Dr. Duke's Blog
Do you know any trading coaches who discuss the market candidly without any marketing hype? Dr. Duke publishes a weekly newsletter and shares the track records of his trading services. If you have questions about any of his services, Ask Dr. Duke.
Markets Rally, But...
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- Written by Dr. Duke
SPX jumped $23 to close at $1722 and RUT gained $13 to close at $1092. This was a new all time high for RUT and SPX is only a few dollars off of a new all time high as well. Trading volume jumped up to 2.3 billion shares of the S&P 500. Trading on the NYSE increased 7% and but trading on NASDAQ only increased 1%. Volatility collapsed almost four points to close at 14.7%.
This market appears to be set on continuing to make new highs. This sets off my personal alarms, but we have to respect the tape. Trade small and hedge yourself appropriately.
The Sky Is Falling!
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- Written by Dr. Duke
The continual drumbeat of global financial collapse started to have an effect on Wall Street today. Unfortunately, the common financial media outlets are playing the same Chicken Little game. Bill Gross of PIMCO fame (the largest bond fund in the world) was interviewed on CNBC several weeks ago and pointed out how it was virtually impossible for the treasury to default on the debt - it requires less than 20% of incoming monthly tax receipts to pay the monthly interest bill. But it was clear that that didn't fit what the producers at CNBC were selling and so it was simply ignored. Our freedom is in danger when the press effectively becomes a propaganda tool for a political point of view.
The Fed's empire manufacturing survey surprised analysts with a
significant decline to 1.5 for October from last month's 6.3 reading.
The Beige Book will be released tomorrow and maybe the CPI data as well.
SPX lost $12 to close at $1698 and RUT gave up $11, closing at $1080 (this figures since the rally yesterday forced me to close my October call spreads on RUT). The reversal on SPX at $1710 reinforces the resistance level set by SPX's high in early August. Volatility spiked up almost three points to 18.7% on today's sell off. For RUT, today's price action is merely a common pull back after setting another all time high. RUT's bullish posture underscores the underlying strength of this market. RUT has been leading this bull market all year. All of the technical signs point to a bull market poised to erupt once Washington settles the debt/spending issue. But when the consensus of the evidence seems so obvious, it worries me. Keep your positions on a short leash.
I entered the EBAY Oct 46/50 and 58/62 iron condor today as a play on this evening's earnings announcement. EBAY's price action has been very sluggish since December, so the OTM options didn't have much premium, but it is a high probability trade, returning about 11% in 2-3 days. In after hours trading, EBAY is unchanged at $54.
New Highs?
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- Written by Dr. Duke
The Russell 2000 Index (RUT) hit a new all time high today, closing at $1090, up $6. SPX didn't set a new high, but it did trade upward by $7, closing at $1710. SPX's all time closing high is $1726. But the question is whether this makes any sense with the politicians bickering and posturing? Perhaps the market is telling Washington that they don't take any of these scare tactics seriously, that the treasury debt interest will continue to be paid and that an agreement will be reached at some point in the near future. I happen to agree with that position, but I am still surprised that the market is taking this so well. The volatility index, VIX, traded up to 17.7% this morning, but then gradually calmed down to close at 16.1%.
However, trading volume was down across the board, so maybe we shouldn't take these increases too seriously. Trading in the S&P 500 stocks decreased to 1.7 billion shares; trading volume on the NYSE declined 11% and trading dropped 15% on NASDAQ.
No significant economic data was reported today. The Empire manufacturing report is due tomorrow and Fed's beige book and CPI data are due Wednesday. But it isn't clear if any of these events will occur given the government shutdown. Today's strong run in RUT forced me to close the October 1110/1120 call spreads. That put another cramp in the potential gains for October, which now stand at +5.4%.
The politician watch continues. I continue to write unflattering emails to my congressman and senators, but they aren't listening. They are too busy posturing for the cameras.
What A Turnaround!
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- Written by Dr. Duke
The markets continued their jubilant march upward today with SPX gaining $11 to close at $1703 and RUT trading even stronger, closing at $1084, up $15. Volume dropped off from yesterday with 2.0 billion shares of the S&P 500 trading. Trading volume on the NYSE dropped 15% and decreased 8% on NASDAQ. The VIX shed another point today, closing at 15.7%.
Apparently, all is well with Washington, the economy and the world. I didn't understand why we traded down as far as we did on trumped up fears of debt default and I don't understand why the market has jumped so strongly upward now that the two sides appear to be only minimally talking to each other. But I have to remind myself that the market is often irrational.
SPX is trading just below resistance at $1710, set by the high in early August. Support stands at the 50 dma at $1678. The candlestick on October 9 is not too far off of a classic doji, but with an elongated lower shadow, setting up a classic reversal. The candlestick purists wouldn't call this a doji or a hammer, but it did at least suggest a reversal.
