing at 15.3%. Amazing. Trading volume was close to flat with 2.5 billion shares of the S&P 500 trading today; trading volume dropped 2% on the NYSE and increased 7% on NASDAQ.

The non-farm payrolls report came in with an anemic 113 thousand jobs and tells us unemployment ticked down to 6.6%. Does this make any sense? The unemployment rate continues to drop while a pathetic number of jobs are added to the economy?

And then the market reacts by buying with both hands. Does that make any sense? Some analysts suggest that the market sees the poor data as evidence that the Fed will slow or stop its stimulus reduction. Really? Markets have always defied reason from time to time, but it seems as though this is becoming the new normal. Don't get me wrong. I am glad the market didn't crash, but it would certainly be nice if I understood the rationale for the exuberant buying.

As my dad used to say, "Don't look a gift horse in the mouth", so I will accept the gift graciously (trivia question for today: where did that saying come from?).

Enjoy your weekend.

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Written by Dr. Duke

Created: 05 February 2014

The major market indexes opened lower this morning and appeared to be continuing the downward plunge. But then the buyers showed up. SPX dipped as low as $1738 and then bounced back to close near its highs of the day at $1752, down $4. RUT displayed a similar pattern, closing down $9 at $1094. VIX rose again today, ending the day at 20%, shy of Monday's high at a little over 21%. Trading volume dropped off a bit to 2.6 billion shares of the S&P 500 stocks, but this remains above the 50 dma at 2.2B. Trading volume on the NYSE decreased 2%, but volume was flat on NASDAQ.

The question on all of our minds is simply this: Where is the bottom of this correction? Some have been hanging their hats on a 10% correction; that would be around $1665 on SPX. The 200 dma of SPX is at $1709. Another possibility results when you apply Bollinger bands to the SPX; the lower edge of the band is at $1690, or about -9%. The last three days of trading seem to suggest support at $1740, but that is based on minimal data.

The jobs report on Friday could be the tipping point. ADP released its private payroll report today with 175 thousand new jobs. This is down quite a bit from December's 227k - and remember how badly the jobs report undershot that number? Is this a precursor to a weak jobs report? Or should we give up on the ADP report as having any predictive value?

The other economic datum today was the ISM Services index, reporting at 54.0, up from the December value of 53.0.

I doubt we will see much market action up or down tomorrow. I think everyone will be waiting on the jobs report Friday morning. But I could be wrong. Maybe traders will be selling to reduce their risk going into Friday. I certainly will be evaluating my positions with that in mind.

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Written by Dr. Duke

Created: 04 February 2014

Traders found plenty of beat-up stocks at what appeared to be bargain prices after yesterday’s huge sell-off. So the buyers dominated today’s market, in contrast to yesterday. SPX gained $13 to close at $1755 and RUT closed up $8 at $1103. Trading volume fell off from those record levels yesterday with 2.75 billion shares of the S&P 500 stocks trading, but this is still well above the 50 dma at 2.2B.  Trading volume dropped 12% on the NYSE and declined 18% on NASDAQ. The VIX opened the day at 20% but closed at 18.7%, down almost three points from yesterday.

The only economic data came in the form of the factory orders report, with a 1.5% decline in December. This was in contrast to the +1.5% increase in November. Apparently, the market believed that was already priced into yesterday’s market drop.

With the S&P 500 down almost 6% for this year through yesterday’s close, one has to be wondering if the correction is over or just getting warmed up. Of course, the usual cast of characters have come out of the shadows with their doomsday scenarios of corrections of 20-30%. Those predictions do succeed in drawing attention and selling books. Evidence for the bulls' camp came from the fact that SPX didn’t sell off into the close; it closed near its high for the day. But I won’t breathe easier until SPX closes above the resistance level at $1773 to $1780. That was the strong support level that held the market for a week. Breaking back through that area to the upside will be a very bullish sign.

AAPL was the only “green” stock on my screen yesterday. I think playing that $495 close a couple of days ago as a long term low makes a lot of sense for a high probability trade.

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Written by Dr. Duke

Created: 03 February 2014

Part of my morning routine is checking the S&P futures to get a sense of the day's markets before the open. But those positive futures were very misleading today. Within a few minutes of the open, the selling began and it continued all day. I expected a little bit of recovery into the close, but it didn't happen. SPX closed down $41 (2.3%) to $1742 and RUT fared even worse, losing 3.2% or $36 to close at $1095. We must back track to June 20th of last year to find another $40+ down day on SPX. As expected, VIX spiked up over three points to 21.4%. Trading volume rose with 3.3 billion shares of the S&P 500 changing hands; trading volume rose 9% on the NYSE and increased 12% on NASDAQ.

What started this rush for the exits? That is always hard to precisely determine. Every guru on CNBC is very certain of his answer, but I have my doubts. The China PMI came in lower for January at 50.5, but that was only down from 51 in December; and this report was out before the market opened, so we should have seen its effects in the futures. The ISM manufacturing index declined to 51.3 for January from 56.5. Construction spending declined 0.1% in December, down from an 0.8% increase in November. The sharp market decline began about 20 minutes before the ISM report and just accelerated from there. As is often the case, it appeared that the impetus to tip this market over the edge didn't have to be a huge event.

