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.
Who's In Charge?
- Details
- Written by Dr. Duke
Each day in the markets can be thought of as a tug of war between the bulls and the bears. Today's intraday pattern of trading was interesting. Both RUT and SPX hit their lows around 10:30 am ET, but then they diverged from each other. RUT traded sideways and closed at $1044, down $8 and near the low at $1043, whereas SPX recovered a fair amount of its losses, closing at $1691 for a loss of $6 on the day (the intraday low was $1685). Given that the RUT tends to lead SPX up or down, I find this divergence interesting. It suggests this market could go lower before it goes higher. With all of the talk about the Fed tapering and traders looking forward to the September FOMC meeting, I think the most optimistic near term course for the market is chopping sideways.
Trading volume today was pretty flat with 1.9 billion shares of the S&P 500 stocks trading (identical to yesterday and well below the 50 dma at 2.3B). Trading volume on the NYSE was down 4% and trading was up 8% on NASDAQ.
The VIX increased about one third of a point to close at 13%. As long as VIX remains reasonably calm in this 12-13% range, I doubt we will see a more serious sell off.
My Aug condor position stands at a loss of $1980 or -9% with delta = -$37 and theta = +$197. The September position stands at a P/L of +$880 or +5% with delta = -$17 and theta = +$78. Both positions are now delta neutral and well positioned, but who knows the future?
Another Bout Of The Taper Blues?
- Details
- Written by Dr. Duke
Comments from Fed officials yesterday and today have scared the markets once again. Recall May 22? Bernanke's attempt to be very clear about the FOMC's game plan wasn't well received. The market gave back 6% by June 24, but then, even more surprising, recovered all of those losses and hit new highs in short order. SPX lost $10 to close at $1697 while RUT lost $11 to close at $1052. Volatility rose nearly one point to 12.7% (as measured by the VIX).
Trading volume rose to 1.9 billion shares of the S&P 500 stocks, but this remains below the 50 dma at 2.3B. Trading on the NYSE increased 23% and also increased on NASDAQ, but not quite as much at +5%.
This is a light week for economic data, so it is hard to predict where this market may be heading. Depending on which Fed official is quoted each day may make a huge difference. If Bernanke frowns as he gets out of his limo, the market may crash! Maybe it isn't quite that bad, but I'm not far off the mark. In fairness, it is true that this scenario is new to Wall Street. No one knows how to value this market in the absence of Fed stimulus. Perhaps many traders have simply decided to take their profits and go on vacation.
Watch the area of $1680 to $1690 on SPX; that has been a strong support area through most of July. If we break down through there, we could find ourselves at the 50 dma at $1650 in no time. A similar area to watch on RUT's chart is $1040 to $1045. RUT's 50 dma is at $1009.
Today's market pull back was just the right medicine for my August iron condor on RUT. It now stands at a net 13% loss with position delta = -$90 and position theta = +$279 (on 20 contracts). My Sept position at 930/940 and 1120/1130 (mistyped those strikes yesterday) stands at a 5% gain with position delta = -$33 and position theta = +$70 (on 20 contracts). Both condors are back closer to delta neutral with today's pull back. I will apply the two sigma rule to the August position this Friday.
So we return to Fed watching...
Resilient Bulls
- Details
- Written by Dr. Duke
The ISM Services index came in this morning for July at 56.0, up from 52.2. But that didn't seem to have much effect on the markets; they traded in a choppy sideways pattern all day. But the bears could not take advantage of this indecision. The bulls held their own and minimized any damage. SPX closed again above the key $1700 level, at $1707, down $3 on the day. RUT gained $3 to close at $1063. Trading volume was minimal with 1.6 billion shares of the S&P 500 stocks trading. Trading volume dropped 19% on the NYSE and dropped 13% on NASDAQ.
The big news of the day was a record inflow of 40.3 billion dollars into equity funds in July. This reflects a large bond sell off but much of the capital coming out of the bond market is going into money market funds. While many traders are chasing this bull market, many are choosing safety and remaining in cash. The large equity inflows may be interpreted positively as part of the driving force behind this bull market. The contrarian viewpoint points out that the large inflow of capital often comes around the market peak. Hmmm...
The EuroZone PMI came in at 50.5 for July, up from June's 48.7, so Europe may be coming out of its recession. But it is early to make that call. Many European countries remain in serious economic difficulty.
My Aug condor continues to limp along with a net loss of 20% and position delta = -$204 and position theta = +$312. I am right on the edge of closing a portion of the call spreads and taking those losses. At this point, each day of time decay makes a big difference. My Sept iron condor on RUT at 930/940 and 1020/1030 stands at a net gain of $440 with delta = -$52 and theta = +$78. The indexes had a moderately strong upward move in the last minute of
trading today; RUT gained over a dollar in the last minute. It's hard to
say if that is a leading indicator of tomorrow's trading or just some
random move. Most of the one minute candlesticks were just one or two cents, so that last minute stood out on the chart.
