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.
Surprise!
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- Written by Dr. Duke
Economic data has been rather positive both yesterday and today with the Chicago PMI increasing to 55.7 in September from August's 53.0. The Dallas Fed manufacturing survey jumped significantly from the August report of 5.0 to September's 12.8. And then today, the ISM manufacturing survey reported 56.2 for September, up from 55.7. So the economic data has been encouraging traders and apparently, they don't see the Washington political impasse to be a tradable issue. Or, more correctly, perhaps they don't see it as an impasse that will last long or cause any real economic damage.
I closed the 910/920 put spreads in my RUT Oct iron condor today. The remaining position stands at a net P/L of -$1,100 or -6%.
All Eyes On the Shutdown
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- Written by Dr. Duke
All of the talking heads could only talk about the haggling in Washington today and the prospect of a government shutdown this evening. In the meantime, investors are taking some of their capital off the table, just in case the end of civilization is near, as the Washington politicians are predicting. Remember how catastrophic the sequester was going to be?
SPX lost $10, closing at $1682. RUT remained pretty flat at $1074, down less than a dollar. As one might expect, volatility popped up a bit with VIX increasing a little over one point to 16.6%. Trading volume increased with trading on the NYSE up 16% and up 9% on NASDAQ.
SPX broke down through its 50 dma today, but recovered to close just above that support level. Breaking through that level in the morning (assuming the government does shut down tonight) could lead to some serious damage. I will be watching the May high at $1670 and the low from the last pullback around $1630 for possible support levels. RUT opened this morning just above its highs in August, backed off a few points and then recovered to close near yesterday's close, only down about forty cents. RUT's 50 day moving average (dma) is at $1047 with a weaker support level at $1040 and the August low at $1010. It is interesting that RUT continues to lead this market, in spite of a host of negative hand wringing over the past several weeks. That is evidence of a strong bullish underside to this market. A resolution in Washington could stimulate a strong rally.
My Oct iron condor on RUT at 910/920, 1110/1120 and 1130/1140 stands at a net P/L of -$720 or -4% with delta on 20 contracts at -$89 and theta = +$172.
I have yet to hear a single media outlet today observe that this shutdown is at least partly rooted in Obama's absolute refusal to negotiate. Instead, the media lap dogs consistently tell us the threat of a shutdown is due to some "extremists" who want to rid us of ObamaCare, a law that over 50% of Americans dislike, according to several polls. I suppose government by the people is an old fashioned idea.
Is This a Bottom?
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- Written by Dr. Duke
SPX finally ended its five session losing streak with a $6 gain today, closing at $1699. RUT also gained with a close at $1078, up $5. The two charts are quite different. SPX has dropped well below its August highs and is nearing its 50 dma. By contrast, RUT is still flirting with its recent all time highs. If you look at the intraday highs, RUT set a new all time high yesterday at $1082, but the intraday high today was $1081. I personally prefer to focus on closing prices and on that basis, RUT set its all time high today. However you look at it, RUT is leading the markets and that is bullish. Volatility was flat with the VIX at 14.1%.
Unemployment claims decreased by five thousand to 305k, but continuing unemployment claims jumped up by 35 thousand to 2.823 million. In contrast to yesterday's robust report of new home sales, today's report of pending home sales posted a 1.6% decline for August.
Is the market pausing for resolution in Washington to the great spending/debt debate? Or is it just consolidating the rather large gains it has made this year? One thing is apparent: in spite of many opportunities to sell off strongly, the bullish support for this market has continued unabated. Buying the dips this year would have been very profitable. In spite of weak economic data, continued high unemployment, and a feckless Washington, the market has held up rather well.
My Oct RUT iron condor position stands at a net P/L of -$830 (-4.5%) with delta = -$103 and theta = +$129.
Many are predicting another up market day tomorrow, reflecting optimism for a continuing resolution being passed over the weekend. As always, that is hard to predict, but we'll see.
Treading Water
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- Written by Dr. Duke
The markets just chopped largely sideways today, apparently just treading water while the politicians "play house" in D.C. SPX lost $5, closing at $1693 and RUT softened just a bit, down just one dollar at $1074. Consistent with the lack of market price action, trading volume was flat with 2.1 billion shares of the S&P 500 trading. Trading on the NYSE dropped 3% and trading on NASDAQ increased 2%. Today was the fifth successive day of declines for SPX.
Orders for durable goods came in at a meager +0.1% increase in August, but that was better than the 8.1% decline we saw last month. New home sales reported 421 thousand for August, up from July's 390k. So the real estate data continue in a positive direction.
I came across an interesting set of data on ZeroHedge.com. He plotted the FOMC predictions for GDP growth for this year. It has declined steadily and dramatically: in January of 2011, the Fed predcited growth this year of 4.2%; in Jan 2012, it dropped to 3%; in Jan 2013, it dropped to 2.5%, and in this last report last week, the prediction is down again to 2.2%. No wonder Bernanke doesn't think the economic data support removing stimulus. But all of this worries me. Over a trillion dollars has been added to the Federal Reserve's balance sheet with all of this quantitative easing and our debt is up to 17 trillion dollars, double what we used to call excessive debt. I confess that I don't know where this takes us, but I don't think the unwinding of all of this will be painless.
