Dr. Duke's Blog

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Written by Dr. Duke

Created: 11 September 2013

The major market indexes traded higher today, but on lower volume. SPX gained $5 to close at $1689 but RUT closed unchanged at $1055. RUT's price behavior together with decreased trading volume suggests a slowing of this rally as traders look forward to the FOMC meeting next week. Trading in the S&P 500 stocks decreased to 2.0 billion shares while trading on the NYSE declined 12%. Trading volume on NASDAQ dropped 6%. As concern about Syria falls off, we may start to see increased taper anxiety in advance of the FOMC announcement and Bernanke news conference.

No substantial economic data were reported today. The big news was Apple's large drop in stock price to roughly where it was before Carl Icahn's famous tweet. In fact, Icahn said today on CNBC that he was buying more shares at this lower price. It will be interesting to see where this story goes.

My September iron condor on RUT stands near its maximum gain with a net P/L of $2,420 or +14% and a position delta of -$7 (nearly perfectly delta neutral) and position theta = +$49. The temptation at this point to close for much of the potential gain, but if you are trading larger numbers of contracts, the trading commission costs become an inhibiting factor. Allowing spreads to expire worthless is attractive as long as you don't allow that to draw you into taking too much risk. So we will watch these spreads closely between now and expiration next week and close if the market starts to threaten either side.

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Written by Dr. Duke

Created: 10 September 2013

Positive economic data out of China and cooling of the rhetoric about Syria gave the market reasons to trade higher today. SPX gained $12 to close at $1684. RUT traded upward as well, closing at $1056 for a $10 gain. VIX dropped a little over one point to close at 14.5%. And these gains occurred on higher trading volume with 2.2 billion shares of the S&P 500 stocks trading; trading increased 15% on the NYSE and increased 8% on NASDAQ.  Strong increases on higher trading volume are good signs for the bulls.

SPX gapped open upward this morning and sliced through resistance at $1680. Yesterday's trading broke out above the 50 dma, and today's trading left the 50 dma in the dust. If one draws a trend line on SPX from mid-November of last year to the present, touching all of the pullbacks except the low on June 24, then we won't be back on that bullish trend until around $1710 on SPX. If SPX peaks and pulls back before reaching $1710, beware of the head and shoulders reversal pattern that will result.

This is a light week for economic data. Not much happens tomorrow and then Thursday brings the unemployment claims. Friday is the heaviest day this week with retail sales, the PPI and the University of Michigan Consumer Sentiment report. Now that we have Syria out of the way, the news will probably start to focus on the debt ceiling and spending arguments. Allow me one observation on the debt ceiling debate: if my son were spending more than he earned and he hit the credit limit on his credit card, the solution wouldn't be to raise the credit limit on his card.

As you consider any new trades based on this bullish euphoria, remember that the FOMC meeting and announcement are next week. September 18 is likely to be a volatile trading day.

My Sept RUT condor position continues to be very strong with P/L of +$2,360 (+14%) with position delta = -$4 and position theta = +$59. Even with RUT's recent strong push upward, the Sept 1120/1130 calls are over two standard deviations OTM.

The higher price volatility of the past few months has many traders feeling a bit paranoid. I see the very bullish signs on the charts, but I still fear some surprise coming out of left field. I will go see my shrink, lie down on the couch and talk about my childhood. Or maybe it would be cheaper to have a glass of wine with dinner and go to bed early. We'll see if those bulls can hold this position.

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Written by Dr. Duke

Created: 09 September 2013

Some positive economic news out of China boosted Asian markets and that appeared to spread across the globe. It probably also helped that reports from Washington suggest that a compromise solution to avoid a government shutdown is in the works so the debt and spending debate participants can have more time to craft a solution. I think Fed tapering is effectively priced into the markets with all of the debate over the past couple of months, so I don't think that is a significant risk issue at this time. But that leaves Syria. Is Obama willing to forge ahead without support from Congress or the American people? That risk remains, but may be diminished somewhat. SPX spurted ahead $17, broke through its 50 dma at $1667 and closed at $1672. RUT also traded strongly higher, tacking on $17 to close at $1046. RUT opened right at its 50 dma at $1033 and never looked back.

