Dr. Duke's Blog

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Written by Dr. Duke

Created: 04 November 2013

Just when many of us were counting on a small correction, the markets turn and bounce strongly - surprise! SPX gained $5 to close at $1766 and RUT outperformed SPX with an eleven dollar gain to close at $1107. However, trading volume fell off to 1.9 billion shares of the S&P 500 stocks (the 50 dma = 2.1B). Trading on the NYSE dropped 17% and trading volume decreased 7% on NASDAQ. SPX opened strongly this morning and then traded down to its opening price by mid-morning. But the remainder of the day saw a slow but steady climb higher.

There weren't any significant economic reports to drive this market today. Many are looking forward to the Twitter IPO on Thursday and the jobs report Friday.

Perhaps the bullish undercurrent is just too strong to allow a correction, and we will trade sideways for a while and burn off the excesses. The test of that theory will be whether SPX can break out above the highs set last week around $1775. Today's gains on weak volume don't provide very strong motivation to buy into this market. Many of the gurus on CNBC are predicting a correction, but the market has a way of surprising traders.

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Written by Dr. Duke

Created: 01 November 2013

SPX traded lower through the middle of the day, but then recovered sufficiently to close with a $5 gain at $1762. However, RUT continued its slide downward with a loss of $4. closing at $1096. One positive sign was RUT's low on the day at $1087, almost ten points lower than its close. That suggests some buying strength around support at $1088, the high set in early October. Trading volume fell off today with 2.3 billion shares of the S&P 500 trading. Trading volume fell 3% on the NYSE and dropped 14% on NASDAQ.

Due to the government shutdown, the jobs report has been delayed until next Friday. The ADP report came out a couple of weeks ago at a modest 130,000 jobs, so expectations have been lowered for the federal report.

My November iron condor on SPX is doing well with a net loss of $1,900 or -9% with position delta = -$79 and position theta = +$122. However, due to previous adjustments, the best outcome for this position is a loss of $660 on 20 contracts or -3.9%.

Enjoy this nice fall weekend. We are starting to rake leaves in this neighborhood.

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Written by Dr. Duke

Created: 31 October 2013

The markets opened and traded down this morning, but had moved back into positive territory by the afternoon. However, a sell off in the last hour of trading wiped out all of the earlier gains. SPX lost $7 to close at $1757 and RUT closed at $1100, down $5.  Trading volume jumped up in this sell off with 2.4 billion shares of the S&P 500 stocks trading. Trading on the NYSE increased 15% and trading volume increased 20% on NASDAQ. Perhaps fund managers were taking profits at month end? Volatility was largely unchanged with the VIX at 13.8%, up a tenth of a percent. Today's drop on increased volume after yesterday's drop after the FOMC announcement is one more bearish signal for this market. Apparently, the Fed's pessimistic assessment of the economy was regarded as bad news this time, instead of the "bad news is good news" reaction we have seen recently.

The Chicago PMI jumped markedly from 55.7 to 65.9 for October. One might have expected that report to buoy the markets, but it didn't. Unemployment claims came in at 340k, down ten thousand from last week, but continuing claims rose by 38k.

$1750 was a weak resistance level for SPX on the way up. I will be watching that level for possible support. Otherwise, the top around $1730 from late September is the next solid support level.

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Written by Dr. Duke

Created: 30 October 2013

 The markets have been showing signs of weakness for several days, most notably RUT's lack of leadership while SPX traded higher. That trend continued this morning with RUT trading lower even as SPX traded upward. But then SPX weakened and traded down to about $1764 before the FOMC announcement at 2 pm ET. Then SPX traded even lower to its low of the day at $1757. But it recovered somewhat before closing down $9 at $1763. In stark contrast, RUT traded lower all day, hitting its low around 2:45 pm ET at $1104 before closing at $1106, down $16.

Volatility spiked during the trading day but settled at the close with VIX at 13.7%, down only two tenths of a point. RUT's comparative weakness is a bearish sign for the market. Trading volume was flat with 2.1 billion shares of the S&P 500 trading. Trading volume increased 2% on the NYSE and was flat on NASDAQ.

The consensus expectation for the FOMC announcement was a continuation of stimulus, given the weak economic data reported since the last meeting. I had expected SPX to spike upward after the announcement, and thought I would hedge or close my Nov call spreads. But after watching RUT lead lower all day, I decided it was safe to leave my November iron condor in play. It remains underwater, but the delta of the 1800 calls is now down to 16, so much of the pressure has been relieved.

