Dr. Duke's Blog

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Written by Dr. Duke

Created: 14 June 2013

I was surprised by the huge recovery spike upward yesterday. If that was surprising, then today's move back down, wiping out almost half of yesterday's gains was equally surprising. SPX closed down $10 at $1627 and RUT closed at $981, down $8. Last week's jobs report was the most closely watched jobs report in some time. Next week's FOMC announcement and Bernanke's news conference will also be very closely watched. Every word of the announcement will be studied and compared to the last announcement. Bernanke's news conference will be recorded and replayed many times, looking for clues. But this may be similar to people playing the Beatles' records backwards in the sixties, looking for some hidden message. I don't think the message is there.

Bernanke has made it clear that he is looking for significant improvement in unemployment before withdrawing stimulus. If unemployment is improving, it is miniscule at best. In any case, the bottom line is this: 1) I don't expect much movement in the markets between now and Wednesday afternoon, and 2) the latter part of next week could be a wild ride depending on the market's interpretation of the FOMC announcement, rumors, and crowd psychology.

Today's economic data supports the mediocre, muddling along viewpoint of the economy. PPI rose 0.5% in May and industrial production was unchanged. Capacity utilization was flat at 77.6% and the University of Michigan consumer sentiment survey dropped to 82.7 for June from 84.5.

My June condor stands at a net gain of $540 or +3% with delta = -$13 and theta = +$159. I decided not to close the June 1030/1040 call spreads today. They remain not quite two standard deviations OTM. My July position stands at a net gain of $1,040 or +6% with delta = -$3 and theta = +$89 (each position consists of 20 contracts).

Have a nice weekend.

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Written by Dr. Duke

Created: 13 June 2013

Apparently I was naive to think yesterday's reversal was unusual volatility - today's moves made that look like a walk in the park. Early this morning, the S&P futures were very negative and SPX opened at $1612 and traded down about $4 before starting a steady run upward and never faltered for a moment. SPX closed at $1636, up over $24 - wow! RUT followed suit with a gain of $17, closing at $990. Trading volume was mixed with 2.2 billion shares of the S&P 500 stocks trading (still below the 50 dma); trading on the NYSE increased 8% but trading volume decreased 2% on NASDAQ. VIX dropped off by over two points to 16.4%.

So what incredibly good news prompted this huge move upward? Initial unemployment claims came in this morning and decreased 12 thousand from last week. Continuing claims decreased two thousand out of three million. If you have followed this data, you know that neither of these moves are significant; the trend in unemployment claims has been essentially flat for several months. This report came out well before the market open, so that wasn't the source of the big bull run upward that started about an hour after the market opened this morning. Retail sales reported an increase of 0.6% for May which was a bit better than the previous month's 0.1% increase, but again, that report doesn't seem likely to have unleashed the bulls on a rampage.

Today's candlestick on SPX is the classic bullish engulfing pattern and suggests a reversal of this downward move of the past couple of weeks. However, I find this market's reversals back and forth to be rather erratic and I wouldn't bank on any one signal. The recent price swings defy any common sense. I can almost hear some of you saying that's typical of the markets, and I agree to some degree, but the recent volatility is extreme by any measure and normally the stimulus behind the move is obvious. I believe the source of this extreme volatility is the strong presence of the Fed in today's markets. Traders are left guessing whether Bernanke is about to withdraw the quantitative easing next month or next year. So if you think Ben is staying with us, you go all in, but if you think he is planning his exit, you take your money off the table. That leaves us subject to crowd psychology and rumors as traders run from one side of the market to the other and then back again.

My June position stands at a net gain of $280 or +2% with delta = -$18 and theta = +$207. The July condor position stands at a net gain of +$520 or +3% with delta = -$26 and theta = +$110. The theta/delta ratios of both positions are very strong. I will apply the Two Sigma Rule to the June position tomorrow, and it looks likely that I will close the June call spreads.