SPX sliced through the strong support level at $1773 this morning and did not hesitate to continue lower to break support at $1748. The next possible support level is $1730, set by the mid-September peak last year. Even more bearishly, SPX closed at $1742, just above the lows of the day at $1740. There was no "buy the dip" rally late in this trading day. RUT's close at $1095 is just above the October 1st high of $1088. With today's close, SPX is now almost 6% off of its highs this year. RUT is down 7.4%.

I decided to take advantage of this huge down day and close my RUT Feb 1210/1220 call spreads for $0.10. That closed the February iron condor spread for a net gain of $960 or +7%. That brings our portfolio performance for 2014 to roughly break-even (-0.3%), as compared to the S&P 500, down 5.7%. It is nice to be beating the S&P 500 again; I couldn't seem to manage that last year.

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Written by Dr. Duke

Created: 30 January 2014

SPX spiked upward at the open this morning and then climbed to hit its intraday high around 1 pm ET. SPX closed up $20 at $1794. RUT tacked on $17 to close at $1139. Trading in SPX the last four days appears to be confirming that support level at $1773. SPX made up a lot of recent losses today, but is a long ways from resistance at $1850, so be careful about going bullish just yet. RUT broke through the 50 dma, but couldn't hold it, closing just below that level. That 50 dma at $1140 and resistance at $1147 are good levels to watch in RUT.

I don't care for how the VIX moved today. It opened at 16.4%, dropped to just below 16%, but then rose to close at 17.3%, roughly unchanged from yesterday's close. While the market was trading upward most of the day, VIX rose over one percentage point. That is what we call a VIX divergence. It could be foretelling a market drop tomorrow. Trading volume fell off from yesterday with 2.5 billion shares of the S&P 500 stocks trading. Trading volume dropped 11% on the NYSE and decreased 4% on NASDAQ.

Initial unemployment claims came in at 348k, up 19 thousand from last week. Continuing unemployment claims are flat at three million. Fourth quarter GDP rose at an annualized rate of 3.2% and pending home sales fell 8.7% in December.

If you followed my lead and closed your index put spreads, don't get too anxious to re-establish those positions. I am giving this market some time to stabilize before exposing any money to another downturn.

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Written by Dr. Duke

Created: 29 January 2014

Markets traded down from the open today; it was almost as though everyone was betting on a negative reaction to the FOMC announcement. SPX traded as low as $1775 within a few minutes of the open this morning; it traded down to $1770 right after the Fed announcement, danced around a bit for the next two hours and closed at $1774, down $19 on the day. RUT followed a similar pattern, losing $16 to close at $1122. One bearish thought: SPX lost 1% on the day, whereas RUT lost 1.4%. RUT normally leads the market higher in bull markets and lower in bearish markets. On the other hand, VIX popped up 1.6 points to 17.4%, well below the high of 18.1% on Friday's strong sell-off. But that could change quickly tomorrow.

Trading volume increased today with 2.9 billion shares of the S&P 500 stocks.  Trading on the NYSE increased 24% and increased 11% on NASDAQ.

The FOMC announced that they intend to continue the reduction of quantitative easing by another ten billion dollars per month in February. I was surprised that the market didn't sell off more than it did on that announcement, but perhaps that is a positive signal. Is the market consensus that it can survive just fine without the Fed's support?

SPX is now down 4.1% from its recent highs. While that is in line with the corrections we saw in 2013, many analysts are predicting a much more severe correction, e.g., down 8% to the 200 dma at $1704. A corresponding drop to the 200 dma on RUT at $1055 would represent an 11% correction.  An 8% correction on RUT leads to $1087.

The RUT Feb 1210/1220 call spreads are all that is left of my Feb iron condor at this point. That position stands at a net gain of $860 on 20 contracts or +6% (on the original capital at risk) with a maximum potential gain of $1,160 or +8%. If I have the opportunity, I will re-establish put spreads to boost the returns.

My own take is that this market is very nervous and therefore dangerous. Be very cautious, especially about any bullish trades. I am tempted to play GOOG's earnings announcement tomorrow, but that will be a very speculative trade. It may be best to sit on the sidelines for a few days.

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Written by Dr. Duke

Created: 28 January 2014

The markets appeared to stabilize today, but I am not coming out of the bomb shelter just yet. Tomorrow's FOMC announcement may cause some fireworks or it could be a dud. It is impossible to predict the Fed, much less the market's reaction. SPX gained $11 to close at $1793 and RUT also gained $11 to close at $1138. Volatility continued its decline with the VIX decreasing by 1.6 points to 15.8%. The VIX decline is significant because it suggests that the big institutional traders are not too concerned about tomorrow's announcement tipping us over the cliff. SPX and RUT are in parallel positions, both trading between the November highs as support and the December highs as resistance. It would seem surprising if this is all of the correction, but I don't think we can be too confident until after the Fed announcement.

Trading volume dropped off today with 2.4 billion shares of the S&P 500 trading. Trading on the NYSE dropped 22% and trading volume on NASDAQ declined 15%.

Durable goods orders declined 4.3% in December, down from November's positive 2.6% gain. The Case Schiller Housing Price Index for November was about flat with the previous month at 13.7% for November. The consumer confidence report from the Conference Board came in at 80.7 for January, up from 77.5 in December.

Grab your popcorn and wait for the FOMC announcement tomorrow at 2 pm ET.