Dr. Duke's Blog

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Written by Dr. Duke

Created: 13 December 2013

Trading volume fell off today and the market averages didn't move much when all was said and done. SPX closed unchanged at $1775 and RUT gained $4 to close at $1107. Volatility continues to inch higher with the VIX gaining two tenths of a point to close at 15.8%. Trading in the S&P 500 dropped off to 1.9 billion shares. Trading volume on the NYSE dropped 14% and trading on NASDAQ declined 15%. SPX continues to hover in that support range of $1770 to $1780 while RUT appears to be tracking along its 50 dma at $1106.

The only economic news was the PPI report for November, declining 0.1%.

I closed the remaining 1150/1160 call spreads in my December iron condor position on RUT. This results in a current P/L of +$3,430 on 20 contracts or 21% on capital at risk. I will close the 1030/1040 put spreads next week before the Fed announcement. Who knows where that announcement may take the market?

Enjoy your weekend.

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Written by Dr. Duke

Created: 12 December 2013

SPX closed down $7 today at $1776. But RUT climbed $2, closing at $1103. Maybe RUT was making up for some of its extreme move downward yesterday. In any case, SPX's move today broke a significant support level at $1780, and closed just above the highs set in late October. Many analysts have been saying that their bullish opinion on this market would only change if SPX broke support at $1780. Now, both SPX and RUT have broken the lower support levels of the sideways channel of the past few weeks. But tomorrow could tell a different story. Trading volume was pretty flat with 2.1 billion shares of the S&P 500 stocks trading. Trading volume rose 1% on the NYSE and dropped 2% on NASDAQ. The VIX rose only a tenth of a point to 15.5%.

Economic news was mixed. Retail sales came in unexpectedly strong with a 0.7% rise in November. But unemployment claims increased 68 thousand to 368k. Continuing unemployment claims rose by 40 thousand to 2.8 million. I have embedded a very telling chart from today's Investors Business Daily below the blog. The normal practice of the Labor Department is to exclude the unemployed workers from the count if they have given up looking for work, and this tends to result in lower unemployment numbers the unemployed "drop out". If one does include these workers into the total number of unemployed, the unemployment rate has been constant to about 11% throughout this recession. This correlates well with my perception, based on people I speak with in my neighborhood, at work and so on. The economic recovery we hear about is largely propaganda or naive ignorance.

My Dec RUT iron condor at 1030/1040 and 1150/1160 stands at a net P/L of +$3,390, or +21% with delta = +$4 and theta = +$167.

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Written by Dr. Duke

Created: 10 December 2013

Today was a mixed day on Wall Street with some stocks continuing their climb higher, but the broad market averages pulled back a bit. SPX closed down $6 at $1803, but RUT traded down even more with a decrease of $10 to $1120. Trading volume was mixed with two billion shares of the S&P 500 stocks trading, down just a bit from yesterday. Trading dropped 6% on the NYSE but increased 12% on NASDAQ. The VIX tacked on almost a half point to close the day at 13.9%.

SPX and RUT have both appeared to have set up a sideways trading channel defined on the lower end by the highs set in late October which were tested last week, and the upper end defined by the highs set the day after Thanksgiving. This corresponds to $1123 to $1147 on RUT, and $1780 to $1810 on SPX. Today's close on SPX at $1803 isn't too far from the high set at $1814, so SPX remains close to the upper end of that channel, but RUT's close at $1120 has broken the lower end of RUT's trading range. Yesterday's disparity in RUT trading down more strongly than SPX continued today. It would appear traders are taking some risk off the table and selling their higher beta stocks.

My RUT Dec iron condor continues to benefit from the sideways to downward movement of the past few days. The current P/L is +$2,820, or +18%, with delta = -$48 and theta = +$184 on 20 contracts. The FOMC meeting is next week. Will the markets just tread water until then?

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Written by Dr. Duke

Created: 09 December 2013

As I expected, the enthusiasm from Friday was muted significantly today. SPX gained $3 to close at $1808, but RUT lost $2 to close at $1129. VIX dropped off about a third of a point to 13.5%. Trading volume was flat in the S&P 500 stocks, coming in right at the 50 dma at 2.1 billion shares. Trading volume on the NYSE declined 2% and volume dropped off 5% on NASDAQ.

In one report I read today, the percentage of bullish investment advisers was at the highest level of the year. That has been a reliable indicator of the tops of bullish markets in the past. When everyone thinks the market is going higher, we are often very close to the top of the trend.

