Dr. Duke's Blog

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Written by Dr. Duke

Created: 30 May 2013

The Standard and Poors 500 Index (SPX) jumped up at the open and traded as high as $1662, but a sell-off in the last hour of trading took its toll. SPX closed at $1654, up $6. RUT closed up $7 at $994. Volatility decreased less than a half point to 14.5%. Trading volume was flat with 2.3 billion shares of the S&P 500 trading (the 50 dma = 2.4B). Trading on the NYSE was down 4% and trading volume on NASDAQ was up 1%.

Initial unemployment claims came in about ten thousand higher at 354k while the continuing unemployment claims rose 63k to 2.986 million. First quarter GDP was revised downward one tenth of a percentage point to an annualized growth rate of +2.4%.

I noticed today that the last six trading sessions on SPX had long shadows on the candlesticks - three were higher and three were lower. On those days, traders took the index either higher or lower during the day, but were pulled back before the close. This suggests a great deal of indecision to me. Traders are nervous about the Fed pulling back from stimulating the market and are jumping one way or the other almost every day based on the latest data or the latest rumor.

My June iron condor position on RUT stands at a P/L of -$2,230 with position delta = -$101 and position theta = +$161.

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Written by Dr. Duke

Created: 29 May 2013

Yesterday's sell off continued today with SPX losing $12 to close at $1648 and RUT closing down $10 at $987. Volatility increased almost a half point to 14.8%. On the SPX chart, there is strong support at $1635 and it may be significant that three times in the past few days, SPX has traded down into the $1635-$1640 range. Today SPX traded down to $1640 before rebounding into the close. On the upper side, $1670 is the resistance level that must be broken to move higher. Corresponding support on RUT is in the range of $970-$975 and resistance is at $1000.

Trading volume was pretty much flat today with 2.3 billion shares of the S&P 500 trading. Trading volume on the NYSE increased 1% and trading on NASDAQ increased 2%.

My June iron condor on RUT stands at a P/L of -$2,360 with position delta = -$81 and position theta = +$176. I will be watching the $1635-$1640 range on SPX to see if this minor pull back gets more serious. By my measure, not much has changed, but traders are getting nervous about the Fed's support of this market.

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Written by Dr. Duke

Created: 28 May 2013

The markets leaped off to the races this morning, breaking all kinds of records, but then trading started to falter and the major indexes began to give back most of the early gains before the day was over. SPX closed at $1660, up $10 and RUT gained $13 to close at $997. SPX ran as high as $1674 before pulling back. Often these type of days when the bulls push a stock or index price much higher but can't hold those highs is a sign of a weaker market moving forward (the classic shooting star candlestick). At a minimum, one can consider today's intraday highs as a resistance level for break-outs to the upside. The $1660 level on SPX was resistance for a couple of days in mid-May, but I'm unsure that today's closing there is significant. We have had too few data points at these lofty levels to have solid resistance levels. Volatility rose a half point to 14.5%.

There were several positive news items this morning that contributed to the bullish tone of the markets. The Case Schiller housing price index increased 10.9% in March, as compared to a 9.3% increase in February, so housing is hot. Consumer confidence increased to 76.2 in May from 68.1 in April. And Moody's issued a report on the large banks and revised their rating from "negative outlook" to "stable". This was the first improvement in the bank rating since 2008.

My June condor position on RUT stands at a P/L of -$3,220 with delta = -$111 and theta = +$175. The 1030/1040 call spreads are right on the edge of adjustment. We'll see what tomorrow brings. The bullish influence seems unstoppable. Maybe trading sideways is the least bullish behavior this market can display.

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Written by Dr. Duke

Created: 24 May 2013

A positive economic data point hit the screens this morning with the report that durable goods orders increased 3.3% in April. When contrasted with March's 5.9% decline, this was encouraging. But we are in that bizarre "good news is bad news" world where all positive news is regarded as evidence that the Fed will terminate its quantitative easing programs. So that may have contributed to this morning's weak market performance; but the markets strengthened at about 10:30 ET this morning and continued to climb all day. This resulted in the DJX closing up for the day and SPX closing down $1 at $1650. RUT closed flat at $984. Traders had already left for the holiday weekend today; trading volume was down 28% on the NYSE and volume was down 21% on NASDAQ.

So that leaves us with the "Is this the beginning of a correction?" debate. Trading for the past three days supports the idea of $1650 as support on SPX. Yesterday's snap back is another positive point arguing against the severe correction position. RUT has traded even more strongly, closing unchanged today. So I am inclined toward the viewpoint that traders panicked a bit after Bernanke's remarks and the FOMC minutes Wednesday. After all, the committee members voted 11 to 1 in favor of continued quantitative easing. It seems unlikely to me that we will see the strengthening in the job market that Bernanke has said he will require to begin to pull back on the FOMC stimulus. Therefore, it is highly probable that we won't see any Fed tapering until late fourth quarter or even well into 2014.