The question for traders is whether this is merely a brief consolidation phase in the bull market or a trend reversal. That question causes me to reflect on the advantages of non-directional trading...

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Written by Dr. Duke

Created: 29 October 2013

SPX tacked on another ten dollars today, closing at $1772. RUT is moving up at a slower pace lately, adding $4 today to close at $1122. Volatility is pretty tame, but the VIX rose a tenth of a point today to close at 13.4%. The bottom line: the markets are overbought by any measure, but they continue higher.  The poor bears keep shorting this market but then are forced to cover their shorts. The FOMC meeting started today. It will be interesting to see how the announcement tomorrow affects the market, if at all. I suppose the most likely scenario has the FOMC reaffirming their stimulus for the foreseeable future, signaling that the party will continue, and the markets trade higher.

Consumer confidence continues to erode with a 71.2 for October, down from 80.2. But the real estate market continues to heal with the Case Schiller price index increasing 12.8% in August. The Producer Price Index (PPI) surprised me again with a decline of 0.1%; it seems to me that prices are increasing in my part of the world, but neither the CPI or the PPI are showing any sign of inflation. Retail sales for September dropped 0.1%. All in all, it was a pretty dismal set of economic data, but the markets traded upward anyway... interesting.

The last minute spurt of SPX has pushed my November condor to the edge. Tomorrow will be "fish or cut bait" time.

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Written by Dr. Duke

Created: 28 October 2013

The markets managed to stay in the black today, but it wasn't pretty. SPX gained $2 to close at $1762 while RUT managed to remain unchanged at $1118. Volatility, as measured by the VIX, increased just two tenths of a point to close at 13.3%. SPX traded lower all morning but then revived during the afternoon only to give it all back in the last hour of trading. RUT was weak all day and this could be foretelling some overall market weakness. RUT has consistently led the bull market this year. Trading volume fell off with 2.1 billion shares of the S&P 500 stocks trading. Trading volume increased 3% on the NYSE but fell 19% on NASDAQ.

Industrial production figures for September came in at a gain of +0.6%, up slightly from the previous reading of +0.4%. Wow. Capacity utilization increased slightly in September from 77.9% to 78.3%. Pending home sales fell again in September by 5.6%, an increase over August's -1.6% drop. Obviously, none of these reports excited the bulls. But we may see a quiet market during the next two days until the FOMC announcement on Wednesday afternoon.

I was unsure whether to bet on AAPL into the earnings announcement. The Ichan effect could have been thought to give it a bullish push, but I finally decided to close my AAPL spreads to be safe. That appears to have been a good call at this moment, but AAPL hasn't dropped much. Maybe it will bounce tomorrow.

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Written by Dr. Duke

Created: 25 October 2013

The bulls continued their buying spree today, primarily fueled by Microsoft and Amazon earnings reported last evening. SPX hit a new all time high, closing at $1760, up $8. But RUT was trading much weaker all day and managed to recover somewhat in the afternoon to close down $1 at $1118. The VIX declined a tenth of a point to 13.1%. Trading volume dropped off with 2.2 billion shares of the S&P 500 stocks trading. Trading also dropped 4% on the NYSE but volume increased 10% on NASDAQ.

SPX chopped sideways and somewhat lower all morning, but then strengthened to close the day on a nice gain. But small and mid-cap stocks, as measured by the Russell 2000 Index, weren't leading the big cap stocks as they have all year. RUT traded in the red all day, but managed to recover most of that loss by the close. If you are following the talking heads, purported gurus are coming out of the woodwork to warn of an impending crash. And it is true that the markets are high and overbought by many measures. One interesting plot showed total stock margin is nearing its all time high; at the beginning of the last two major bear markets of 2000 and 2008, margin had peaked as traders enthusiastically went "all in". But, it is also true that markets can trend longer up or down than considered rational by market analysts. The take away for most of us is simply to be cautious as we chase stocks higher.

My November iron condor on SPX stands at a net P/L of -$3660 or -18% with position delta = -$70 and position theta = +$171 on 20 contracts. Time decay is ramping up for this position and will erase much of these losses, assuming the index doesn't trend too strongly. But this trade will be a small loser, even in the best scenario. My adjustments and hedging to date have chewed up all of the potential profit.

Have a nice weekend.

