Dr. Duke's Blog

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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?

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Written by Dr. Duke

Created: 26 August 2013

The markets rose this morning in spite of durable goods orders falling off by 7.3% in July - quite the contrast from the 3.9% increase in June. But the market shrugged off the bad news and traded higher until a little after 3 pm ET, when the tensions in Syria appeared to be heating up with some strong words from Secretary Kerry. News reports of an impending debt crisis fight in Washington are also starting to take their toll. But I think that crisis will be pushed to the back burner behind the September FOMC meeting. When all the traders return after Labor Day, FOMC will be the focus (absent a blow up of some kind in the Middle East).

SPX closed down $7 at $1657, after trading ten points higher most of the day. RUT was unchanged at $1038. Volatility fell below 14% early in the session, but rose in the last hour, with VIX closing up one point to 15%. Trading volume in the S&P 500 stocks fell to 1.6 billion shares. Trading volume fell 7% on the NYSE and dropped 6% on NASDAQ. Today's close on SPX took it back below the 50 dma that it struggled to break last week. In a similar fashion, RUT cannot break resistance at $1040. The market is mildly bullish at this point, but those bulls are cautious. It won't take much to spook them.

My Sept RUT iron condor at 930/940 and 1120/1130 stands at a net gain of 13% with position delta on 20 contracts at +$10 and position theta = +$69. Tomorrow brings the consumer confidence numbers and the Case Schiller housing price index.

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Written by Dr. Duke

Created: 23 August 2013

This was a relatively slow week for economic data, with the exception of the Fed minutes being released. But economic reports continue to be mediocre or weak with the notable exception of real estate. Earlier this week, existing home sales hit a three-year high, continuing a stream of positive data supporting the notion of a recovery in real estate. But some negative news appeared this morning when new home sales tumbled in July to 394k, down from 455k in June. But the markets gapped open upward this morning. Are we back to a point where bad news is interpreted as good news with the reasoning that it will cause the Fed to continue pumping money into the markets? The release of the FOMC minutes made it quite clear that a diversity of views exist in the FOMC on whether to taper now or later, or even what data should trigger a decision.

SPX ran up $7 to close at $1664 while RUT only increased $2 to close at $1038. Today's close by SPX finally broke above the 50 dma. SPX had unsuccessfully challenged that level for the past four days. Volatility dropped again today with the VIX closing at 14%. Trading volume was up a bit with 1.9 billion shares of the S&P 500 stocks trading. Trading volume was flat on the NYSE and appeared to be huge on NASDAQ with +63%, but that was an anomaly following the NASDAQ outage yesterday.

My Sep iron condor on RUT stands at a 14% gain with delta = +$9 and theta = +$48. This should be an interesting ride between now and September 18th (the FOMC announcement). Hold on tight.

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Written by Dr. Duke

Created: 21 August 2013

As expected, the FOMC minutes resulted in a lot of price volatility this afternoon. Immediately upon the release, SPX dropped $9 in less than 10 minutes, and then reversed on a dime and shot up almost $18 in the next 40 minutes. If that wasn't enough, then SPX turned and dropped over $14 before the close at $1643 for a net loss of $10 on the day. RUT gave up $7 to close at $1022. SPX tried unsuccessfully once again to regain the 50 dma at $1658. The most pessimistic signal I saw today was a one point increase in the VIX to 15.9%. This shows that traders are beginning to be concerned that this pullback may gain momentum; we are now down 4% from the early August highs. Are we heading for a more serious correction of 10% or more? As a reminder, the correction in August of 2011 was over 20%.

The Fed minutes seemed to throw cold water on the notion that the committee is poised to begin tapering in September. The consensus of economic analysts, at least as represented by interviews on CNBC over the past week or so, appeared to favor tapering beginning in September. Many of the guests acted as though this was a foregone conclusion. But it appears that the committee was largely divided on that issue, at least at the last meeting. As I read the minutes, it appears that multiple viewpoints are represented on the committee on the timing and duration of tapering, as well as adherence to the 6.5% unemployment "line in the sand". Maybe that is why the market's reaction this afternoon was so volatile. It will be interesting to observe the market at the open tomorrow after thoroughly digesting the minutes. HP's earnings announcement may tend to favor the bears tomorrow. We'll see.

Does this continuing lack of clarity lock us into a sideways consolidation until the September Fed meeting? Or does it give the bears control?