My Oct iron condor on RUT stands at a P/L of -$670 or -3.6% with delta = -$88 and theta = +$129.
Watch the 50 dma of SPX at $1680. As long as SPX doesn't break that level, I think we will just consolidate sideways as we watch the politicians fight - but I prefer watching football.
The Euphoria Has Ended
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- Written by Dr. Duke
Last Wednesday's huge bullish run seems like a distant memory. Last week, it appeared that the markets believed that the bulls' party would continue, but that seems far away. Now traders worry about a weak economy and the Greek tragedy in Washington - remember those Greek plays we read in school? All manner of terrible calamities occurred and usually most of the characters had either been murdered or committed suicide in the last act of the play. Our politicians remind me of those Greek plays; it is depressing.
SPX closed down $4 at $1697 and RUT gained $3 to close at $1075 - somewhat unusual to see those indexes disconnected. Trading volume was flat to slightly up with 2.1 billion shares of the S&P 500 stocks trading; this is just slightly over the 50 dma. Trading volume on the NYSE increased 4% and also increased 4% on NASDAQ. Volatility popped back up yesterday with the VIX hitting 14.7%, but closed today at 14.1%. After closing at a new all time high last week, SPX has now fallen back below the August highs and may even have the 50 dma at $1680 in its sights. SPX has given up almost 2% in only four trading sessions. RUT has fared much better, still holding above the August highs and posting a gain today. If RUT is still leading the markets, perhaps I should be encouraged by today's strength in RUT?
The Case Schiller Housing Price Index increased 12.4% in July, up slightly from last month's 12.1% increase. The Conference Board's consumer confidence report came in at 79.7 for September, down from 81.8. So the housing market continues to turn in encouraging numbers. Some of that should filter out into the economy at some point as construction picks up, but it will be a slow process. A large number of foreclosed homes remain either on the market or being held by banks. The recent tick up in interest rates is probably slowing the real estate markets a bit, but interest rates are still very low historically. I bought my first house on a 9.5% mortgage, so rates around 4% look pretty good to me.
My Oct iron condor on RUT consists of 910/920 put spreads, 1110/1120 call spreads and 1130/1140 call spreads. The 1110/1120 calls were the original position from August 22, but I rolled up half of the contracts to 1130/1140 today. The current P/L is -$680 or -4% on 20 contracts with delta = -$91 and theta = +$114.
The Markets Give and The Markets Take Away
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- Written by Dr. Duke
The last two days have erased almost all of those ecstatic gains from Wednesday. It was as though traders reassessed their initial conclusions after Bernanke's news conference on Wednesday afternoon and decided that Bernanke had it right - the economic data are weak and don't warrant pulling stimulus out of the economy. SPX closed down $12 at $1710 while RUT gave back $2, closing at $1073. This returns SPX to the previous high for the year at $1710. This will be a pivotal point to watch Monday - which way will it tip? Volatility decreased earlier today, down as far as 12.5%, but rose to close at 13.1%, still a relatively low level of volatility. Trading volume was higher on this expiration Friday with 3.0 billion shares of the S&P 500 stocks trading. Trading on the NYSE increased 82% and increased 35% on NASDAQ.
No substantive economic data was released today, but comments from at least two different Federal Reserve presidents seemed to revive the idea of the FOMC beginning tapering as early as October. Perhaps that drove the markets lower, or perhaps the heated rhetoric out of Washington was responsible. Why is it that our politicians can't address real economic issues like adults and instead resort to name calling and accusations? One of our candidates for governor in Illinois is calling for term limits to completely turn over our state legislature - perhaps that would be good for Congress as well.
SPX settled at $1723.89 today and RUT settled at $1078.65. So my September iron condor positions expired worthless for a net gain of 15.2%, bringing the total returns for Flying With The Condor™ in 2013 to 7.9%.
Have a pleasant weekend.
FOMC Surprise
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- Written by Dr. Duke
Bernanke surprised the markets today by announcing that economic conditions do not yet justify beginning a reduction of the Fed's stimulus programs. This announcement certainly was a surprise to most market analysts, but Bernanke's message has been remarkably consistent - the market just didn't listen. Bernanke laid out the conditions for beginning tapering back in June, viz., an improvement in the unemployment rate to 6.5% or lower. Ironically, the market threw a tantrum at the mention of tapering at that time, but now is surprised by Bernanke following his own stated guidelines. Perhaps this was a classic example of crowd psychology.
Markets spurted higher on the FOMC announcement, and one could argue that was a predictable response to the idea of continued stimulus. But perhaps a large amount of today's rally was short covering because so many traders expected the announcement of tapering and were expecting the market to drop at least somewhat in response.
SPX gained $21 to close at a new all-time high of $1726. RUT also set a new all-time high at $1077 with an $11 gain. Volatility pulled back a bit with the VIX paring off nearly a full percentage point to 13.7%. Trading volume spurted higher with 2.4 billion shares of the S&P 500 stocks trading. Trading on the NYSE increased 42% while trading volume increased 21% on NASDAQ.