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Written by Dr. Duke

Created: 23 October 2013

The markets pulled back a bit today, causing many bears to wonder if finally their predictions are coming true. But I'm not so sure. SPX closed down $8 at $1746 and RUT closed at $1111 for a loss of $5 on the day. SPX hit its low around 11am ET this morning at $1741 and then recovered to the close at $1746. RUT's candlestick is the classic hanging man which often signals weakness at the top of a trend. Coming after yesterday's doji, this is one more sign of the trend weakening. However, look at the VIX, closing at 13.4%, up just one tenth of a percentage point. That tells me that market participants are not concerned about this move, so I wouldn't put on the bear suit just yet. This bullish trend has been proceeding nonstop for almost a year now, so it is tempting to start imagining the end around the corner. Plus, it is hard to see any really good economic news to build one's confidence. The best I can do is remind myself that the Fed is holding this market up and I should therefore be bullish. That seems to be the working hypothesis to date, with emphasis on "working". Whether it feels good or not, it is working. The corrections have been frequent and volatile, but the bullish trend is intact.

An additional piece of data supporting the slowing market case is the flat to declining trading volume today, with 2.5 billion shares of the S&P 500 stocks trading. Trading on the NYSE dropped 4%, but trading on NASDAQ increased 2%. But I would also point out that today's market declines were modest and yet volume remained low. Therefore, it wasn't a case of traders heading for the exits.

Unemployment claims are out tomorrow and Friday brings consumer sentiment and durable goods orders. It will be interesting to see how the market handles those reports. Will bad news continue to be seen as good news, i.e., meaning the Fed will continue filling the punch bowl?

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Written by Dr. Duke

Created: 22 October 2013

The markets continued to trade higher today and the euphoria continues (unless you own NFLX). SPX gained $10 to close at $1755 and RUT gained $3 to close at $1116. Volatility remained flat with VIX closing unchanged at 13.3%. Trading volume jumped upward with 2.5 billion shares of the S&P 500 stocks trading. Trading volume on the NYSE surged upward 13% and trading on the NASDAQ was up 6%. New market highs are becoming routine events in this marketplace. It makes me uneasy. RUT set a new high with its intraday high of $1122, but it closed almost precisely at its opening price, setting up the classic doji candlestick. The doji is the sign of a marketplace nearly perfectly balanced between the buyers and sellers; candlestick analysts view this as a sign of indecision, and possibly a change in direction.

The September jobs report was issued today, a couple of weeks late due to the government shutdown. It reported a drop in new jobs to 148 thousand and a slight drop in unemployment from 7.3% to 7.2%. Most analysts had expected closer to 180k new jobs. The previous month's reports were revised with August moving up to 193k from 169k. But July was revised downward to 89k from 104k. So the report was similar to recent ones: not too bad, but not very good either. But many view these weak reports as positive news in that the Fed isn't as likely to remove its stimulus programs. That is probably a short sighted viewpoint, but we'll see.

As you probably have guessed, my NFLX earnings trade didn't work as planned. The put helped, but wasn't sufficient to save me. I adjusted the trade this morning, but NFLX just continued to fall all day, so I closed for a loss this afternoon. The CEO's comments on the conference call that the stock price had traded too high apparently were taken to heart.

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Written by Dr. Duke

Created: 21 October 2013

Markets took a pause today, but the bulls remain very much in control of this market. The bears are left trying to argue that the markets are over valued. That is always a tough argument. Consider Tesla. By most any financial measure the stock has been and continues to be over valued, but it continues to trade higher. Tesla is showing a little weakness lately, but it remains over $170/share. The bulls took a little bit of a pause today, but the bull trend remains strong. SPX closed unchanged at $1745 and RUT dropped $2 to close at $1112. Volatility is flat with VIX closing at 13.2%, unchanged on the day. Trading volume dropped back with two billion shares of the S&P 500 trading. Volume on the NYSE decreased 23% and trading dropped 9% on NASDAQ.

New home sales came in at 5.29 million for September, down a bit from the previous report of 5.39 million units. It is one more report of the real estate market holding its own, if not rising.

My Nov iron condor on SPX at 1650/1660 and 1800/1810 has been hedged once and repositioned, so it is currently underwater with a P/L of -$3,260 or -16% with position delta = -$27 and position theta = +$126 on 20 contracts.

My trading group entered the following trade on Netflix today with the diagonal call spread, Jan14/Nov $350/$400. I also bought the Nov $300 put just in case the earnings announcement went south. That gave us a position where we were only exposed to a loss of 2-3% if NFLX fell out of bed, but we still have a bullish position if the stock continues its run. As I write this blog, NFLX is trading around $390, so I will sell the put protection tomorrow and allow the spread to profit as NFLX trades upward. Check out Dr. Duke's Trading Group if you would like to learn more about using options conservatively.