Jobs Report Disappoints
- Details
- Written by Dr. Duke
The jobs report this morning was the last market moving event in a full week. The report disappointed the street with 162 thousand new jobs. The unemployment rate dropped to 7.4%, but many analysts brushed that away with concerns about a record low in the Labor Force Participation Rate, and the fact that many of the reported new jobs are part time, not full time.
The more positive number of 200k jobs reported by ADP earlier in the week didn’t correlate very well with the jobs report and this probably was a large part of the market’s disappointment – their expectations had been built up. You can see evidence of that in the bullish trading late in the day yesterday.
SPX closed at $1710, up $3 and RUT closed at $1060, flat on the day. Today’s disappointing jobs report would have sunk a weak market, but it couldn’t sink this market, with today’s closes matching or beating yesterday’s closes. So the economic environment may be weak, but the bullish market trend continues.
Volatility hit a recent low with a VIX reading of 12%. One has to go back to mid-March to find a lower value of VIX. One can view that as a bullish indicator, i.e., traders are confident the uptrend will continue. Or one can view this as a low before the VIX spikes upward, i.e., the calm before the storm.
Many analysts are skeptical of this bullish market because the underlying economic data are so weak. But one must remember that the corporate earnings this quarter have largely beat estimates. This economic recovery is certainly the weakest in history by a long shot, but companies are making money and that drives share prices.
Have a great weekend. Next week looks to be a slow week in terms of economic data, but we'll see if that correlates with a calm market. After all, this week didn't have the fireworks I would have predicted.
The Bulls Return
- Details
- Written by Dr. Duke
After digesting the FOMC announcement, the markets opened very aggressively this morning. SPX gained $21, closing at a new record of $1707. RUT also set a new record high at $1060, up $15. Volatility dropped a half point to 13.0%. Trading volume dropped off a bit with 2.3 billion shares of the S&P 500 stocks trading. Trading on the NYSE dropped 5% and trading on NASDAQ declined 4%.
The ISM manufacturing index came in at 55.4 for July, a two year high, and up from June's 50.9. This added fuel to the bullish sentiment of this morning's market.
Many analysts were watching for the jobs report tomorrow as the next significant market moving event this week. So this extremely bullish day in advance of the announcement was a bit surprising. Assuming the ADP report earlier this week is an early indicator of a more positive jobs report tomorrow, perhaps this bullish trend continues tomorrow. But an alternative view is that we set market highs today and a strong jobs report makes the market reconsider the Fed beginning to withdraw their stimulus and results in a bit of a pull back - difficult to predict. All one can do is hedge your positions.
Fed Watch
- Details
- Written by Dr. Duke
The Chicago PMI came in at 52.3 in July, up from 51.6 in June. This was slightly better than analysts expected. ADP issued their private jobs number at 200 thousand jobs created in July; traders were encouraged that this positive number may be indicative of a good jobs report Friday. GDP for the second quarter came in at an annualized gain of +1.7%. This was up from the first quarter and beat analyst expectations.
The FOMC announcement was largely unchanged from the previous announcement with a couple of key changes. Perhaps most significantly, there was no discussion of ending the quantitative easing programs; anyone who was expecting a timetable is disappointed. The committee also changed their assessment of the economic recovery to a slightly more pessimistic posture with language of a "moderate recovery" changed to a "modest recovery". The FOMC is also starting to see some early signs of growing inflation but doesn't see that as an imminent threat (yet). Increasing inflation is probably the largest risk to the Fed's stimulus programs.
Waiting On The Fed
- Details
- Written by Dr. Duke
The markets continue to trade in a tight range with neither the bulls or the bears in control. SPX chopped sideways most of the day, traded into negative territory in the afternoon, but recovered by the close to gain only one dollar, closing at $1686. RUT traded in a similar pattern, closing up $3 at $1044. The volatility index, VIX, closed unchanged at 13.4%. SPX is hammering out a support level at $1680 while RUT seems to be trading down to and bouncing off of support at $1040. Trading volume increased to 2.1 billion shares on the S&P 500 stocks, but remains below the 50 dma at 2.4B. Trading volume increased 16% on the NYSE and increased 21% on NASDAQ.
The Case Schiller Housing Price Index came in at an increase of 1% in May as compared to a 1.7% increase in April. Most analysts were expecting a slightly higher number but remain upbeat on real estate.
All eyes are on the FOMC announcement tomorrow afternoon. It is hard to predict how the market may respond.
MA reports earnings in the morning before the bell and I sold the AugWk1 570/575 and 625/630 iron condor in anticipation of the volatility crush after the announcement.
My Aug iron condor on RUT stands at a net P/L of -$3620 with delta = -$84 and theta = +$233. My short strikes are at 980 and 1080. As you can see from the Greeks, we are gaining quite a bit each day from time decay at this point in the trade.