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Written by Dr. Duke

Created: 12 June 2013

The S&P 500 opened up this morning and quickly rose $7 to $1638, but then turned and dropped to $1617 - a $21 swing before noon! Then SPX steadily declined to close at $1613, down $14, and near the low of the day at $1611. RUT lost $9 to close at $972 and volatility rose almost another two points, with the VIX closing at 18.6%. This is getting serious. SPX bounced off the 50 dma at $1611 late this afternoon, but appears to be setting up to challenge support at $1600 tomorrow.

The fascinating part of this story is the reasoning given by all of the talking heads: they claim traders are concerned about the Fed reducing its stimulus programs. It seems to me that Bernanke has been extraordinarily open about the criteria for withdrawing the quantitative easing, citing an improvement in unemployment to 6.5% or better. Since unemployment stubbornly remained high and even ticked up a bit in the last report, why the panic? I don't know. It is true that the market is always discounting the future, but this seems extraordinary. Well, we can check the unemployment claims data in the morning, but I doubt that we will see that number of claims have suddenly dropped from last week.

My June condor stands roughly at break-even with delta = +$22 and theta = +$192. The call spreads are slightly less than two standard deviations OTM and the put spreads are over two standard deviations OTM, so this position is quite safe with just over a week to go. The July position stands at a net gain of $620 or 4% with delta = +$5 and theta = +$84. So now we wait to see if SPX bounces off the 50 dma or heads lower. Perhaps the long awaited correction is here.

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Written by Dr. Duke

Created: 11 June 2013

The Bank of Japan disappointed traders by failing to augment its stimulus programs, so markets around the world sold off. Heaven help us when the Fed announces they are withdrawing! SPX opened and traded down as low as $1623 and then recovered nearly all the way to $1640 by noon, only to sell off and close near the lows of the day at $1626, down $17. RUT lost $11 to close at $981. As one might expect with these wild swings, VIX increased by nearly two points to close at 17.1%.

Trading volume increased with 2.4 billion shares of the S&P 500 stocks trading. Trading volume increased 17% on the NYSE, but only increased 1% on NASDAQ.

There was no economic data of any significance reported today.

My June iron condor stands at a net gain of +$180 or +1% with delta = -$9 and theta = +$163. The July position stands at a P/L of +$740 or +4% with delta = -$11 and theta = +$89. Today's increase in volatility pushed the P/L of these positions lower (iron condors are negative vega positions), but the health of these positions is nearly ideal (note the small deltas).

What surprises await us tomorrow?

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Written by Dr. Duke

Created: 10 June 2013

The markets opened positively this morning on news that Standard and Poors had revised the outlook for our treasury debt from negative to stable. Then the major indexes dipped but  stayed in the black most of the morning. But the bulls couldn't make the gains stick. The major indexes chopped sideways most of the day and SPX closed at $1643, down $1 for the day. By contrast, RUT gained $5 to close at $993. Seeing small caps outperform the blue chips is encouraging, but the negative sign was volatility rising to 15.4%; it only rose about a third of a point, but that is clearly the wrong direction if indeed we are firmly back on the bullish track. Trading volume fell off significantly with only 2.1 billion shares of the S&P 500 stocks trading today. Trading volume on the NYSE was down 15% and volume on NASDAQ dropped 6%.

We may not have the incredibly bullish market trend of the past few months, but I have been impressed with this market's resilience in the face of all challenges. It seems as though the closest thing to a correction this market can sustain is a minor pull back or just some sideways consolidation. But it remains a nervous market, so be careful.

My June iron condor position on RUT stands roughly at break even with position delta of -$47 and position theta of +$209. At this point, it appears likely that my Two Sigma Rule will close the call spreads of this position on Friday; currently the delta of those short 1030 calls = 6, so it is reasonably safe at this point. The July condor stands at a net gain of $880 or +5% with delta = -$26 and theta = +$85. This position is essentially delta neutral with the delta of each short option at 7-8.

There wasn't any significant economic data reported today (outside of the S&P announcement). Later in the week, we will check up on inflation with the CPI and PPI numbers. The consumer sentiment numbers, industrial production and capacity utilization reports come out Friday. Barring any surprises in this data, I don't see any market-moving events upcoming - but those are always the famous last words before the surprise. Stay alert.