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Written by Dr. Duke

Created: 20 August 2013

The markets bounced back upward strongly today and it was hard to say why. Many analysts pointed to the earnings announcements from Best Buy, TJ Maxx, and other retailers, but closer analysis reveals a mixed bag. Actually, this is becoming a common theme for this market: big moves up or down with the market analysts struggling to understand the drivers. SPX closed up $6 at $1652 and RUT soared $15 to close at $1029. However, it is interesting that volatility did not decrease by any meaningful amount. VIX closed at 14.9%, down only two tenths of a point. Hmmm...

SPX tried to move back above the 50 dma at $1658, but failed to hold it. By contrast, RUT blew through the 50 dma at $1020, closing well above at $1029. This strong performance by RUT would seem to be a bullish sign, but I'm not sure any of our conventional wisdom holds in this market.

Trading volume was pretty flat with 1.9 billion shares of the S&P 500 stocks trading, up from yesterday's 1.8B but well below the 50 dma. Trading volume on the NYSE dropped 0.2% and trading volume on NASDAQ decreased by 9%.

I have resisted adding any new positions this week because of the release of the minutes from the last FOMC meeting tomorrow afternoon. It should be a "yawn", but who knows with this market? Everyone is trying their best to read the tea leaves and that often leads to imagined boogeymen.

My Sept iron condor on RUT stands at a net gain of 8% with position delta = +$17 and position theta = +$89. Now we wait on the market's reaction to the Fed minutes...

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Written by Dr. Duke

Created: 19 August 2013

That is the question as the markets trade downward again today. SPX broke through its 50 day moving average (dma) and lost $10 to close at $1646. RUT lost $11 to close at $1013. Volatility rose almost one point with VIX closing at 15.1%. Trading volume was down from Friday. Trading volume always drops off from expiration Friday, but the trading in the S&P 500 stocks has dropped each day from Thursday of last week; today 1.8 billion shares traded; the 50 dma = 2.2B. Trading volume on the NYSE was down 21% and volume was down 5% on NASDAQ.

SPX broke the support level at the 50 dma today, but it also broke through support at about $1652, set in late June just before the bottom of that pull back was reached. The next solid support level for SPX is around $1610. RUT's chart is equally ugly with RUT decisively breaking through the 50 dma at $1019. The next support level on RUT is around $1000.

There was no economic news to drive the market today, but we have the FOMC minutes from the last meeting being issued Wednesday afternoon. That would be a good time to be on alert for some market volatility. It appears that traders have now concluded that the Fed will announce tapering of the stimulus programs at the September meeting and they are taking money off the table. The last time traders were spooked about tapering, RUT bottomed around $951 (-5%) and SPX bottomed around $1574 (-6%). Alternately, we could look at 5% and 6% pullbacks, respectively, from the early August highs and that gives us $1010 on RUT and $1607 on SPX. That analysis takes us quite a bit lower on SPX, but RUT is very close at today's close of $1013.

Fortunately, my put spreads in the Sept position are still relatively far OTM at 930/940. The position stands at a net gain of 7% with delta = +$38 and theta = +$64. I think it is reasonable to assume we won't continue to drop until September 18 when the FOMC announcement comes out and Bernanke holds his press conference. So the question is, where is the equilibrium point where traders are comfortable and willing to tread water in advance of the announcement?

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Written by Dr. Duke

Created: 15 August 2013

Analysts and market gurus have been predicting a correction for most of this year. And since the market reversed on a dime and recovered all of the 6% correction in June, they have resumed their message: a correction will be good for the market. Well, today they received at least a start on their healthy market elixir. SPX lost $24 to close at $1661 while RUT closed at $1028, down $20. Volatility popped up almost two points, with VIX closing at 14.7%. Although I was a bit surprised VIX didn't spike higher on today's market move.

Many observers thought the market was reacting to the weak Philadelphia Fed and Empire Manufacturing numbers, but the futures were down over ten points before those reports were released. The Philadelphia Fed survey for August came in at 9.3, down markedly from July's 19.8. The Empire Manufacturing survey dropped a bit to 8.6 from last month's 9.5. Industrial production and capacity utilization data were both flat for the month. The CPI came in at +0.2%; is it starting to inch up? Initial unemployment claims dropped to 320k, down 15k, while continuing claims dropped 54k. All in all, the data didn't seem too bad. After all, you would think we would be getting accustomed to poor economic data. I'm not sure what started this down draft, but traders were anxious to protect their gains once it started. Today also didn't fit the "good news is bad news" theory of predicting whether the Fed will start to taper stimulus. On that basis, one would have thought today's weak data would have rallied the market.