My June condor position stands at a P/L of -$2,240 with position delta = -$60 and position theta = +$142.

Enjoy your long weekend. Take a moment to remember the significance of this Memorial Day.

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Written by Dr. Duke

Created: 23 May 2013

Markets opened in the red this morning after a punishing day yesterday. SPX opened at yesterday's close and dropped to $1636 but then started bouncing back, recovering most of the early losses by noon and then chopping sideways through the close. SPX closed at $1651, down $5. RUT actually closed the day with a $2 gain at $984. Volatility rose less than a half point to 14.1%. Trading volume fell off from yesterday's highs with 2.6 billion shares of the S&P 500 trading, just above the 50 dma at 2.4B. Trading volume on the NYSE dropped 4% and volume on NASDAQ decreased 16%.

Initial unemployment claims dropped 23k and the number of continuing claims declined 112k to just under three million. The FHFA housing price index rose 1.3% in March compared to February and was up over 7% compared to one year ago. So the data supporting the idea of real estate having hit its bottom and bouncing back continue to come in.

Looking for support levels from the nearly continuous upward trending SPX chart isn't easy. Today's close at $1651 supports the $1650 level touched about three times earlier this month. One may also discern a support level at about $1635 from early May. So the fact that SPX bounced back and held above $1650 may be significant. I will be watching $1650 and then $1635 before pulling the emergency stop cord. Today's bounce back upward on decreased volume supports the premise that this isn't the beginning of the long awaited 5-10% correction. A well defined support level is on the chart at $1600 and a 5% correction would take us through that level to $1586. Another well defined support level exists at $1540 and a 10% correction would take us back to $1503. Today's price action started out looking like it could be the beginning of the correction, but the bounce on lower volume certainly doesn't support that premise.

What yesterday's price action does tell us isn't pleasant: when the Fed does start to "taper" its stimulus, look out below! It will be ugly. But I think traders reflected on Bernanke's words and realized he doesn't have anywhere near the strong economic data he has repeatedly cited as a precursor to ending the Fed's quantitative easing.

This drop in the market has softened the pressure on the call spreads of my June condor on RUT, pushing the call spreads out to about one standard deviation OTM. The position's P/L stands at -$2,660 with delta = -$74 and theta = +$145. We have a long holiday weekend coming up; it will be interesting to see how traders position themselves tomorrow. But we non-directional traders love long weekends.

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Written by Dr. Duke

Created: 22 May 2013

The markets traded up strongly this morning, mostly based on Bernanke's testimony before Congress. But when the FOMC minutes were released this afternoon, it included comments that several committee members are ready to reduce the Fed stimulus if economic data show improvement. To my mind, that wasn't news because it was the classic "if" statement and we aren't seeing much in the way of stronger economic data. The news has been full of committee members saying they were ready to reduce quantitative easing if the economic data improved, so today's minutes should not have surprised anyone. Apparently, many fingers were on the sell trigger and the markets sold off strongly in the afternoon on strong volume.

The report of another strong increase in existing home sales to an annualized rate of 4.97 million didn't hurt the morning's bullish sentiment. SPX lost $14 to close at $1655 and RUT sold off even more strongly to $982, down $17. Trading volume spiked upward with 3.0 billion shares of the S&P 500 stocks trading; volume on the NYSE increased 28% and trading on NASDAQ increased 23%. The VIX jumped up to 14.5%, but then pulled back to 13.8%, up about half a point.

Is this the beginning of the long awaited correction or did traders just get spooked and overreact? The SPX candlestick pattern is the classic bearish engulfing pattern, or the outside day in western bar charts. This often signals a trend reversal to the downside. On the other hand, SPX traded down to $1650 and then bounced. Hewlett Packard reported better than expected results after the bell, so that might help support a bounce back tomorrow.

I removed the hedge on my June position; that takes it to a net P/L of -$2,940 with position delta = -$69 and position theta = +$148. Today's market move reduced the delta of the 1030 calls to 14 and the 900 puts remain far OTM with a delta of 9. Our theta/delta ratio is strong. But we'll see what tomorrow brings.

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Written by Dr. Duke

Created: 21 May 2013

Markets seemed a little lost today. SPX opened positively this morning, but then quickly dove into the red, traded slightly upward for the balance of the day, and then deteriorated from about 2 pm ET through the close. SPX gained $3 to close at $1669 while RUT closed at $999, up $1. Trading volume bumped up a little from yesterday but remained below average. Trading in the S&P 500 rose to 2.3 billion shares and trading on the NYSE was up 6%. Volume on NASDAQ rose 2%. Volatility rose a touch with the VIX closing up 0.4 points at 13.4%. It is too early to be conclusive, but the SPX chart of the past few days seems to be treating $1670 as resistance; a similar pattern is emerging with RUT tentatively trading above $1000, but then pulling back.