The cautionary note on the day was that volatility remained pretty high in spite of these bullish advances. VIX only decreased about two tenths of point to 15.6%. Everyone isn't totally relaxed and comfortable in trader-land even with a one percent gain on the day.

My iron condor position on RUT for September stands at a net gain of $2,200 or +13% with position delta = +$10 and position theta = +$73. This position is nearly perfectly delta neutral with ten days to go to expiration.

I think the big question, in view of VIX remaining relatively high, is pretty simple: will today's advances hold tomorrow? Maybe Apple's new iPhones will cause an uncontrolled exuberance in the markets, but I doubt it.

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Written by Dr. Duke

Created: 06 September 2013

SPX opened higher this morning in spite of a weak jobs report, probably thinking that bolstered the case for tapering (now the market seems ready for tapering). But it quickly reversed and dropped $20 to the low of the day at $1641, based on Putin's comments about supporting Syria. Then it regained its previous highs by noon and traded higher in the early afternoon. But then all of this exuberance appeared to weigh on the markets so it gave it all back with SPX closing flat at $1655. RUT followed suit but managed to close up one dollar at $1030. Volatility also ran higher before settling to close with no change with VIX at 15.8%. All of this occurred with higher trading volume, up to 2.0 billion shares of the S&P 500. Trading volume increased 9% on the NYSE and increased 11% on NASDAQ.

The jobs report came out with 169 thousand new jobs and unemployment dropped a tenth of a percent to 7.3%. But the unemployment drop was principally due to a lowered labor force participation rate. Many analysts viewed the report as mediocre, but probably adequate for the FOMC to justify a beginning to tapering the stimulus programs. Others believe Bernanke will wish to begin tapering before his term runs out, but that doesn't make sense to me. If Bernanke believes stimulus is needed until unemployment drops below 6.5%, then why would he remove stimulus and risk a recession? If he doesn't think stimulus is required with unemployment at 7.3%, why did he specify 6.5% as the target (repeatedly)?

I re-established my Sept condor position with the 940/950 put spreads and that position now stands at a net P/L of +$1,760 or +10% with delta = +$25 and theta =+$99.

Have a great weekend.

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Written by Dr. Duke

Created: 04 September 2013

The markets traded upward strongly today on increased volume. But reasoning why is tough. We are still in the midst of this Syria military action debate (during my lifetime, the "spin" of language has hit its stride - it is no longer "going to war" or "killing people"; it is "military action"). The question of tapering of Fed stimulus is still very much up in the air and that won't be resolved until September 18 (maybe). In the midst of all of this uncertainty, SPX tacked on $13 to close at $1653. It remains ten dollars below the 50 dma, so don't uncork the champagne just yet. RUT followed suit with a nine dollar increase to $1026. RUT's 50 dma is at $1029. Both charts seem to have hammered out solid support at $1630 and $1010, respectively. Is it reasonable to think of those levels as the lows if the Syria action is approved? Maybe, but rational reasoning may be dangerous in this market.

Trading volume bumped upward today with 2.3 billion shares of the S&P 500 stocks trading (2.1B is the 50 dma). Trading was down 10% on the NYSE but up 12% on NASDAQ. Volatility pulled back almost one full point to 15.9% (as measured by the VIX). Volatility remains relatively high, so don't take a nap.

There were no significant economic data reports today. Unemployment claims, the ADP private employment numbers, and the ISM Services index all report tomorrow, with the Nonfarm Payrolls Report, aka, the jobs report, to be released  Friday morning before the market opens. We could see a big move in the markets Friday.