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Written by Dr. Duke

Created: 07 June 2013

Everyone was focused on the jobs report this morning, and this was even more the case than usual because of the recent market weakness and the whole Fed tapering discussion. The Nonfarm Payrolls report came in with 175k jobs and unemployment increased slightly to 7.6%. Apparently this was weak enough to convince traders that the Fed won't be withdrawing anytime soon, so the buying resumed. SPX gained $21 to close at $1643 and RUT followed suit a little more weakly with a gain of $8 to close at $988. SPX gained almost $10 during the last hour of trading, so traders were gaining enthusiasm as the trading session came to a close. Trading volume dropped off with 2.4 billion shares of the S&P 500 stocks trading; volume fell 5% on the NYSE and decreased 8% on NASDAQ. Volatility dropped off significantly with the VIX closing down 1.5 points at 15.1%.

This week of trading underscored how nervous this market is, given the knowledge that the Fed is supporting the market and perhaps responsible for much or all of the bullish run. That results in traders running for the exits on the slightest rumor. The normal uncertainty associated with trading has been exaggerated. Plus, this is new territory; we aren't accustomed to accounting for Fed stimulus in our analysis of the markets.

However, don't let down your guard; we may not be out of the woods yet. Don't be surprised if the market "changes its mind" Monday.

My Jun iron condor on RUT now stands at breakeven with position delta = -$15 and position theta = +$146. The July condor stands at a P/L of +$800 (+5%) with position delta = -$18 and position theta = +$80.

Enjoy your weekend. It almost feels like spring here in Chicago with temperatures in the sixties. I just paid my property taxes this week: $4.40 per square foot. Do the math; I will be surprised if your taxes are higher. Why do I stay here?

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Written by Dr. Duke

Created: 05 June 2013

Earlier this week, I said I expected the markets to chop weakly sideways this week as we approach the jobs report Friday. But the market has just traded lower each day. Gloom has replaced euphoria. SPX closed down $22 today at $1609. This solidly broke support at $1635 and closed just above strong support at $1600 and near the 50 dma at $1604. A 5% pull back from the highs would take us to $1586. RUT's chart is similar. RUT broke support at $975 and closed at $968, down $14. The next strong support level is at $955 and the 50 dma = $954. As one might expect, the VIX jumped up over a point to 17.5% today. For comparison, VIX hit 17.5% in the minor pull back in April, touched 19% in February, and was just under 23% during the fiscal cliff debacle before the first of the year. Trading volume was flat with 2.6 billion shares of the S&P 500 stocks trading; trading volume on the NYSE increased 1% and trading on NASDAQ decreased 1%.

The ADP employment report came out this morning at 135k. That isn't a great number, but not terrible either, so I'm unsure why the market would tumble on that basis. If anything, I would have thought this was setting the stage for a mediocre jobs report Friday that would assure traders that the Fed will continue to support this market. The ISM service report increased to 53.7 for May from last month's 53.1. The issuance of the Beige Book from the FOMC was a non-event this afternoon.

I watch CNBC off and on throughout the day. It fascinates me how they can find guests to deliver the "I told you so" message no matter what the market does each day. They must have a prearranged cast of bulls and bears just waiting for the call.

My June iron condor at 890/900 and 1030/1040 stands at a P/L of -$760 with position delta = +$17 and position theta = +$158. This condor is now pretty close to delta neutral with the delta of the short call at 4 and the short put at 9. My July condor is positioned at 870/880 and 1060/1070 and is already in the black with a net gain of $400 and delta = +$15 and theta = +$68.

Tomorrow brings us the unemployment claims report, our last significant data point before the Non-Farm Payrolls report Friday morning, aka the jobs report.

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Written by Dr. Duke

Created: 04 June 2013

The occasional downright silliness of financial news was illustrated well today as the various CNBC hosts kept worrying about whether the twenty week streak of positive market increases on Tuesdays might end today - really? And in another breath we would ridicule the natives in darkest Africa for being afraid of a mirror.

SPX opened the day positively, but soon traded downward. FOMC member Esther George's speech was released sometime during the day after the market had already turned down, but her comments advocating cessation of the Fed QE programs seemed to drive markets lower. But much of those losses were recovered before the close. SPX closed at $1631, down $9 and RUT also lost $9 to close at $982. Trading volume decreased with 2.5 billion shares of the S&P 500 stocks trading. Trading volume on the NYSE decreased 8% and volume was off 10% on NASDAQ. The VIX closed unchanged at 16.3% - not too high but not too low either.

