Dr. Duke's Blog

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Written by Dr. Duke

Created: 14 May 2013

There was an enormous amount of talk about the old "Sell in May and Go Away" adage on CNBC for the past few weeks. Needless to say, anyone who followed that advice is very disappointed, as the market has simply continued on a tear upward almost without even a slight pause and certainly no correction. A pullback or correction is always possible, but so far I have lost money on the puts I have bought as insurance on my stock portfolio.  SPX closed at $1650, up $17 today and RUT ran up $12 to close at $986. RUT closed at its high for the day - very bullish behavior.

It appeared like David Tepper’s comments on CNBC this morning set the tone for today’s bullish run. Trading volume spiked up today, but barely made it to the 50 dma. Trading in the S&P 500 has not exceeded the 50 day moving average even once in May. Just under 2.4 billion shares of the S&P 500 traded today and trading volume increased 19% on the NYSE and increased 11% on NASDAQ.

Market bears have been pointing to the lower trading volume as a warning sign on this market. Traditional bull markets occur on higher than average trading volume and today's spike upward in volume matches that historical tendency. But daily volumes above the 50-day moving average in this bullish run have been relatively rare and so the average is actually declining.  When one considers how many individual investors have been spooked and have left the markets since 2008, perhaps this low volume isn’t surprising.

VIX is currently at 12.85%, a historically low level. This morning, VIX rose as the markets traded upward – an unusual divergence. This could be a result of continued high volume of puts being bought as this market hits new highs and correction concerns abound. Many institutional traders see these low levels of volatility as an opportunity to buy inexpensive insurance on their portfolios. Or it could be that the bulls are loading up on SPX calls.

The PPI will be announced tomorrow. That may raise the debate about inflation, but I doubt it will derail this market. It appears like it will require an extraordinary surprise of some kind to even give the bulls a pause.

My June iron condor position on RUT stands at a P/L of -$2,670 or -12% with delta = -$11 and theta = +$71. I closed the 820/830 put spreads today and rolled them up to 890/900. These adjustments have retained a nice potential gain for this position, assuming (big assumption) the bulls' truck slows down a bit.

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Written by Dr. Duke

Created: 13 May 2013

The markets traded down a bit this morning in spite of good retail sales data, but then recovered to close very close to the closes of the past 4 days.SPX closed unchanged at $1634 and RUT lost $1 to close at $974. VIX was unchanged at 12.6%. Trading volume fell off with 2.0 billion shares of the S&P 500. Volume on the NYSE was down 7% and trading volume in the NASDAQ was down 5%.

So all indicators remain rather positive and this will be a light economic data week, so a continuation of the bullish trend seems most likely. The CPI and PPI data later this week could possibly bring more debate about the Fed's policy and inflation, but there are no signs that the price data are likely to spike upward.

My Jun iron condor on RUT stands at a net P/L of -$2,160 with delta = -$15 and theta = +$52. The July hedges remain in place.

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Written by Dr. Duke

Created: 10 May 2013

Through about half of today's trading, the S&P 500 Index (SPX) was down or flat, but the Russell 2000 Index (RUT) was always in positive territory and just advanced even higher as SPX moved into the black in the afternoon. SPX ended up $7 higher at $1634 and RUT gained $9 to close at $975. But trading volume declined with 2.1 billion shares of the S&P 500 trading and volume on the NYSE dropped 8%. Trading volume on NASDAQ decreased 7%. Seeing RUT leading the SPX is very bullish - the classic definition of "risk on". But lower trading volume continues as a hallmark of this bullish market. This certainly is atypical of strong bull markets.

VIX dropped a half point to 12.6%. There was no economic news of any consequence today.

I closed my RUT May 1010/1020 call spreads today in accordance with my Two Sigma Rule. The 1010 call was 1.9 standard deviations OTM this morning. It was borderline whether to close the call spreads this morning, but the decision appeared more and more correct as the day wore on. That confirms a 9% gain for my May condor, assuming the 840/850 put spreads expire worthless next weekend.

I opened the June iron condor on RUT at 820/830 and 1000/1010 for a credit of $1.50 on 4/24 and hedged with the July 1000 calls on 5/3. Today, I closed the 1000/1010 call spreads and rolled them up to 1020/1030; I left the July hedges in place. This position still retains the potential of a gain of around 5.5% if everything goes well for us - wishful thinking perhaps. But that is the point of hedging: keep the losses in check and buy time for the market to flatten out or pull back.

This bull market is certainly persistent. It is fascinating how many of us traders are wary of it. One of the guys on CNBC today said this was the "most hated bull market" on the exchange floor he had ever seen. It makes traders nervous to be investing in a market that is largely being held up by the Fed.

Enjoy your weekend.

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Written by Dr. Duke

Created: 09 May 2013

The major market indexes didn't tack on more gains today - how about that? But the averages didn't drop much either; this bullish trend is still very much alive. SPX dropped back $6 to close at $1627 while RUT lost $4 to close at $966. The VIX added a half point to close at 13.1%, still relatively low. Trading volume was relatively flat with 2.3 billion shares of the S&P 500 stocks trading. Trading on the NYSE was down 3% while trading volume on NASDAQ was up 5%.

