Dr. Duke's Blog

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Written by Dr. Duke

Created: 02 July 2013

Today's trading pattern was very similar to yesterday with a bullish start and acceleration up to or just beyond the 50 day moving average (dma), but then a pullback to the close. The 50 dma is beginning to appear to be a substantial resistance level. Last Thursday marked another day where the 50 dma pushed the bulls back before the close of trading. SPX closed down $1 at $1614 and RUT closed unchanged at $989. Volatility remains unchanged at 16.4%. Trading volume rose modestly from yesterday with 2.3 billion shares of the S&P 500 trading today. Trading volume rose 6% on the NYSE and increased 7% on NASDAQ. The exchanges will be closed Thursday and will close early tomorrow, so I would expect volume to fall off markedly tomorrow. If not for the jobs report Friday morning, I would expect a very low volume trading day, assuming most traders will be out of the office. But an surprising jobs report might trigger some volatility on Friday.

The S&P 500 remains trapped between support at $1600 and the 50 dma at $1624. But I would prefer to see SPX break through $1640 before I would feel very confident about a return to the bullish trend that characterized trading this year until May 22nd. That era of unbridled enthusiasm appears to have ended. But I've been wrong before.

My July iron condor on RUT at 870/880 and 1060/1070 stands at a net gain of $2,840 or +17% with position delta = +$5 and position theta = +$41 (20 contracts). This position is remarkably delta neutral as we approach the two week mark until July expiration. What has happened to this year? I just became accustomed to writing 2013 on various documents and the year is half gone!

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Written by Dr. Duke

Created: 01 July 2013

Markets traded higher today, but couldn't hold those highs. SPX closed at $1615 for a gain of $9 after trading as high as $1627. RUT closed up $12 at $990. Trading volume was off significantly with only 2.1 billion shares of the S&P 500 stocks trading. Trading on the NYSE dropped 26% and trading volume on NASDAQ decreased 38%. I guess traders are taking off early for the holiday.

I was impressed with the strength of SPX this morning as SPX broke through the 50 dma at $1623, but it couldn't hold. Traders took their profits and pulled it back to $1615. The extremely low trading volume makes drawing conclusions difficult. Intraday volatility remains a common characteristic of this market. The sell-off this afternoon may suggest a larger number of traders who are concerned about losing their gains in this strong market. This will be an unusual week with a holiday Thursday and then the jobs report Friday morning. I'm not sure what to expect.

My July condor on RUT stands at a net gain of $2,660 or +16% with delta = -$10 and theta = +$67.

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Written by Dr. Duke

Created: 28 June 2013

SPX opened lower this morning and then sunk even farther after a disappointing Chicago PMI report. Then SPX strengthened and traded sideways roughly at no change most of the day, but then sold off at the close. SPX lost $7 to close at $1606 while RUT closed at $977, down $2 on the day. VIX ended the day unchanged at 16.9% after moving as high as 17.7% this morning. Trading volume was up with 2.9 billion shares of the S&P 500 stocks trading. Trading volume on the NYSE was up 32% and volume increased 49% on NASDAQ.

The Chicago PMI came in at 51.6 for June, down from last month's 58.7. But the University of Michigan consumer sentiment survey reported 84.1, up from 82.7. The Chicago PMI is closely watched by traders and probably set a negative tone for trading today.

SPX traded up and bounced off resistance at the 50 dma yesterday. This morning SPX traded down and bounced off support at $1600. So those are the "lines in the sand" to watch. A break out above the 50 dma at $1622 would be bullish and a break below $1600 would be a bearish sign. But this market remains very volatile; it is exceedingly difficult to determine a trend. The least little thing seems to push it either way and then it reverses course the next day. But support at $1600 and resistance at $1622 are at least the first signals of a break one way or the other.

My July iron condor stands at a net gain of $2,100 or +12% with position delta = +$24 and position theta = +$86.

Enjoy your weekend.

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Written by Dr. Duke

Created: 26 June 2013

SPX actually gapped open to the upside today and closed above resistance at $1600 with a gain of $15, closing at $1603. Next stop is the 50 dma at $1619. RUT gained $3 to close at $964. RUT's chart didn't look as bullish with a run up to $969, but then it pulled back to close at $964. Volatility trimmed back 1.3 points with VIX closing at 17.2%.

First quarter GDP was revised downward once again to a +1.8% annualized growth rate. It makes you wonder about the process that the initial report is always high and then keeps being trimmed back. Some analysts believe this poor showing for GDP actually helped boost the market in a "bad news is good news" effect, making traders think it more likely that the Fed's stimulus will last longer. One has to wonder when the markets will decide that Fed stimulus is actually having some ill effects on the economy. I don't claim to know where this is going, but I am skeptical that the Fed pumping this much into the markets for so long doesn't have some unanticipated consequences.

My July condor position on RUT now stands at a net gain of $2,000 or +12% with delta = +$31 and theta = +$69.

Be careful out there. I closed many positions last week and on Monday, but I'm not convinced it is safe to go back in the water. Maybe I have become gun-shy (for you city folk, it is a term used for hunting dogs that can't get accustomed to the loud noise of the shotguns).