But no one would have predicted this strong turnaround. From the intraday high on September 19th through the intraday low on October 9th, SPX dropped $84, but SPX has now recovered $57 or 68% of that drop in three days. Wow! It is also worth noting that the bullish trend of higher highs and higher lows remains alive and well. The low in late September was at $1630 and the closing low on Tuesday was $26 higher.
My first blush analysis of the RUT price chart is simply that it has behaved more bullishly all along, trading down less and now trading upward even more strongly. RUT's close today at $1084 is very close to its all time high at $1088 on October 1st. So the charts are clearly bullish, but be careful about taking any bullish positions; protect the downside. The bulls are in charge, but this remains a very volatile market.
Enjoy the weekend.
Wow!
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- Written by Dr. Duke
Today's market rally was unprecedented. SPX ran up $36 to close at $1693. RUT closed up $26 at $1070. Both indexes gapped open this morning. SPX then proceeded to break through resistance at the 50 dma at $1678 and closed well above that level at $1693. RUT traded even stronger, gapping open above the 50 dma and breaking through resistance at $1062. As one might expect amid all of this enthusiasm, volatility dropped off by three points with VIX closing at 16.5%, a very bullish move.
Trading volume was not as large as I would have guessed. 2.2 billion shares of the S&P 500 stocks traded today, down from yesterday. Trading increased by 1% on the NYSE, but decreased 17% on NASDAQ. We saw record breaking one day advances on many of the market indexes today, but trading volume was flat at best?
Of course, the question of the day is whether this enthusiasm is warranted. It isn't clear that a deal has been reached on the debt limit or the government shutdown. If the debt limit is just kicked down the road a few weeks, does that warrant a strong bull market? One can't argue with the tape, but I am not reassured that all is well.
I wonder what the debt rating agencies are discussing behind closed doors. Of course, the Feds have sued S&P over their bond rating services in 2007-2008, so they may be chastised into pretending all is well. Federal debt is now at 17 trillion and rapidly rising; the current debt situation is worse than it was in 2011 when they downgraded the treasury debt. What happens to the market then?
Yesterday's Free Fall Ends?
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- Written by Dr. Duke
SPX opened this morning and plunged as low as $1646 before bouncing and closing near its opening at $1656 for a one dollar increase on the day. RUT traded a little more bearishly, closing down $4 at 1043. RUT opened at the 50 dma that it broke yesterday, but it couldn't hold that level and fell to $1039 before rebounding to close at $1043.
Trading volume increased to 2.4 billion shares of the S&P 500 while trading on the NYSE decreased 2%. But trading volume on NASDAQ increased 8%. Volatility pulled back a bit as the markets bounced; the VIX closed down one point to 19.6%. This is still a high level for volatility, so don't take a nap yet. And there is no sign that Obama will soften his refusal to negotiate; so increased volatility may be with us for a while.
The FOMC minutes from the September meeting were issued today. The minutes revealed a lot of debate over whether or not to taper stimulus - not too surprising. Many members believed the economic data had not yet reached the goals previously set by the committee, while other members wanted to soften the goals and declare the economic data were "good enough". Markets hit their lows around 11 am ET and then traded up close to the intraday highs by 2 pm when the FOMC minutes were released, so the minutes had little, if any, effect on the markets. One might be tempted to credit the news of Yellen's nomination as the market-turning event, but that news was out yesterday, so that doesn't track. But it is true that markets will take some calming effect from Yellen's
nomination. Many analysts believe Yellen is likely to
continue Bernanke's dovish policies, and perceive this as bullish for
the markets.
With a market this nervous, attempts to rationalize its behavior are largely futile. I will go crawl back into the cave.
Turning Downward
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- Written by Dr. Duke
The president and the media are getting their way, trying their best to scare everyone with the prospects of a global meltdown that starts with the U.S. defaulting on the debt. Haven't we heard this before? Did we go over the fiscal cliff? Did sequestration force us into recession? But it appears that the propaganda is starting to work. If you tell a lie long enough, everyone believes it. SPX broke through the 50 dma today, and appeared to be in free fall thereafter, closing at $1655, down $21. RUT gave way as well, breaking support at $1062 and then the 50 dma at $1050, closing down $19 at $1047. Volatility spiked upward, with the VIX touching 21% intraday and closing at 20.3%. VIX is now roughly where it was at the bottom of the pullback that ended June 24. But Obama still insists he will not negotiate, so we may see further declines in the markets before this is over.
I watch CNBC all day and I find it fascinating how several guests have pointed out why it is highly unlikely, if not impossible, that we will default on the treasury debt (see yesterday's blog for the details). But the hosts all continue to breathlessly worry about what will happen if we default. One has to wonder why.