Traders seem to be obsessed with any news, rumors, or even baseless speculations concerning the Fed scaling back its quantitative easing. I think it is evidence of the market finding itself in new territory, i.e., a strong bullish trend with minimal underlying economic support. Yes, one can point to good corporate earnings, but we all know the macroeconomic data remain weak. Companies aren't posting good earnings by expanding and hiring. Traders know the picture is flawed and they are spooked by the idea of the Fed pulling out and the markets having to stand on their own. Perhaps that is a problem with the entire country with more and more people feeling they must depend on the government.

My Jun condor position on the Russell 2000 Index remains hedged with a P/L of -$2,850 with position delta = -$13 and position theta = +$77. Be careful about adding more capital to positions until after the Bernanke testimony and the release of the FOMC meeting minutes tomorrow.

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Written by Dr. Duke

Created: 20 May 2013

The SPX opened this morning and started another relentless climb higher, peaking at $1673 around noon ET. But then it bled off all of those gains and went into the red, dropping to $1664 by 2 pm ET. It recovered most of that by the end of trading, closing at $1666 for a loss of one dollar. RUT fared a little better, with a $2 gain at $998, but those gains came in the last 4-5 minutes of trading. Trading volume was down significantly with 2.1 billion shares of the S&P 500 trading.  Trading volume was lower by 5% on both the NYSE and NASDAQ. VIX popped up a half point to 13.0%, still a low value historically.

There wasn't much economic news today. The Chicago Federal Reserve Bank released its national activity index that measures manufacturing activity. It decreased to a -5.3 for April from the previous month's -2.3, with negative numbers indicating contraction. This is consistent with other similar manufacturing surveys of the past few months. The stock market going higher every day causes us to forget that the economy is still struggling.

I rolled the 1020/1030 call spreads in my RUT Jun condor to 1030/1040 this morning, and, of course, then the market pulled back. This position now stands at a loss of -$2,530 on 20 contracts with delta = -$7 and theta = +$66. We still hold the July 1000 calls as a hedge. This condor still has the potential to make a nice profit if the index levels out or pulls back from here, so our rolls and hedges have served their purposes.

Traders are focused on Bernanke's testimony before Congress on Wednesday, so tomorrow's market may be very quiet.

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Written by Dr. Duke

Created: 17 May 2013

Consumer sentiment data appeared to give the market a boost today and resumed the uptrend. SPX closed up $16 at $1666. RUT increased $11 to close at $996. VIX lost almost a percentage point to close at 12.5%. Trading volume was mixed with a slight decrease in the S&P 500 to 2.5 billion shares, but a 17% increase on the NYSE. But on the other hand, trading volume fell 7% on NASDAQ.

The University of Michigan consumer sentiment data jumped up in May to 83.7, significantly higher than April's 76.4. Leading economic indicators were released for April and were up 0.6%.

RUT settled at $989.53 today, so the remaining put spreads in my May condor will expire worthless this weekend, resulting in a 10% gain. This brings the Flying With The Condor™ service to break-even for 2013 (making up for the Jan loss). My Jun position stands at a P/L of -$2,670 with position delta = -$44 and position theta = +$76.

Have a great weekend.

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Written by Dr. Duke

Created: 15 May 2013

The market opened weakly this morning, then climbed to an intraday high around 1 pm ET and then lost almost all of its gains only to recover most of the gains in the last hour. You may wonder - what's my point? Traders continue to come in and buy any weakness; it isn't hard to find nervous traders - nearly everyone is on high alert for a correction. But it is also true that  no one wants to miss out on any more of this bull market. SPX ended up $8 higher at $1659 and RUT gained $3 to close at $989. Trading volume was essentially flat with 2.4 billion shares of the S&P 500 trading; trading volume on the NYSE rose 4% and trading on NASDAQ was up 1%.

There was a large amount of economic data released today, but most of it was mediocre to poor. Perhaps that explains the early weakness in the markets today. The Producers Price Index (PPI) decreased 0.7%, but the Empire Manaufacturing Survey dropped from +3.1 to a negative 1.4. Industrial production for April declined 0.5% and capacity utilization declined a half percentage point to 77.8%. The only bright spot was the NAHB Housing Market index that increased 3 points to 44 for May. One of the bizarre aspects of this particular bull market is that poor economic news is often seen as bullish simply because it means the Fed will continue its stimulus programs.

My Jun condor position on RUT is largely unchanged at a P/L of -12% with a position delta = -$8 and position theta = +$73. The position is still hedged but I have rolled the call spreads higher. As you can see, the position is delta neutral with a large positive theta, so we are in pretty good shape.