Dr. Duke's Blog

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Written by Dr. Duke

Created: 26 April 2013

 First quarter GDP growth was reported this morning at an annualized rate of +2.5%. This was, to my mind, a pretty good result, and certainly much better than the fourth quarter's anemic +0.4%. But economists were expecting +2.8% and some were even expecting increases of 3 to 3.5%. SPX opened weakly and then rebounded, only to sink to its intraday low at $1578. But then it rebounded and closed at $1582, down only $3. RUT dropped $5 to close at $935. After such an unrelenting rise over the past several sessions, today's pause wasn't too surprising. Trading volume also fell off significantly, further supporting the idea that there is no reason to panic over this decline. Trading in the S&P 500 declined with 2.3 billion shares changing hands today and trading volume on the NYSE declined 11%; trading on NASDAQ declined 14%. Volatility remains unchanged with the VIX at 13.6%. All in all, it was a slow day on the street.

My May iron condor stands at a P/L of +$1,320 or +7% with position delta = +$23 and position theta = +$40. As a note to anyone new to my blog, I track the position theta of my condors because this is effectively the profit machine of the trade; it is a measurement of the gain in the position over the next 24 hours due to time decay. The position delta tells us how much risk we are incurring from a price move for the underlying index. In general, I like to see theta at levels greater than delta and ideally greater than twice delta. As position delta and theta values converge, it shows the pressure of stress placed on the position by the index moving too close to one side or the other of the condor. Thus, the current levels of delta and theta for this May position look pretty good.

Enjoy your weekend. It appears as though springtime may finally come to Chicago this weekend.

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Written by Dr. Duke

Created: 25 April 2013

SPX continued its run to the upside, adding $6 to close at $1585. One week ago, SPX bounced off support at $1540 and started a bullish run the next day that continues through today's market action. SPX is nearing the highs around $1595 set about two weeks ago. RUT closed up $6 at $940.The markets hit intraday peaks around 2 pm ET and declined from there but still held onto gains for the day. SPX hit a high of $1593 before turning back. Volatility remains relatively low with the VIX at 13.6%. Trading volume edged up with 2.8 billion shares of the S&P 500 stocks trading today. Trading volume increased 5% on the NYSE and increased 13% on NASDAQ.

Initial unemployment claims decreased 16 thousand to 339k and continuing unemployment claims decreased 93k to three million. Meanwhile, we hit a new record of 8.9 million on disability.

My May iron condor on RUT is up 6% with position delta = +$20 and position theta = +$57. If RUT climbs a few more points, we will be perfectly delta neutral with three weeks to go.

As I look at the SPX price chart, it is interesting that we are duplicating the run SPX made earlier in April, when it bounced off $1540 and headed higher to hit $1595 and then turned down. Now we are retracing the steps higher. Will SPX break out to new highs or be pulled back into the trading range? The nervous profit taking we saw this afternoon may grow. Stay tuned.

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Written by Dr. Duke

Created: 24 April 2013

SPX took a time out and rested today, closing unchanged at $1579. However, RUT gained $5 to close at $934. Trading volume was slightly up with 2.7 billion shares of the S&P 500 trading. Trading on the NYSE was up 1% and volume rose 1% on NASDAQ. VIX was essentially unchanged at 13.6%.

Durable orders declined 5.7% in March, not a good sign. The other ominous news concerned corporate earnings. Midway through the earnings announcements for this quarter, about 69% of companies reporting are beating the earnings estimates, but only 39% are beating revenue estimates. My interpretation is that companies have trimmed all their fat and that has helped secure their earnings, but now the general poor state of the economy is starting to take its toll on sales. The GDP numbers Friday will be watched closely. On a more positive note Goldman Sachs announced that they expect global growth to exceed 3% this year and predicted further gains for the equity markets.

My May RUT iron condor stands at a P/L of +$1,100 (+6%) with a position delta of +$27 and position theta of +$49. See you tomorrow...

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Written by Dr. Duke

Created: 23 April 2013

The strength of today's market impressed me. First of all, SPX opened at yesterday's close to start the day and then steadily climbed to close up $16 at $1579, only a few cents off of the intraday high. Similarly, RUT gained $15 to close at $929. Volatility dropped a full point to 13.5% and trading volume expanded with 2.6 billion shares of the S&P 500 trading today. Trading increased 11% on the NYSE and moved up 1% on NASDAQ.

Traders were spooked by an Associated Press tweet of a terrorist attack at about 1:10 pm ET, and that dropped the SPX $15, but that tweet was quickly discovered to be the result of a hacking incident at AP. Markets fully recovered within five minutes.

