Dr. Duke's Blog

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Written by Dr. Duke

Created: 26 July 2013

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.

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Written by Dr. Duke

Created: 24 July 2013

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.

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Written by Dr. Duke

Created: 23 July 2013

Markets slowed a bit today and basically wandered sideways. SPX dropped $3 to close at $1692 and RUT lost $1 to close at $1052. So RUT continues to lead SPX in a bullish fashion, pulling back a bit less on a dull trading day. Trading volume was mixed with only two billion shares of the S&P 500 stocks trading. That is an increase over yesterday, but well below the 50 dma. Trading volume increased 8% on the NYSE and increased 6% on NASDAQ. Volatility was largely unchanged with VIX at 12.7%, up less than half a point.

The only hard economic news today was the FHFA Housing Price Index, reporting an increase of 0.7% in May, up from April's +0.5%. This is consistent with all of the real estate data of the past 2-3 months. The granddaddy of real estate pricing data, Case Schiller, comes out July 30.

The most exciting thing going on in an otherwise boring market was anticipation of Apple's earnings announcement and how to play it. The ATM straddle was pricing in a move between $397 and $449. Thus, the question: would the move be greater or less? If you were in the "greater" camp, the straddle was the right play. But I couldn't believe that the large crowd of Apple naysayers would surrender easily. On the other hand, playing a lesser move with an an iron condor did not appeal to me. It just seemed too probable that AAPL might surprise the market with something clever or simply surprise the naysayers with even greater piles of cash. So, in the end, I sat on my hands - when in doubt, preserve your cash. As of this moment, AAPL is trading up $15 at $434. So, once again, the options market had it priced rather well. The iron condor would have been a good play.

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Written by Dr. Duke

Created: 22 July 2013

The major market averages all tacked on a few more points today as this bullish run continues. SPX closed at $1696, up $3 and RUT gained $3 to close at $1053. The VIX dropped a quarter of a point to 12.3%. Trading volume declined, although part of that is misleading since trading volume on this past  Friday was unusually high, as it always is on expiration Friday. Trading volume in the S&P 500 dropped to 1.9 billion shares and trading on the NYSE dropped 16%. Trading on NASDAQ declined 15%.

Existing home sales for June came in at 5.08 million (annualized); this was down from the previous month's 5.14 million and lower than analyst predictions at 5.28 million. Several analysts I read claim the drop was primarily in the category of distressed sales, and therefore wasn't significant.

SPX gapped open this morning, but ended the day with a candlestick similar to a doji, representative of a trading day where neither the bulls or the bears were in strong control. The question on traders' minds is: Where should this market trade in the absence of Fed stimulus? The FOMC meeting is coming up next week. It should be interesting to see what they say and how the market responds.

This is a light week for economic data, so we may continue to see this slightly bullish slow climb higher continue this week.

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Written by Dr. Duke

Created: 18 July 2013

Bernanke completed his two days before Congress today and apparently succeeded in not spooking Wall Street. SPX gained $8 to close at $1689 and RUT closed at $1050 for a gain of $8 on the day. Volatility was unchanged with the VIX at 13.8%. Trading volume in the S&P 500 jumped up to the 50 dma at 2.4 billion shares. Trading volume on the NYSE was unchanged, but was up 10% on NASDAQ.

Today's economic news was reasonably positive with initial unemployment claims dropping 24 thousand to 334k. Continuing unemployment claims declined 63 thousand to 2.96 million. The Philadelphia Fed survey moved to 19.8 for July, up significantly from June's 12.5.

So it appears that the formulas of mediocre economic growth coupled with Fed stimulus continue to push this market higher. It doesn't seem like the current level of economic recovery is sufficiently robust to drive a bullish market as strong as what we have witnessed, but it has...

We don't have any major economic data being reported tomorrow and presumably we won't hear from Bernanke for a while. So will Friday be a dull nowhere trading day? Or will the bulls continue their buying spree? Or will Google cast a shadow on the market? (They missed earnings after the bell today.)

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Written by Dr. Duke

Created: 16 July 2013

Bernanke will be testifying before Congress Wednesday and Thursday. It appears as though traders were taking some of their profits off the table just in case his comments spark another rout like we had in May and June. On the other hand, his comments could spark an incredible rally like we saw last week after his speech in Cambridge. One thing is clear: it is impossible to predict the market's reaction.

SPX closed at $1676, down $6 and RUT lost $5 to close at $1039. Volatility rose almost a full percentage point to 14.4%.

The economic data that were reported today didn't help the markets. Industrial production increased 0.3% (better than last month's zero, but still poor). Capacity utilization was flat at 77.8% and the CPI rose 0.5%. Increasing inflation could put a serious cramp in Bernanke's efforts to shore up this economy. That wouldn't be fun for anyone, whether you are a Bernanke fan or not.

When the RUT opened up weakly this morning, I took that opportunity to close my July 1060/1070 call spreads. For those of you with more patience, you would have received a much better price later in the trading day. Assuming the Jul 870/880 puts expire worthless this weekend, this results a gain of 10.7% for July and pushes the year to date results for Flying With The Condor™to +5.2%. Normally, I pride myself on beating the S&P 500 index performance, but I still lag far behind this year. Hopefully, I will continue to close the gap in the coming months.