SPX sliced through support at $1680 and $1670, and appeared to find support at the 50 dma ($1657), hitting a low of $1659 today. The mid-June peak at $1052 may be a support level to watch if the 50 dma is breached. RUT is in "no man's land" on its price chart. RUT gapped down at the open and broke support at $1040. The 50 dma is at $1018 and solid support can be found at $1000.

This pullback essentially guaranteed that my Aug spreads on RUT at 970/980 and 1080/1090 will expire worthless this weekend. My Sept position at 930/940 and 1120/1130 stands at a gain of 8% with position delta = +$27 and position theta = +$60.

Will this really get ugly or is this just a minor pull back as the market awaits the September FOMC meeting?

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Written by Dr. Duke

Created: 14 August 2013

The bulls and the bears appear to be at a stalemate here. For several days now, the market has opened strongly and spurted upward, but then quickly reversed downward. Much of the news and CNBC commentary throughout the day has been focused on Bernanke and the FOMC. Everyone is consumed with the Fed tapering their QE programs and arguing about whether that tapering will begin in September.

A good example was this afternoon when one of the FOMC members was quoted as saying that tapering wouldn't begin in September. The markets popped up a bit on that news, but it didn't take long before those gains were lost and the market actually dipped lower. In the meantime, it appears as though traders are sitting on the sidelines, reluctant to commit additional capital to this market. SPX lost $9 today, closing at $1685. RUT closed down $4 at $1048. The VIX increased about half a point to 12.9%.

Trading volume continues to be very low and this is actually consistent with the stalemate view expressed above. Only 1.8 billion shares of the S&P 500 stocks traded today and the 50 dma stands at 2.3B shares. Trading on the NYSE decreased 3% and trading volume dropped 1% on NASDAQ.

The Producers Price Index, PPI, was announced this morning for July and, surprisingly, was a big fat zero. I would have thought we would be seeing the early signs of an inflation surge with all of this money being pumped into the markets. I think this reflects the extreme weakness of this economy; it is much weaker than reported in the media.

My Aug condor position at 970/980 and 1080/1090 stands at a 7% loss, assuming both spreads expire worthless this weekend, and that appears likely at this point. Fortunately, my Sept condor position stands at a P/L of +$1620 or +10% with position delta = -$15 and position theta = +$68. This is a good example of managing the risk on each trade so that losses are constrained to be of the order of the gains in a good month.

So now we return to the market watch. Try not to fall asleep.

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Written by Dr. Duke

Created: 12 August 2013

The markets plunged at the open this morning, but almost immediately recovered and had traded back to "even" by noon. But then SPX weakened and recovered a bit before the close at $1689, down $2. RUT traded more aggressively, recovering its opening losses before 10 am ET, and stayed in the black all day, closing up $5 at $1054. Trading volume dropped again today with 1.7 billion shares of the S&P 500 stocks trading. Trading volume on the NYSE and on NASDAQ each dropped 8% today.

Volatility dropped almost one point to 12.8% (as measured by the VIX).

Today was a light day for economic news. We get retail sales tomorrow, the PPI Wednesday, and then the CPI and unemployment claims on Thursday. Barring any surprises in those announcements, I expect this market to continue sideways as everyone is either on vacation, or sitting on the sideline pondering whether tapering will start in September. A CNBC survey of economists found a large majority expecting the Fed to begin tapering in September in spite of the fact that the unemployment rate will not be even close to the 6.5% figure Bernanke stated as their trigger. Why would Bernanke go to such an extent to communicate that guideline and then ignore it?

My RUT Aug condor at 970/980 and 1080/1090 stands at a 7% loss with delta = -$42 and theta = +$194. Our earlier adjustments of this position as the market traded straight up have successfully minimized the loss. The Sept position at 930/940 and 1120/1130 is up $1520 or +9% with delta = -$23 and theta = +$63. The good news is that the September position has already recovered the August losses.

RUT has been trading much more bullishly than SPX the past 2-3 sessions. SPX is being held back by strong resistance at $1700. Time will tell if RUT is effectively forecasting an increase by SPX or whether RUT will be pulled back by the blue chip stall.