Dr. Duke's Blog

Details

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.

Details

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.

Details

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?

Details

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...

Details

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?

Details

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?

Details

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.

Details

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.

Details

Written by Dr. Duke

Created: 09 August 2013

 The S&P 500 Index (SPX) opened up lower this morning and then the bulls tried to take it higher, but were once again rebuffed at $1700 (reached $1699 as the intraday high). Then the bears took over and traded it down to the low of the day at $1686. A compromise was reached as SPX closed at $1691, down $6. RUT traded more strongly, closing down one dollar at $1048. Volatility increased almost one point to 13.4%, which is still pretty low historically. Trading volume fell off with 1.8 billion shares of the S&P 500 stocks trading. Trading on the NYSE dropped 7% and trading volume decreased 13% on NASDAQ.

The first three days of trading this week created a lot of correction chatter, but the last two days appear more consistent with overall market trading since mid-July. During that period of time, SPX has traded from $1680 to $1710 and RUT has traded in the range of $1040 to $1062. Since the discussions of Fed tapering in September earlier this week didn't panic the market the way it did in late May, we may just see some sideways consolidation range trading for the near future. But the next Fed meeting is over a month away; traders may get nervous waiting.

I decided to leave my RUT Aug 1080/1090 call spreads open into next week. I will probably close them next week and allow the Aug 970/980 puts to expire worthless unless the market drops quite a bit. The Sept position stands at a net gain of $1,180 or +7% with delta = -$17 and theta = +$70.

I need to clear out of here and meet my wife for dinner. Have a great weekend.

Details

Written by Dr. Duke

Created: 08 August 2013

SPX opened strongly this morning and ran up to that psychologically important $1700 level. But then the bears pulled it back to $1688, all of this in a little over an hour of trading. But the bulls held the day, pushing SPX back up to close at $1697, up $7 on the day. RUT didn't trade as strongly upward but still gained $5 to close at $1049. Volatility cooled a bit with VIX dropping to 12.7%.

This morning's headline on Yahoo Finance is an excellent illustration of one of the most troublesome problems in our country today. The headline was: U.S. Jobless Claims Edge Up; Still point To Healing Labor Market". Who writes this stuff? Does he get a commission check from the administration? Initial unemployment claims increased by five thousand and continuing claims increased by 67 thousand. Tell those people that the labor market is healing. I remember when journalists were very scrupulous to never allow their opions and political posture be revealed in their reporting - but no more.

My Aug iron condor on RUT stands at a net loss of $1,700 or -8% with delta = -$43 and theta = +$141. The Sept position is up $1,140 or +7% with delta = -$22 and theta = +$71. I have my trading group meeting this evening, so I have to cut this blog short. I hope you are long PCLN...