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Written by Dr. Duke

Created: 03 September 2013

The markets opened strongly upward this morning on expectations that any U.S. incursion into Syria appeared less likely with the Congress getting involved. But then the Speaker of the House backed Obama's plan and the markets tumbled. SPX spurted up to $1651 but was pulled back to close at $1640. However, this still maintained a gain of $7 on the day. RUT behaved similarly, trading up $5 to close at $1016. Trading volume in the S&P 500 stocks jumped up to 2.1 billion shares, just below the 50 dma. Trading volume increased 31% on the NYSE and increased 35% on NASDAQ. But these volume increases reflect the low pre-holiday trading volume more than anything else. VIX decreased about a third of a point to 16.7%, so volatility remains in the moderately high range of 16.5% to 17% where it has been over the past five trading sessions.

The ISM manufacturing index increased a bit to 55.7 in August, up from 55.4. Increased new factory orders were an encouraging aspect of this report if you studied the details. On the other hand, over fifteen billion dollars (about 1%) flowed out of exchange traded funds (ETFs) in August. This reflects the public's worry about this market going into the historically weak part of the year. Many are going to cash. All of the talk about Syria toward the end of the month probably exacerbated this trend.

My September iron condor on RUT only consists of the 1120/1130 call spreads at this point. It is tempting to sell new put spreads but we only have 16 days left until expiration, so it may be safer to sit on the sidelines with our gain.

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Written by Dr. Duke

Created: 30 August 2013

All of the talk of attacking Syria this week has the markets on edge. The markets were not exactly healthy anyway, so this additional dose of uncertainty hit hard. SPX closed down $5 at $1633.  The essence of a bearish trend is lower highs and lower lows and SPX has been setting lower highs and lower lows ever since August 5. Although the trading this week seems to be establishing support at $1630, the next well defined support level is around $1605 and then at the June low around $1572. But RUT traded even weaker than SPX today, opening at its 50 dma, and trading lower by $16 to close at $1011. Unlike SPX, RUT set a new low today. Next stop is support at $1000, the peak from late May.

The RUT chart raises my concerns because it shows that traders are scared to carry their riskier high beta stocks into the long weekend. For this reason, I closed the put spreads on several of my condor positions today. If we attack Syria this weekend and/or something equally disconcerting occurs, we could have a market facing us Tuesday morning with extreme pent up selling pressure from global markets trading off on Monday. That could be ugly.

Volatility popped up to nearly 18% today, but settled to 17% at the close. This leaves us in the typical correction area of the VIX. We hit a high of about 17.5% in April as SPX pulled back about 3% to the 50 dma. The pull back in June was more severe at about 6%, and VIX hit a high of almost 21% at the low on June 24th. Today’s close on SPX at $1633 represents a 4.5% correction from the high on August 2nd.

The combination of a more severe pullback in RUT than SPX today together with the increase in the VIX caused me to take corrective action in advance of the long weekend. Maybe the Hindenburg Omen was correct. I closed the 930/940 put spreads in my September iron condor on RUT today. Assuming the Sep 1120/1130 call spreads expire worthless, this locks in a gain of 9.2% for the September position. I decided I would enjoy this long weekend more without thinking about those put spreads.

Enjoy your Labor Day weekend. For those of you in the north, grill a hot dog - time is getting short.

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Written by Dr. Duke

Created: 29 August 2013

Second quarter GDP was revised to an annualized growth rate of 2.5% this morning and many cited that as the impetus for today's rally. Others pointed to signs that Obama is calming his sword rattling campaign with Syria. Any parent would know that you don't issue ultimatums you can't keep, but he couldn't resist sounding presidential.

I found the CNBC chatter today interesting; many of their hosts and guests are citing the GDP data as evidence that the Fed will begin tapering soon. Bernanke has been very clear that his critical data point for that decision is unemployment. And everyone is politely ignoring the change in how the government calculates the GDP data - a change widely regarded as delivering larger, more positive numbers. Unemployment is continuing its slow change for the better with initial unemployment claims decreasing by six thousand this week, but we are far from the 6.5% unemployment rate target Bernanke cited in May.