New home sales came in at 417k in March, up from 411k in February. The FHFA Housing Price Index increased 0.7% in February after a 0.6% rise in January. This further underscores the noticeable improvement in the real estate markets. But builders are struggling to take advantage of the improving demand picture. Builders, like other small businesses, are finding it difficult or impossible to get bank financing.

SPX is quickly closing in on its recent closing high at $1593 on April 11. That will be a crucial resistance level to watch as the bulls drive forward. It is hard to see anything bearish in this market - volatility keeps dropping and stocks keep trading higher. It isn't hard to find bearish arguments on CNBC and in other financial news, but the markets are trading higher. The lone dissent at this point is the Investors Business Daily with their Big Picture still holding a market posture of "Market in Correction". But that could change this evening; it is updated around 7 pm ET each evening.

My May iron condor position on RUT stands at a P/L of +$860 or +5% with position delta = +$21 and position theta = +$65. Both spreads are nearly two standard deviations out of the money (OTM), so this position is looking pretty solid with about three weeks to go until expiration. But this is a volatile market; that could change quickly.

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Written by Dr. Duke

Created: 22 April 2013

It appeared that CAT's earnings announcement unsettled some traders, but they seemed to get over it as the day progressed. SPX began the day weakly, but revived in afternoon trading to finish with a $7 gain at $1563. RUT added $2, closing at $915. But trading volume fell off  with only 2.2 billion shares of the S&P 500 trading. Trading volume fell 15% on the NYSE and dropped 4% on NASDAQ. Volatility declined a bit with VIX ending the day at 14.4%, down almost one percentage point.

A strong support level on the RUT price chart is being established at $900. The lower shadows of the candlesticks have touched $900 several times before bouncing back upward. If you draw a trend line on the SPX chart through all of the lows since mid-November, then today's close at $1563 gets us back above the trend line. But that doesn't mean this correction or pullback is over. One could argue that SPX is still in a sideways trading range from roughly $1540 to $1595. So until it breaks through one of those levels, it is hard to be very confident about a trend in either direction. Of course, the longer we chop along largely sideways, we accomplish the same thing as a more severe correction.

My May iron condor position on RUT stands at a P/L of +$640 or +4% with position delta = +$46 and position theta = +$38. Will the positive NFLX announcement push the market higher? That seems doubtful, but we'll see.

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Written by Dr. Duke

Created: 19 April 2013

SPX closed yesterday right at a major support line, the 50 day moving average (DMA). Today's market action seems to suggest it has bounced off support and all is well. But it is hard to take any confidence in this volatile market. It seems to just whip back and forth in an effort to frustrate as many traders as possible. SPX tacked on $14 to close at $1555 and RUT joined the party with a close at $913, up $11. VIX pulled back almost three points to 15%. Trading volume was flat on the S&P 500 stocks at 2.8 billion shares, still above the 50 dma. In fact, SPX volume traded above the 50 dma every day this week - unusual.

SPX settled at $1545.35 and RUT settled at $901.94. So the 990/1000 call spreads of my April condor will expire worthless this weekend. I was feeling more conservative and closed the 880/890 put spreads last Friday. They were over two standard deviations OTM, but this market makes me nervous, so I closed them anyway. As it turned out, those spreads would have expired worthless as well, so the Two Sigma Rule worked once again. But playing it safe now and then isn't a bad thing. That brings my April position to a net loss of $400 or -4% for April. That brings my Flying With The Condor™ to a net return of -4% for 2013, as compared to a net gain of 9% on the S&P 500. This is the first time in quite a while that I have fallen behind the S&P 500, but I am regaining the ground and should be back in the black with the May position. I removed the hedge on the May condor today (840/850 and 1010/1020) and it stands at a net P/L of -$100 with position delta = +$61 and position theta = +$44. This trade is positioned well with the call spreads about two standard deviations OTM and the put spreads well over one standard deviation OTM with less than thirty days to go.

Enjoy your weekend. I thought I would start on some of my tasks in the yard this weekend, but it was in the high thirties as I headed to the office this morning - good grief!