So far, SPX is holding support in the $1630-$1635 area. If it breaks through to the downside, watch the next support level at $1600, strengthened by the 50 dma at $1603.

The reaction to George's comments does illustrate the fear permeating this market that the Fed's removal of stimulus will tank the markets. There is a clear belief that one needs to be the first to sell and preserve all of these gains of the bull market of the past six months the minute the Fed begins to pull out or even talks about pulling out. It also underscores how difficult it is to predict the market's reaction to the jobs number Friday morning. A strong number may cause the market to sell off and a weak number may be tolerated.

My June condor stands at a P/L of -$1,420 with delta = -$54 and theta = +$215. As we head into the last couple of weeks of this trade, the time decay is starting to build nicely. The call spreads are outside of one standard deviation OTM and the put spreads are over two standard deviations OTM. We may be able to salvage a small gain from this position in spite of several adjustments and hedges, but it is early to count those chickens.

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Written by Dr. Duke

Created: 03 June 2013

I'm not quite sure how we arrived here, but traders seem to have nothing on their minds other than reading tea leaves for when the Fed will begin to taper off their stimulus programs. The markets opened upward this morning, but then sunk into the red after the weak ISM manufacturing report at 10 am ET. But traders regained their confidence in the Fed's free lunch program around 2 pm ET and started buying again, pushing the major indexes into positive territory. SPX gained $10 to close at $1640 and RUT closed up $6 at $991. Trading volume was flat from Friday with 2.6 billion shares of the S&P 500 stocks trading. Trading volume on the NYSE was up 1% and trading on NASDAQ was up 6%. The VIX closed at 16.3%, unchanged on the day.

The ISM manufacturing report came in at 49.0 (recall that numbers below 50 indicate contraction). Some history is in order: this measure hit its low around the mid thirties in November of 2008 and climbed to a peak in February 2011. The last time it moved through the area of 49 was on its way up in May 2009. So this anemic manufacturing report doesn't bode well for the economy. But this brings up an interesting conundrum as we look forward to the jobs report Friday. Will a poor jobs report be interpreted as good news for the markets because it will suggest continued Fed QE? And will a positive jobs report be considered bad news because it suggests a tapering off of the QE?

My June condor position stands at a P/L of-$1,980 with a position delta of -$87 and position theta = +$206. The 1030/1040 call spreads are over one standard deviation OTM and the 890/900 put spreads are over two standard deviations OTM, which is excellent given all of the correction talk.

Today's choppy trading may be typical of this week as everyone tries to predict what is coming in the jobs report Friday morning.

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Written by Dr. Duke

Created: 31 May 2013

The stock markets sold off pretty strongly starting around 2pm ET this afternoon.  Some of the selling might have been associated with some index rebalancing, but the reality is that the charts have looked pretty weak the past couple of weeks. SPX lost $24 to close at $1631 and RUT closed down $10 at $984. Trading volume spiked upward with 2.8 billion shares of the S&P 500 stocks trading; trading volume on the NYSE increased 22% and trading increased 6% on NASDAQ.

Support on SPX is around $1635, so today's close was either right at support or SPX has already broken support - we'll see on Monday. The next strong support level on SPX is around $1600. Similarly, RUT's close was very close to support at $985. The next support level on RUT is at $975.

The markets traded more positively this morning after the Chicago PMI surprised traders with a report at 58.7, up from last month's 49.0. The University of Michigan's consumer sentiment values were revised to 84.5 for May, the highest sentiment reading since July 2007. However, traders may be starting to worry early about next week's jobs report.

The Jun iron condor position on RUT closed at a P/L of -$1,620 with delta = -$48 and theta = +$165. The 1030/1040 call spreads are about one standard deviation OTM and the 890/900 put spreads are two standard deviations OTM. Several adjustments have taken their toll on this trade, but it still retains a maximum gain of about 5% with three weeks to go.

Enjoy your weekend.