Grab your popcorn and let's watch the Bernanke games...

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Written by Dr. Duke

Created: 15 July 2013

The markets slowed a bit today, but not much. SPX opened higher this morning and then pulled back into negative territory; but by late morning, it had moved into positive gains and stayed there the rest of the day. SPX gained $2 to close at $1683. RUT continues to lead the markets and today was no exception. RUT gapped open this morning and gained $7 to close at $1043 for a new all-time high. Trading volume fell off from Friday with only 1.8 billion shares of the S&P 500 trading today. Trading volume declined 11% on the NYSE and also declined 7% on NASDAQ.

We heard some positive economic news today and that may have helped push markets higher. Retail sales for June increased 0.4% and the Empire manufacturing survey increased to 9.5 from the previous month's 7.8. The FOMC Beige Book comes out on Wednesday and Bernanke testifies before Congress Wednesday and Thursday, so we might expect some market volatility around those events.

I chose to allow some more time decay to assist my July 1060/1070 call spreads and held them open over the weekend,  but I will close those spreads soon. The July condor position on RUT stands at a gain of +6% with position delta = -$221 and position theta is a whopping +$801. IBM announces earnings Wednesday after the close; that announcement will be watched carefully as an indicator of the economy's health.

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Written by Dr. Duke

Created: 10 July 2013

The markets basically slogged slowly sideways on low volume as traders waited to read the FOMC minutes. I listened to several of the talking heads on CNBC complain about the lack of a "clear timetable" - really? How can Bernanke deliver a clear timetable when Fed actions have been clearly communicated as dependent on economic data to assure the committee that the economy is strong enough to stand on its own? Do we expect him to predict that unemployment will decline to 6.5% in September and then he will reduce the bond purchases by 15% each month, etc.? Really?

This is the reward Bernanke receives for his attempts to better communicate FOMC reasoning and decisions. Perhaps this is just more evidence of why the FOMC had no business doing QE in the first place.

SPX closed the day flat at $1653 while RUT gained $2 to close at $1020. VIX was essentially unchanged at 14.2%. Trading volume was flat with 2.1 billion shares of the S&P 500 trading. Trading volume declined 5% on the NYSE and volume declined 4% on NASDAQ.

My July condor position stands at a net gain of 15% with position delta = -$34 and theta = +$222. The 1050/1060 call spreads are far OTM (delta of the 1050 call = 4), but I will most likely close them this week unless the market pulls back from these levels.

Bernanke will deliver the Humphrey-Hawkins report to Congress next week, so the Fed watching craziness is far from over.

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Written by Dr. Duke

Created: 09 July 2013

The markets continue to amaze me. I recognize that the economy has been showing improvement, but we still have record unemployment and corporate earnings are being held up only because those companies dumped so many people when the financial crisis started. But the markets continue to march higher and they aren't moving slowly. SPX tacked on another $12 today to close at $1652 while RUT set another all time high at $1018, up $9. Trading volume declined significantly today with 2.1 billion shares of the S&P 500 stocks trading; trading volume declined 7% on the NYSE but increased 7% on NASDAQ. The VIX declined to 14.4%, bringing it back to the levels in late May just after the markets started this most recent decline.

SPX broke support at $1650 today. SPX has gapped upward at the opening bell for the past three sessions, as has RUT. In addition, RUT has set new all-time highs for three days in succession. What can I say? This is exceptional behavior.

The FOMC minutes will be released tomorrow at 2 pm ET, so watch the markets as that happens. I don't expect anything new from those minutes, but don't forget how the market reacted to Bernanke in late May - the market doesn't have to be rational. Bernanke also has a speech scheduled tomorrow, but it will occur after the market closes. That could affect Thursday's open, but again, I doubt it.

My July condor position stands at a net gain of $2,860 or +17% with delta =-$28 and theta = +$55. Unless the market slows, the 1050/1060 call spreads will probably flunk the Two Sigma test this Friday. So I look forward to my recent early morning routine: as soon as I climb out of bed, I check the S&P futures and say, "good grief - positive again". I long to go back to my normal routine where I at least get a cup of coffee before checking the news, overnight markets, and then the futures.

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Written by Dr. Duke

Created: 08 July 2013

Friday's jobs numbers stimulated some bullish trading, and I was surprised to see the market indexes gap open and continue that upward trend today. SPX traded up $9 and closed at $1640. RUT closed at $1009, up $4. This makes the second day SPX has closed above the 50 day moving average, so I think we can safely say that that resistance level has been broken. SPX had bounced off that resistance several times, but now seems to be well on its way higher. Trading volume in the S&P 500 jumped up above the 50 dma to 2.6 billion shares. Trading volume was up 15% on the NYSE and increased 20% on NASDAQ, but those increases were off very low numbers on Friday. The VIX actually increased this morning, but then settled back down to 14.8%, up one tenth of a point on the day.

The FOMC minutes will be released Wednesday. Alcoa started the earnings announcement parade this evening and the early market response appears positive. It is possible that some comments in those Fed minutes or some earnings surprises later this week might derail this bullish recovery, but this market is looking pretty solid at this point.

My July iron condor position stands at a net gain of $2,900 or +17% with position delta on 20 contracts = -$21 and position theta = +$51.