The unemployment claims came in this morning at 323k, down four thousand from last week. Continuing claims dropped 27k, but these decreases are small percentage changes; the data trend lines are basically flat, so the market didn't celebrate.

The new support level for SPX is now $1600, so it would take a pretty significant drop to really get traders' attention. The comparable support level for RUT is much closer at $955. Many market analysts feel a correction of some kind is overdue, but so far that has been a futile waiting game. I think three main factors are driving this market: 1) The Fed's QE policies, 2) Reasonable corporate earnings growth, and 3) A search for income in dividend paying stocks for traders leaving the bond market.

My May iron condor on RUT stands at a net gain of $1,560 or +9% with position delta = -$37 and position theta = +$125. I will apply my Two Sigma Rule tomorrow to this position. Unless the market opens down quite a bit tomorrow, I will probably be closing the 1010/1020 May call spreads; those spreads are just inside of two standard deviations today. So the bull market game continues. As soon as the last of the bears are vanquished, the correction will begin!

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Written by Dr. Duke

Created: 08 May 2013

The markets sputtered a bit at the open this morning, but the bulls quickly reclaimed control. Even on these slow days, the market averages tack on a few points. SPX gained $7 to close at $1633 and RUT gained $3 to close at $970. Trading volume pumped up a bit with 2.4 billion shares of the S&P 500 stocks trading. This is right at the 50 dma. Trading increased 12% on the NYSE and rose 2% on NASDAQ.

This is a slow week for economic data. Tomorrow will bring the weekly unemployment claims data, but that isn't likely to change much and consequently isn't likely to slow down this market. The major averages appear to be slowing a bit, so maybe we will trade largely sideways for a bit to blow off steam in this rally. At least I hope so; the alternative may not be pretty.

My iron condor on RUT for May stands at a net gain of +$1,759 or +10% with position delta = -$20 and position theta = +$47. It looks like we may be closing the call spreads on Friday as we apply the Two Sigma Rule, unless we see a bit of a pull back before then. Currently, those 1010/1020 call spreads are about one and a half standard deviations OTM.

This has been an interesting bull market; I don't recall having a bullish run this strong with such a large chorus of naysayers predicting an imminent correction. Maybe the last few years have turned us into pessimists.

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Written by Dr. Duke

Created: 06 May 2013

After Friday's strong rally, one might have naturally expected a little profit taking today, but no way. SPX tacks on another $3 to close at $1618 and RUT gained $5 to close at $960. That may not seem like a strong rise upward, but the consistency of the upward pressure is what impresses me. But this rally continues to be a low volume affair with only 2.2 billion shares of the S&P 500 trading today. Trading volume fell 15% on the NYSE and fell 13% on NASDAQ.

There weren't any economic data reports today and minimal economic news.

One data point from Friday that I found significant, but forgot to point out in Friday's blog: Germany's equivalent of our Dow Jone Industrial Average, the DAX, jumped upward over 1% on the U.S. nonfarm payrolls report. This underscores a basic tenet driving this stock market - it is the best game in town. We may not see our economy as firing on all cylinders, but it beats the alternatives, so global monies are flowing into our stock market. When combined with fed stimulus, it is a powerful combination.

My May condor is feeling a little of the upward pressure. The P/L now stands at +$1,052 or +6%, with delta = -$4 and theta = +$275. But the 1010 calls still have a delta of 2, so those spreads are still pretty safe. We may still see a pull back or breather of some sort, but the probability of a severe correction is diminished, in my opinion. There are just too many forces pushing this market higher. But remain on guard. Risk management is king.

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Written by Dr. Duke

Created: 03 May 2013

It seemed like the more favorable jobs report this morning came as a surprise to the markets. The weaker ADP number earlier in the week had traders worried and many were short the market going into the jobs report. The result was a huge rally. SPX tacked on $17 to close at $1614 and RUT climbed $15 to close at $954. Trading volume was weak with 2.4 billion shares of the S&P 500 stocks, remaining below the 50 dma. Trading was up 6% on the NYSE but down 1% on NASDAQ.

CNBC and other outlets were trumpeting the Dow's breaking 15,000 and the S&P 500 breaking above $1600, but none of the market indexes held their highs. VIX dropped back to 12.9%, off almost one point. SPX's close was well above the trading range it has been trapped within for several weeks. Now we will see if it can hold above that $1600 level. RUT traded up to $960, above the top of the trading range at $955, but pulled back to close at resistance.

The jobs report included an increase of 165k jobs and a reduction in the unemployment rate of one tenth of a percent to 7.5%. While this certainly doesn't suggest all is well for the economy, traders were relieved and traded the report positively. And it assured traders that the Fed will continue its QE programs. So mediocre numbers can be bullish in this environment.

My May iron condor position stands at a gain of $1,500 or +8% with position delta = -$10 and position theta = +$75.