It seems like almost all of the market commentary concerns the FOMC and when they might start reducing their stimulus programs. The majority of the Fed watchers are expecting the tapering to begin in March, but who knows?

Today's market action was pretty bearish, in my opinion. SPX toyed with the idea of a new closing high, but couldn't quite make it. However, Russell actually declined - not by a lot, but weaker than the S&P 500. This contrast of SPX and RUT that we saw today is not isolated. A similar pattern has repeated several times over the past few weeks.

My Dec iron condor on RUT stands at a net P/L of +$2,090 or +13% with position Greeks on 20 contracts at delta = -$96 and theta = +$128.

Another consideration for traders of this market: When will trading volume begin to dry up in anticipation of Christmas and New Year's? One might expect that to result in more sideways consolidation trading, but the bulls were very much in charge during Thanksgiving week, in spite of low trading volume. Stay tuned.

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Written by Dr. Duke

Created: 06 December 2013

If you listen to the talking heads and gurus on CNBC, you would think that today's huge rally on the report of a reduced unemployment rate was very predictable. The reality is much different. The Non-Farm Payrolls report, aka the jobs report, cited 230k new jobs and a reduction in the unemployment rate to 7.0% from 7.3%. You might have reasonably thought that would revive the talk of the Fed tapering their stimulus programs and resulted in a market sell-off. After all, earlier this year, we had a rather sudden market pullback when members of the FOMC dared to even discuss the future possibilities of tapering at a time when the unemployment rate was quite a bit higher than it is now. It's the old marketing hype game: Sound confident as though this was all obvious and predictable and your loyal followers will increase in number. Unfortunately, it works.

At a recent trading conference, I picked up a handout from one of the speakers. He plotted the future price charts for the major stock indexes, gold, silver, and several prominent ETFs - about 8-10 in total. I placed that handout on my desk and marked the actual prices on each of the charts each month. At the end of three months, he was not only wrong on every chart, he wasn't even close. But he is selling subscriptions to his services.

SPX gained $20 to close at $1805, erasing about three of the past five days of declines. RUT was more subdued, rising $9 to close at $1131. Predictably, volatility decreased with the VIX coming in at 13.8%, down 1.3 points. SPX is now within striking distance of its recent intraday high of $1814, but the corresponding recent high for RUT was $1147, or $16 higher than today's close. So the high beta stocks were not leading today's big rally. That is why I didn't immediately run out and buy into a lot of bullish plays today. I will wait to see how next week develops.

The University of Michigan consumer sentiment report came out today with an increase from the previous result of 75.1 to 82.5 for Dec. But one has to be wary of these surveys. Just last week, the Conference Board's survey of consumer confidence didn't increase; it declined.

My Dec iron condor on RUT stands at a net P/L of +$1,350 or +8.5% with delta = -$81 and theta = +$180 (on 20 contracts). It will be interesting to see if this market rally follows through next week. I am doubtful.

Have a great weekend.

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Written by Dr. Duke

Created: 04 December 2013

Today's markets could not decide which way was up. SPX opened down and then quickly reversed to move into the black. But then SPX traded down steadily until early afternoon when it began to recover, closing at $1793, only down $2 on the day. RUT followed suit, trading as low as $1112 before recovering to close at $1121, down $2. All of this back and forth occurred on higher trading volume, with 2.4 billion shares of the S&P 500 trading today. Volume increased on both the NYSE and NASDAQ, +5% and +4%, respectively.

As you might expect, volatility also reflected this back and forth price action, moving as high as 15.7% and as low as 14.2%, before closing at 14.7%, up two tenths of a point on the day.

ADP's private employment report came out today with 215k new jobs. Some analysts are now wondering if this is an early indicator of a positive jobs report on Friday. But ADP has a spotty record of correlation with the jobs report. New home sales increased 90k to 444k in October. The ISM services index decreased to 53.9 for November from October's 55.4.

So where is that Santa Claus rally? Have we already gained too much this year and we will therefore spend the next couple of weeks consolidating those gains? Or is this just another minor pull back that the bulls will take as a buying opportunity and push on to new highs?