Bearish technical data is starting to accumulate. The percentage of NYSE stocks that are above their 50 day moving averages (dma) has continued to decline since May, even as the market hit new highs. This shows a deterioration of the underlying health of the market even as the overall averages hit highs in August and September. And we have the historical tendency for market crashes occurring in October. The silliness in Washington coupled with the media propaganda may succeed in crashing this market in spite of the economic underpinnings. Don't get me wrong; the economy is certainly weak, and this is the weakest and longest economic recovery in history. But we are not in or near recession status. This drama is being orchestrated.
As it turns out, I was wise to close the put spreads on my October iron condor on RUT. It now stands at a gain of 7%; if the call spreads expire worthless, which now appears highly probable, we will end that trade with an 8.4% gain and our Flying With The Condor™ gains will be up +11% for the year. We are still lagging behind the S&P 500, but we are gaining on it.
The Sky Is Falling
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- Written by Dr. Duke
The incessant drumbeat of Armageddon and global financial disaster appeared to finally start to weigh on the market today. SPX dropped off $14 to close at $1676 and RUT closed down $12 at $1066. Trading volume dropped off again today with 1.7 billion shares of the S&P 500 stocks trading. Trading volume was flat on the NYSE and decreased 6% on NASDAQ. Volatility spiked up nearly three points with VIX closing at 19.4%.
From a technical standpoint, SPX has now broken through support at the 50 dma. RUT traded down very close to the support level around $1065. So far, the markets have held up rather well, but the spike in volatility today is worrisome.
My October condor consists only of the RUT 1110/1120 and 1130/1140 call spreads at this point and each day brings more gains via time decay; we now stand at a gain of 4.2% and the delta of the 1110 calls is 8, so the position is very safe; the maximum potential gain is 8.4%.
Be sure to hedge your positions. October is historically a dangerous month and Washington is adding to that danger.
Wall Street Ignores The Scare Tactics
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- Written by Dr. Duke
Obama and his allies are telling everyone that the end is near. It is almost as though he wants the market to crash. But the markets ignored him and traded back upward today with SPX tacking on $12 to close at $1691, coming close to making up yesterday's losses. RUT gained $7 to close at $1078. VIX decreased about nine tenths of a point to 16.7%, still a relatively high level of volatility. The low yesterday represented a 3% pullback on SPX, so the spike to 18% volatility yesterday was roughly in line with the last pullback in late August. Today's bounce also reinforced the support level on SPX at the 50 dma at $1680. So that becomes an excellent "line in the sand" to keep an eye on.
There were no economic reports today; normally the non-farm payroll report would have issued this morning, but that office was shut down. It doesn't appear that we missed it. By the way, one of the lies being knowingly perpetrated by many politicians and their lapdog media friends is that we are in danger of defaulting on the treasury debt. The facts are that tax revenue continues to flow into the treasury during the shutdown at the rate of over two hundred billion dollars per month. One month's interest on our treasury debt is about twenty billion dollars. Therefore, the only way we can default on our debt is if Obama orders his treasury secretary to do just that to further his political agenda. There is plenty of money to pay the interest due on our debt even if the politicians are still fighting over the debt ceiling (the debt ceiling only needs to be raised to accommodate all of the other spending in addition to our interest payments). I encourage you to check my figures.
I closed the put spreads in my October iron condor on RUT a few days ago because of my concern that the markets might melt down amid all of this rhetoric about the sky falling. With today's rally in the markets, I considered adding new put spreads to the position to boost the potential gains, but we only have two weeks left until expiration. I would have had to enter a position around 990 to 1000 on RUT to collect a reasonable credit. I decided the risk wasn't worth the additional gains. If the current call spreads expire worthless, a gain of 8.4% will result. That's more than respectable - no need to walk out on the thin ice.
Enjoy your weekend. It is cooling off here in Chicago. Fall is here.
Is The Sky Falling?
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- Written by Dr. Duke
We were told the sequester was going to be a huge disaster and it seems we are being told the same story once again. But the markets are basically saying, "Ho hum. It's business as usual". SPX dropped a whole dollar to close at $1694 while RUT dropped $5, closing at $1083. This is the first in several sessions where RUT closed down more than SPX. Of course, as the debt ceiling deadline approaches, the market may not be as benign. SPX opened at $1692 and traded down to the 50 dma at $1680 before bouncing back up to close at its high of the day. If you look at the SPX chart, the last three sessions have reinforced the strength of that 50 dma support line.
Trading volume was basically flat with two billion shares of the S&P 500 trading. Trading on the NYSE was flat and volume declined 3% on NASDAQ. We probably won't have a jobs report Friday, so many traders were focused on the ADP private jobs report today; it came in at 166k and that disappointed analysts who were expecting 170-180k.
It doesn't look like we are going to see an end to this mess in Washington anytime soon, so I bought some VIX calls today. That is a speculative trade, so don't jump into it unaware. I made 25% today, but could lose it all tomorrow if a surprise compromise were reached overnight. But Obama's interview with CNBC after the market closed communicated his continued refusal to negotiate on anything. My way or the highway...
But my trades are doing well, so I can at least take some comfort in that as Rome burns.