A couple of economic reports this morning were over-shadowed by the FOMC. Housing starts in August rose by eight thousand to 891k. But building permits dropped from 954k to 918k in August.
Today's surprising rally didn't change the position for my September iron condor at 940/950 and 1120/1130. Both spreads are over two standard deviations OTM, so I will allow these spreads to enter expiration this weekend and expire worthless for the maximum gain of 15.2%. This brings the year to date results for the Flying With The Condor™ service to +7.9%.
So what should we expect tomorrow - a continued rally or some profit taking?
What Does The Market Expect?
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- Written by Dr. Duke
The major market averages all traded up substantially again today. With all of the talk about tapering and Bernanke's replacement, who would have guessed two strong trading days in succession before the FOMC announcement? It is just one more example of how difficult it is to predict market direction. The cynic in me thinks all of those guests on CNBC take a strong, confident position with the idea that if they are correct, they can use that for marketing material for the next several months. If they're wrong, they just need to come out with a new prediction. But I digress...
SPX gained $7 to close at $1705, roughly $5 off its high for the year. RUT continued to outperform SPX, hitting a new all-time high at $1066, up $10. The VIX increased about two tenths of a point to 14.5%, probably the result of institutions hedging their portfolios in front of the FOMC announcement tomorrow. Trading volume fell off a bit from yesterday with 1.8 billion shares of the S&P 500 stocks changing hands. Trading volume on the NYSE dropped 11% and decreased 2% on NASDAQ.
The principal economic data reported today was the CPI, which came in basically flat at +0.1% for August. The NAHB Housing Market Index came in flat for September.
So now we turn to the FOMC announcement tomorrow afternoon. Who knows how the traders will react tomorrow afternoon? From all of the commentary on CNBC, it appears that the most common expectation is for the Fed to announce the beginning of tapering tomorrow. I find the bullishness of the past few days to be surprising in that light. It wasn't long ago that the market dropped 6% on just the possibility of tapering sometime later this year. Have we now talked ourselves into thinking everything is OK? One possibility for tomorrow is the classic, "sell the news". Or will the markets sell off if Bernanke says the economy still needs Fed stimulus? We'll see. Watch your exposure; it could be very volatile.
Summers Rally?
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- Written by Dr. Duke
The markets rallied today, on a day that should have been a bit subdued as we look forward to the FOMC meeting Tuesday and Wednesday. The general consensus was that it was a relief rally due to Larry Summers withdrawing his name for nomination as the next FOMC chairman. That seems like an over-reaction to me, but I suppose the street prefers the more predictable Fed under the leadership of Yellin, since she would be expected to smoothly transition from Bernanke's policies. In the meantime, Obama emphasized his intransigence in negotiating over the debt ceiling and spending, so the FOMC chair is the least of our problems in Washington.
SPX gained $10 to close at $1698 and RUT gained $2 to close at $1056. On a percentage basis, RUT's gain was much less than that of its big brother, SPX. Does that signal a slowing of the markets, or is it just noise? The candlestick on RUT today appears to be a shooting star, as RUT traded as high as $1065 before pulling back to close at $1056. The shooting star may signal the top of a bullish trend, but it requires confirmation; it is often a false signal.
Trading volume increased today with 1.98 billion shares of the S&P 500 trading. Trading on the NYSE increased 15% and trading on NASDAQ increased 5%.
The Empire Manufacturing Survey decreased to 6.3 for September, down from the previous 8.2. Industrial production increased slightly to +0.4% from flat last month. Capacity utilization also bumped up slightly to 77.8% from 77.6%.
My September iron condor on RUT continues to cruise along toward its maximum gain with a current P/L of +$2,557 with delta = -$1 and theta = +$6. I would expect tomorrow to be a slow day in the markets as we anticipate the Fed announcement Wednesday - but that is what I expected for today...
Waiting on the Fed
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- Written by Dr. Duke
The markets opened modestly higher this morning but quickly weakened and traded lower. SPX hit a high of $1690, matching yesterday's high, but then closed very close to its low of the day ($1682) at $1683, down $6. RUT lost $7 to close at $1049. Volatility rose a bit with VIX closing at 14.3%, up a half point. Trading volume was flat to down with 2.0 billion shares of the S&P 500 stocks trading (flat from yesterday). Trading on the NYSE dropped 2% and trading volume declined 3% on NASDAQ.
This week's unemployment data showed some additional improvement with initial unemployment claims of 292k, down 31k from last week. Continuing unemployment claims declined 73k to 2871k. Maybe that is what drove the initial spurt in the markets at the open this morning. But that bullishness didn't last.
My September iron condor on RUT stands at a P/L = +$2,360 or +13.5% with position delta = +$5 and position theta = +$85. Both spreads are over two standard deviations OTM; the maximum gain for the 20 contract position is $2,560 or 14.7%.
Retail sales, PPI and consumer sentiment all report tomorrow - will those reports move the market? I doubt it. I think the FOMC announcement next Wednesday is the market's focus at this point.