It will be interesting to watch next week's markets to see if this bullish action can continue. We may see some profit taking on Monday.

Enjoy the weekend.

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Written by Dr. Duke

Created: 01 May 2013

Yesterday's soft market became ugly this afternoon. It appeared that the more traders considered the Fed announcement, the more they decided to sell. SPX closed down $15 at $1583, but RUT really tanked with a drop of $23 to $924. Trading volume actually dropped from yesterday with 2.4 billion shares of the S&P 500 trading. Trading on the NYSE dropped 7% and volume on NASDAQ dropped 5%. Volatility rose one point to 14.5%, so traders weren't spooked; if we had seen a spike in volatility plus high trading volume, that would have been more worrisome.

There wasn't anything notable in the FOMC announcement: fed rates remain unchanged and QE will continue until either unemployment drops below 6.5% or inflation exceeds 2.5%. There was a change in language in that the Fed may "increase or reduce" the amount of quantitative easing as it sees necessary. Those who oppose the Fed's involvement thus far weren't happy with that phrase, but I doubt that affected the market. Maybe the economic data released earlier in the day was unsettling as traders look forward to the jobs report Friday. ADP reported an increase of 119k jobs but analysts expected 155k. The ISM index dropped from 51.3 to 50.7, not significant, but in the wrong direction. And construction spending contracted by 1.7% in March in contrast with February's 1.5% increase.

RUT sliced right through the 50 dma to return to the middle of the recent trading range, whereas the drop in SPX was much more modest, remaining high above the bottom of the trading range at $1540. All in all, I am less concerned since the volatility didn't spike and trading volume was relatively low - but I am glad I bought puts for my stock portfolio on Monday. Perhaps all of this market weakness is setting up for the jobs report Friday. If I am trying to remove risk from my portfolio, selling the small and mid-caps first makes sense, i.e., a larger drop in RUT.

Today's drop didn't affect my May iron condor position much; the P/L stands at a gain of $1,000 (+6%) with position delta = +$28 and position theta = +$90. I suspect we won't see much of a move either way tomorrow, as we anticipate the jobs report Friday.

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Written by Dr. Duke

Created: 30 April 2013

The disappointing Chicago PMI numbers gave traders pause this morning, but it didn't take long for the bulls to take charge once again, driving the market higher in the afternoon. SPX opened lower and traded down to $1586 before recovering and trending higher to close up $4 at $1598. RUT gained $5 to close at $947. RUT still has a ways to go to beat its highs from March, but SPX set new historic highs today (it may have traded this high intraday in April, but this is a higher close). I was surprised by the market's strength today; I expected the markets to basically trade sideways as we move through the FOMC announcement and Bernanke's news conference tomorrow and then the jobs report on Friday. But these bulls are relentless.

The Chicago PMI came in at 49.0 for April, a big drop from last month's 52.4. But a positive note came from the Case Schiller Housing Price Index, up 9.3% in February after a strong +8.1% increase in January. In some areas, builders are resorting to lotteries to sell a limited number of housing to large numbers of hopeful buyers. This is some of the market action that is driving prices higher. My son sold his house in Plainfield, IL for the asking price in 5 hours yesterday!

I'm not a big fan of historical stock market statistics like the market being up or down in presidential election years and so on. But today marks the well known "Sell in May and go away" adage. Technically, the data suggest that selling on the last day in April and buying back into the market on Halloween, 10/31 would be a high probability strategy.

My May iron condor on RUT stands at a P/L of +$1,540 or +9% with position delta = +$8 and position theta = +$45. I bought some SPX puts for protection in my stock portfolio yesterday, but it doesn't seem like I need them... but I will feel better after the jobs report.

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Written by Dr. Duke

Created: 29 April 2013

Markets opened higher and SPX tried to break its old intraday high, but didn't quite make it. The consensus among the talking heads was that the bullish impetus was Italy finally forming a government. In any case, the bullish trend continued with SPX up $11 to close at $1594 and RUT gained $7 to close at $942. VIX remains low at 13.7%, but trading volume fell off markedly today with only 1.9 billion shares of the S&P 500 stocks trading. Trading volume fell 9% on the NYSE and decreased 8% on NASDAQ.

This bull run continues on the back of reasonable corporate earnings (but weaker this quarter) and the Fed's QE programs. The market averages are in lofty territory, so we are subject to an unexpected "bad" event. The correction could be nasty. A possible candidate is this Friday's jobs report. But the markets shrugged off last week's disappointing GDP report, so it is hard to predict. It may be a good idea to buy some protection in the form of SPX puts for your stock and option portfolios.The current low levels of volatility make protection cheap and, if we have a significant pull back, the spike in volatility will cause the value of those protective puts to sky rocket.

My iron condor on RUT for May stands at a P/L of +$1,400 (+8%) with delta = +$10 and theta = +$56. This condor is positioned well with 17 days to go until expiration. The 1010/1020 call spreads are just under two standard deviations OTM and the 840/850 put spreads are about two and a half standard deviations OTM. We may see some lazy sideways trading action this week as traders anticipate the jobs report Friday.