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Written by Dr. Duke

Created: 03 December 2013

 Markets traded down again today, but this time on higher trading volume. SPX closed at $1795, down $6 while RUT closed at $1124, down $5. As one might expect, volatility is rising with the VIX closing up about a third of a point today at 14.6%. VIX broke 15% intraday. Russell's price action was particularly negative with a gap open downward this morning. Trading in the S&P 500 stocks increased to 2.2 billion shares, above the 50 dma at 2.1B. We haven't seen many S&P 500 volume numbers above the 50 dma recently. Trading on the NYSE increased 10% and trading volume on NASDAQ increased 8%. A gap open toward the downside plus higher volume combine for a significant bearish signal. However, we have seen this market reverse several times this year as the bulls suddenly took over control and pushed higher.

Economic data was sparse today. Some market analysts speculate the market weakness is due to concerns about the Fed tapering stimulus sooner rather than later. But if the markets had surged higher, I am sure they had the answer in the other coat pocket.

My Dec iron condor on RUT stands at a net P/L of +$1,680 or +12% with position delta = -$141 and position theta = +$141 on 20 contracts.

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Written by Dr. Duke

Created: 02 December 2013

Markets tumbled today as reports of Black Friday sales began to come in, and the early reports were weak. SPX was actually flat on the day with about 30 minutes to go into the close, but dropped $5 in that last half hour, closing at $1801, down $5. RUT behaved a bit differently, trading steadily lower as the day progressed, and hit its low of the day just a few minutes before the close at $1129, down $14. The fact that RUT traded off so much more strongly than SPX is a bearish sign, but one data point doesn't define a trend, or, in this case, a correction. Looking at the percentage increases in trading volume from Friday is meaningless because of the holiday, but the absolute trading volume in the S&P 500 stocks came in today at 1.9 billion shares, well below the 50 dma at 2.1B.

Volatility increased about a half point with VIX closing at 14.2%. The ISM manufacturing index came in at 57.3 for November, up from the previous month's 56.4. Construction spending for October increased 0.8%, an improvement over September's 0.3% decline. All in all, more mediocre economic data.

I hedged my Dec iron condor with the RUT Jan14 1135 calls over the holiday weekend just in case the bullish trend continued strongly this week as traders returned from the holiday. I sold those calls this morning. The position stands at a net P/L of -$180 or -1% with position delta = -$173 and position theta = +$199 on 20 contracts.

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Written by Dr. Duke

Created: 26 November 2013

Today was probably the beginning of the trader exodus before the holiday. But they were buying as they walked out the door. SPX traded unchanged, closing at $1803, but RUT surged upward $10 to close at $1135. Volatility is unchanged with the VIX steady at 12.8%. Trading volume remains below average, but was up slightly with 2.1 billion shares of the S&P 500 stocks trading. Trading volume on the NYSE increased 12% and increased 3% on NASDAQ. The net result was a mixed bag, with SPX trading flat and RUT setting a new all-time high.

Traditionally, the period between Thanksgiving and New Year's has been bullish. This year, it seems most analysts are predicting at least a minor pull back, if not a serious correction. So it will be interesting to see if the market shows any weakness after traders return next week. For now, it all looks very bullish.

Building permits issued for September and October were released today at 974k and 1034k, respectively. The Case Schiller housing price index turned in another hot month with prices increasing on an annualized basis of 13.3%. The Conference Board's consumer confidence index dropped again in November to 70.4 from the previous 72.4.

We will probably see trading volume drop off significantly tomorrow and the exchanges will close early on Friday, so most traders won't be back until Monday.

Do you have your turkey? (I know you have him. I meant the one for dinner Thursday.)

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Written by Dr. Duke

Created: 25 November 2013

SPX set a new all-time high Friday on low trading volume, so I was anxious to see what might happen today: fall back below $1800 or head higher? It wasn't either; SPX lost only $2 to close at $1802. RUT was unchanged at $1125. Trading volume also remained low with 2.0 billion shares of the S&P 500 trading. Trading rose 3% on the NYSE and rose 4% on NASDAQ. So, you have a choice of how to interpret the data. If you are a convinced bull, then we are just taking a breather and you would note that SPX remained above the pivotal $1800 mark. But if you are a skeptic or outright bearish, then you hang your hat on the low levels of trading volume. It is hard to be too enthusiastic about break-outs on low volume.

I saw a survey this morning that showed 51% believing the Dow will break $17,000 before year-end - Wow! Is that a classic contrarian signal?

The pending home sales were reported as declining 0.6% in October, which probably is pretty normal for this time of year. And it is a big improvement over the 4.6% decline in September. Tomorrow brings the building permits report, the Case Schiller Housing Price Index and consumer confidence.

My Dec condor is plodding sideways with a net P/L of +$600 or 4.3% with position delta on 20 contracts of -$140 and position theta of +$155.