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Written by Dr. Duke

Created: 25 June 2013

Traders breathed a sign of relief today as the markets essentially recovered all of the losses from the extreme lows yesterday. SPX closed at $1588, up $15 and RUT gained $10 to close at $961. SPX's close today is approximately at yesterday's opening price. SPX plunged to $1560 yesterday and then recovered about half of that carnage yesterday afternoon. Today it recovered the remaining losses.The VIX pulled back almost 2 points to 18.5% and trading volume fell markedly with 2.5 billion shares of the S&P 500 stocks trading today, right at the 50 dma. Trading volume on the NYSE dropped 16% and volume on NASDAQ dropped 18%.

A slew of positive economic data probably helped this recovery. Durable orders gained 3.6% in May and the Price Schiller housing price index increased 12.1% in April (a record for that indicator). Consumer confidence increased  from 74.3 to 81.4 for June and new home sales increased by 10k for May. All in all, this is probably the best set of economic data in quite a while. It isn't too surprising that these data encouraged traders.

Turning to the SPX chart, the index is bouncing just below resistance at $1600. The 50 dma is at $1619, so we have some significant progress that must be made before one can declare the correction is over. On the RUT chart, the corresponding resistance level is $955, so it was broken today. The RUT 50 dma = $966. But the simplistic choice is either 1) heading lower for a more severe correction, or 2) heading back into strong bull market mode. That ignores the very real (and I think more probable) possibility of a choppy sideways market for the balance of the summer. I think the first couple of weeks of earnings announcements may set the tone for this market.

My RUT July iron condor position stands at a net gain of $1,740 or +10% with position delta = +$28 and position theta = +$81. With a theta/delta ratio of just under 3:1 and about three weeks to go to expiration, this position is very strong.

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Written by Dr. Duke

Created: 24 June 2013

Wall Street took us on a a wild ride today. First we were spooked by the 5% decline in the Chinese markets overnight, and, of course, that was reflected in the S&P futures this morning. To my surprise, SPX opened roughly at yesterday's close (I expected worse based on the futures), but proceeded to drop like a rock to $1560 before rebounding a bit to close with a $19 loss at $1573. RUT traded down $13 and closed at $951. The wild ride was reflected in the VIX, ranging from 18.5% to nearly 22%. VIX closed at 20.1%, up 1.2 percentage points. The fact that it didn't close at the low of the day is significant - even the most optimistic trader was taken back by today's price swings.

At today's close, SPX is now down just under 6% from its highs in May. SPX has now sliced through the 50 dma and broken a strong support level at $1600. It is basically in no man's land here. The next strong support level is at $1540. Most analysts define a correction as a drop in value of 7-10%, so we are in the neighborhood, but could go lower. Today's rebound was encouraging, but I doubt we are out of the woods. I don't believe there is a rational basis for this drop of the past week or so (although the airwaves are full of explanations). I think we are just observing the natural market correction to earlier excesses.

My July condor on RUT at 870/880 and 1060/1070 stands at a net gain of $1,100 or +7% with position delta of +$43 and position theta of +$81 on 20 contracts. By the way, if you wish to compare the Greeks of your position with mine, just divide my position Greek by 20 and then multiply by the number of contracts in your position.

OK, the market is closed. Go relax and do something mindless (don't listen to the news; it might push you over the edge).

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Written by Dr. Duke

Created: 21 June 2013

That is the question being debated today. Yesterday's huge decline spooked traders, especially after the S&P 500 index broke through support at $1600 and plunged in afternoon trade. My read, for what it's worth, is that traders have been working in an unfamiliar environment for the past several years. They know the FOMC is and has been supporting the market, but that is a new and unprecedented factor to consider in their trading strategies and analysis of the markets. This is uncharted territory. Add on this incredible rally since mid-December and traders start to get nervous about losing those big gains. Hence, we have everyone overly focused on Bernanke and the FOMC this week. I would argue nothing new was said, but once a few traders started pulling their gains off the table, it started a panic run for the exits. In a strange environment where I have little or no experience to draw upon, I can reasonably conclude that a safe course of action is to go to cash and do it early.

The futures were positive this morning, but weakened as the market open drew closer. Trading was choppy all day. SPX managed a small gain of $4 to close at $1592 and RUT gained $3 to close at $964. SPX managed to get close to resistance this afternoon, trading as high as $1599. The VIX dropped 1.6 percentage points today, closing at 18.9% after running as high as 20.9% (yesterday's VIX was over 21% at one point). This drop in VIX was reassuring and serves as at least one data point suggesting the worst is over. I am inclined toward the view that we will see a choppy sideways market for the rest of the summer. The basic economic data have not been stellar, but they are slowly improving. And Bernanke has made it clear that stimulus will be withdrawn only as stronger employment data are reported. So the sky isn't falling.

Trading volume was huge today, due to quadruple witching: the simultaneous expiration of stock index futures, stock index options, stock options, and single stock futures. These four product expirations occur together once each quarter. Over 4.1 billion shares of the S&P 500 stocks traded today; trading on the NYSE increased 46% and volume increased 35% on NASDAQ. The negative trading earlier this week probably also contributed to the volume spike today as people bailed out of positions this morning.