Grab your popcorn and settle in for the FOMC Show tomorrow!
Consolidation
- Details
- Written by Dr. Duke
Most of today, RUT traded more weakly than SPX. In other words, one is tempted to say that RUT led the markets downward, but that would be extreme. The major market averages are all holding to early support levels. This is only a sideways consolidation thus far. SPX closed at $1685 for a loss of $6. SPX is holding just above a strong support level from $1670 to $1680. RUT closed down $8 at $1041. There is a weak area of support on the RUT chart around $1040. If RUT breaks $1040, there aren't any solid support levels until around $1000, near the 50 dma at $1001. Trading volume declined with 1.9 billion shares of the S&P 500 stocks trading. Trading volume was flat on the NYSE and declined 14% on NASDAQ.
The only significant economic data came in with pending home sales, which declined 0.4% in June after a strong 5.8% gain in May. Price Schiller and consumer confidence come out tomorrow. The FOMC meeting also begins tomorrow, but their announcement will be released Wednesday afternoon.
I don't expect to see much market action until after the FOMC announcement on Wednesday. Then we have the jobs report Friday as the finale.
My Aug iron condor on RUT continues to bleed off time decay, improving the position's P/L day by day. Today's net P/L is -$3,160 or -15% with position delta = -$50 and position theta = +$183 on 20 contracts. So the theta/delta ratio is very positive. Absent an extreme market move, the Aug position will continue to improve.
After several months of positive real estate market data, we seem to be seeing cracks in the story lately. It will be interesting to see if the Price Schiller price data continue to support that positive outlook.
RUT Diverges
- Details
- Written by Dr. Duke
The Standard and Poors 500 Index (SPX) paused its upward trek this week. The intraday price action on SPX both yesterday and today challenged $1680, but then bounced back upward. I think today's price action illustrates that the bullish foundation of this market is still very much intact. I think we are seeing the market pause as it looks forward to a key FOMC announcement next week.
But the FOMC announcement Wednesday afternoon is not the only possible source for market volatility next week. The Case Schiller Housing Price Index and the Chicago PMI are two influential and closely watch reports scheduled for next week. And we also have the second quarter GDP growth rate being reported as well as the granddaddy of market moving reports, the Non-Farm Payroll Report Friday. We may see a very volatile week in the markets.
During this strong bull market, the Russell 2000 Index (RUT) has traded even more bullishly than SPX. Market analysts see this as confirmation of the overall bullish trend, but today’s market action strikes me as a possible divergence. SPX opened down at $1687 and traded to a low at $1676. Then SPX steadily climbed all afternoon to close at $1692, recovering all of its losses and gaining one dollar on the day.
Based on the past few months, we might have expected RUT to post gains on a day like this, but it didn’t. RUT closed down at $1048 for a loss of $6. Is RUT signaling weakness ahead? Perhaps today’s divergence of RUT from SPX is just an aberration. But it is a signal worth keeping in mind. At a minimum, it underscores the need for caution going into next week.
My Aug iron condor on RUT is working off its deficit slowly with a net loss of $3,800 with position Greeks of delta = -$102 and theta = +$171.
Have a great weekend.
Hitting the Top?
- Details
- Written by Dr. Duke
The markets appeared to be losing their bullish steam today. SPX opened down and just slowly sunk throughout the day, closing at $1686, down $6. RUT lost $8 to close at $1044. Volatility increased about half a point with the VIX at 13.2% - still a relatively low number. Trading volume increased quite a bit, adding to the bearish mood. Trading in the S&P 500 stocks increased to 2.3 billion, still below the 50 dma. Trading on the NYSE increased 9% and volume on NASDAQ increased 13%, probably driven by a spike in AAPL trading after its earnings announcement.
Since the recent rise in the S&P 500 has been largely straight up, it is hard to cite strong support levels to watch in a pull back - perhaps $1680? The peak from May was around $1670 and the high in mid-June was around $1652.
The European PMI was issued today, reporting 50.4 for July. This was the first expansionary number (greater than 50) for 18 months, so it was a pleasant surprise, but Europe is far from out of the woods. Euro Zone unemployment stands at 12.2%. This pushed European markets higher but apparently reminded our traders that Europe remains a problem. New home sales came in at 497k for June, up from 459k, but I suppose good news in the real estate markets is old news.
The stellar run up since June 24 has proven difficult for my August iron condor on RUT. I started with the 860/870 put spreads and the 1050/1060 call spreads. I have hedged with Sep 1040 calls (sold today) and have rolled the call spreads twice, now at 1080/1090. The put spreads were rolled up to 970/980. The position currently stands at a net loss of $4700 with delta = -$71 and theta = +$189. Now I am simply managing the trade to minimize the loss for this month. We have a shot of coming out near break-even, but we'll see.