SPX gained $3 to close at $1638, but RUT ran ahead, gaining $10 and closing at $1027. SPX is still far from regaining the 50 dma and this chart remains technically very weak - the damage has been done. By contrast, RUT's close today confirmed its break out above the 50 dma. Can it hold that level? Trading volume began to fall off, perhaps in advance of the long weekend. Trading in the S&P 500 dropped to 1.6 billion shares; trading volume dropped 9% on the NYSE and likewise decreased 3% on NASDAQ.

The most telling data point today was the VIX, which rose three tenths of a point to 16.8%. Yes, the VIX rose as the market averages rose. Hmmm... Maybe traders are thinking the same thing I am. Maybe I need to buy some puts in advance of a long three day weekend.

My Sept condor stands at a net gain of 12% with position delta on 20 contracts of +$30 and position theta = +$73. Fortunately the Sept 930/940 put spreads are about two standard deviations OTM in these uncertain times.

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Written by Dr. Duke

Created: 28 August 2013

After a pretty ugly day yesterday, the markets bounced back upward a bit today. SPX gained $4 to close at $1635 and RUT gained $3 to close at $1017. But one is left wondering why? The chart has been in a pretty consistent down trend since August 5, so was today just a bit of short covering before the next step lower? Or is the market beginning to hammer out a bottom?

Trading volume fell off with 1.8 billion shares of the S&P 500 stocks trading today. Trading fell 14% on the NYSE and decreased 16% on NASDAQ. Volatility remains relatively high at 16.5%, declining only a third of a point today. This tells me that the big institutional desks have not sounded the "all clear" just yet.

Pending home sales declined 1.3% in July, but real estate analysts all chimed in that this wasn't alarming given the recent increase in interest rates and assured us the real estate recovery is intact. That was the extent of economic data for today; GDP and unemployment claims come out tomorrow.

My Sept iron condor on RUT continues at a net gain of 10% with position delta = +$38 and position theta = +$78.

Now the questions remain: Is the potential conflict in Syria really the issue? Is the upcoming Washington debt/budget debate the issue? Is the question of Fed removing their stimulus the issue? I don't have the answers. But it is clear that caution is well advised given the seriousness of all of these issues facing the markets. With a three day weekend coming up, how will the institutional traders position themselves?

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Written by Dr. Duke

Created: 27 August 2013

The markets gapped open to the downside this morning and the losses just mounted as the day went on. The underlying drivers are being debated, but analysts point to talk of the U.S. entering the war in Syria and the coming debate in Washington surrounding budgets and the debt ceiling.

The interview with Secretary Lew on CNBC today where he drew a hard "no negotiation" line in the sand, appears to be leading the country to some ugly brinksmanship. Perhaps that exacerbated the nervousness over Syria. Another viewpoint is to cite this as simply a continuation of the decline that began August 5th. Whatever the underlying drivers are, it was an ugly day with SPX losing $26 to close at $1630 and RUT closing at $1013, down $25. As one might expect, volatility increased with the VIX at 17%, up almost two points on the day. Trading volume popped up to the 50 dma with 2.2 billion shares of the S&P 500 stocks trading today. Trading on the NYSE increased 25% and trading volume increased 16% on NASDAQ.

Consumer confidence surprised analysts by increasing a bit to 81.5 in August; analysts expected a slight pull back from the previous reading of 81.0. The Case Schiller Housing Price Index increased 0.9% on a seasonally adjusted basis (+2.2% non-adjusted), thus reinforcing the continuing housing recovery. But this reasonably positive news this morning did not seem to support this market as it opened down and just traded lower as the day wore on.

Today's drop in RUT and the volatility increase pulled my Sept condor down a bit to a net gain of 10% with delta = +$39 and theta = +$67. But the delta of the 940 put remains relatively low at 11.

So now we look to tomorrow to see if this slide continues or the bulls see these prices as a buying opportunity. You could argue that this bout of market weakness may make it less likely that the FOMC will taper this year and that could stimulate some bullish behavior. But that assumes that the FOMC takes market levels into account in their decisions?