My June iron condor on RUT at 890/900 and 1030/1040 will expire worthless tomorrow for a gain of 5.2%. RUT's settlement price is $964.44. I hedged the call side once and rolled the call spreads higher twice and rolled the put spreads higher once during this position's life, so we did well to salvage a small gain. My July condor stands at a net gain of $1,260 or +7.5% with position delta = $32 and position theta = +$74 on 20 contracts. For those of you trading SPX, it settled at $1599.93, an unusually large move from yesterday's close at $1588.19. The average differences between Thursday's close and settlement last year were $5.95 on SPX and $4.46 on RUT. So far this year, those differences are $4.69 and $2.42, respectively. I would not recommend carrying short index option spreads into expiration that were anywhere near that close to the index price, but there is the data, for your consideration - different stokes for different folks.

Enjoy the weekend.

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Written by Dr. Duke

Created: 19 June 2013

All eyes were focused on the Fed today. The official policy statement was essentially the same as last month: the economic recovery continues slowly, interest rates will remain low and the bond buying programs will continue. Bernanke attempted to communicate the Fed's "game plan" in his news conference, but reporters were naively looking for more specificity. To my mind, Bernanke communicated as well as possible given the unknown future circumstances: QE may begin to be reduced late this year and could end as early as mid-2014, but that depends on the measures of a healthy economic recovery, most notably a lower unemployment rate. Interest rates will remain low until inflation becomes a concern and that could be as late as 2015. What do Liesman and the rest of the CNBC bunch want? Do they seriously think the Fed can lay out a definitive time line without knowing where various economic indicators might be later this year? I might expect freshman college students to be this naive, but not mature adults. Perhaps this is indicative of the general trend in our country to want Big Brother to take care of us and eliminate all risk and uncertainty.

SPX traded down after the Fed announcement, closing down $23 at $1629. RUT lost $13 to close at $987. VIX dropped and then rose, ending the day unchanged at 16.6%.

My June position stands at a net gain of $821 or +4% with position delta = -$11 and position theta = +$266. The July position stands at a net gain of $1,240 or +7% with position delta = -$11 and position theta = +$121. I will be watching the charts closely tomorrow to see if the markets trade lower or just start to chop sideways a bit. It often takes a couple of days for traders to absorb the implications of the Fed announcement.

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Written by Dr. Duke

Created: 18 June 2013

All eyes and conversations are focused on the Fed and tomorrow's announcement and news conference. So why did the bulls go crazy in the markets today? Beats me. I suppose one has to conclude that the consensus is that the Fed will not say anything to suggest a discontinuation of quantitative easing anytime soon. I think this market action just makes it even more likely that we will see extreme volatility in the markets after the announcements tomorrow. SPX gained $13 to close at $1652, but RUT was even more bullish, rising $12 to close at $1000. VIX decreased a touch to 16.6%. Trading volume declined with 2.1 billion shares of the S&P 500 trading. Volume decreased 6% on the NYSE and decreased 1% on NASDAQ.

If we look for economic data to explain today's huge bullish run, we will be disappointed, or at least perplexed. CPI came in for a modest 0.1% increase in May, which is good news on the inflation front. But economists expected 950k housing starts and received 914k. 974k building permits were issued in May, as compared to 1005k last month. So this crop of data just reinforces the now familiar "not too bad, but not too good" theme of the past several months.

My June iron condor on RUT stands at a net gain of $780 or +4% with delta = -$21 and theta = +$118. The July position stands at a net gain of $1,160 with delta = -$49 and theta = +$103.

The bullish nature of the markets this week has me very concerned. I think we are now positioned where even the slightest frown from Bernanke will send the markets tumbling. This Fed announcement and news conference has attracted more attention than any previous meeting, and that sets up the possibility of extreme reactions on the basis of virtually nothing substantive - be careful.

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Written by Dr. Duke

Created: 17 June 2013

Traders appeared to be assuming that the Fed isn't likely to change its accommodative posture later this week as they traded the market higher this morning. But the Financial Times reported around 2pm ET that Bernanke will announce that the Fed will begin to taper their QE soon. The selling quickly took the S&P 500 index down $15, but then it recovered somewhat into the close at $1639, up $12 on the day. RUT gained $6 to close at $988. The VIX rose about a third of a point to close at 16.8%.

The bulls were encouraged by two economic data reports this morning; the Empire manufacturing survey came in for June at 7.8, up from a negative 1.4. The NAHB housing market index reported at 52 for June, up from 44. It is telling that an opinion expressed in a publication seems to carry as much weight as economic facts in this market environment. Wednesday afternoon could be a real roller coaster ride.

My June iron condor position on RUT stands at a net gain of $735 or +4% with position delta on 20 contracts at -$19 and theta = +$156. The call spreads are over two standard deviations OTM, so I will allow both the call and put spreads to expire worthless this weekend. The July position stands at a net P/L of +$1,100 (+6.5%) with delta = -$14 and theta = +$106.

Be careful this week; this market is touchy.