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Written by Dr. Duke

Created: 17 April 2013

The markets started out weakly this morning, largely on disappointing earnings and a weak outlook from Bank of America. But the selling accelerated, leading to broad losses across the board. SPX shed $23 to close at $1552 while RUT closed down $17 at $907. Of course, many of the gurus on CNBC are shouting "I told you so", but the behavior of this market defies most rational analysis in my opinion. Many were pointing to BAC's earnings, but the Fed's Beige Book appears to have been largely ignored. In short, the Fed gave the economy its best rating in several years, saying they see many signs of the economy overcoming its problems. At first, I thought traders might see those comments as a prelude to reduced FOMC stimulus and sell the market. But markets hit their low of the day before the Fed release of the minutes and just traded sideways afterwards. That takes us back to BAC's earnings as the explanation for the weakness, but many of the corporate leaders announcing earnings so far in this cycle have been beating estimates, so it is hard to say why today's trading was so weak. More importantly, why are the markets  oscillating back and forth so wildly?

SPX traded down to the 50 dma and then bounced, closing right where it closed Monday. While Monday's and today's markets were spooky events, this market is not in free fall, so ignore the "sky is falling" crowd (at least for now). But if we break down through $1540, things could get ugly. Interestingly, RUT also closed today at the closing price from Monday, after exploring lower prices. In RUT's case, the break below $895 is the panic zone.

I hedged my May condor position today, just in case the market breaks down further tomorrow. I bought the June 850 puts for $14.70. The May position stands at break-even with position delta = +$14 and position theta = +$8.

Predicting market direction is never easy, but this particular market is particularly daunting. So we wait and see.

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Written by Dr. Duke

Created: 16 April 2013

Stocks opened in positive territory this morning after yesterday's devastating drop. SPX gained $22 to close at $1575 while RUT closed at $923, a gain of $16. Yesterday's move on SPX left the index within the trading range observed for most of March, but today's spurt back upward once again took the index back above that trading range. Whereas SPX opened this morning at yesterday's close, RUT gapped upward at the open and climbed from there. However, neither index undid all of the damage done yesterday. One of the most positive aspects of today's trading was a dramatic three point drop in the VIX, to 13.96%. So it appears that the bulls remain in control of this market. As demonstrated by GS, JNJ and KO last evening, corporate earnings remain strong. And the Fed is still priming the market, so the bullish case is intact. Whether it makes sense to you or me isn't relevant.

Trading volume returned to the 50 dma of 2.5 billion shares in the S&P 500 stocks; trading volume declined from yesterday's elevated levels on both the NYSE (-21%) and NASDAQ (-16%).

A large number of economic data was reported today, but without any surprises either way. The CPI declined 0.2% in March, down from the 0.7% increase reported last month. Housing starts increased 68k, but building permits dropped 37k. Industrial production increased 0.4% and capacity utilization increased slightly to 78.5% from last month's 78.3%.

My May iron condor stands at a P/L of +$900 (+5%) with position delta = +$30 and position theta = +$68.

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Written by Dr. Duke

Created: 15 April 2013

Weak economic news from China triggered declines in Asian markets and resulted in weak openings in U.S. and European stock markets. But that weakness just never stabilized. SPX fell $36 to close at $1552 and RUT was even weaker with a close at $907, also down $36. Trading volume spiked upward with 3.2 billion shares of the S&P 500 stocks trading today. Trading volume rose 43% on the NYSE and increased 22% on NASDAQ. As one might expect, VIX popped up 5 points today to 17.3%.

SPX and RUT were trading in a tight sideways range through most of March, so it is interesting to contrast the two indexes in today's decline. SPX traded from about $1548 to $1570 before breaking out higher last Wednesday. Today's decline was severe, but the close at $1552 just took SPX back to the lower end of that March trading range. But RUT's chart is strikingly different. Last Wednesday's big day merely returned RUT to the middle of the March trading range because the weakness in early April had driven RUT much lower than SPX in a relative sense. And today's move took RUT down close to the next major support level at $895. The concern raised by this analysis is that the small caps normally lead markets both up and down, so, in this case, RUT's exaggerated weakness relative to SPX may portend further correction.

The Empire manufacturing survey came in much lower than analysts expected with a reading of 3.1 for April, down from the previous month's 9.2. While positive readings on this index are good news, the unexpectedly large drop was a concern for traders. The NAHB housing market index  weakened a bit in April, dropping two points to 42.

As one might expect on a day like this, my May condor position pulled back quite a bit on this drop in price and the increase in volatility. It now stands at a P/L of -$600 or -3% with position delta = +$63 and position theta = +$77.

Now the question on everyone's mind: is this the beginning of a severe correction, or just a momentary pullback? After all, the bull camp's arguments of increasing corporate earnings and Fed intervention are still valid. That question just demonstrates why predicting the market's next move is so difficult.

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Written by Dr. Duke

Created: 12 April 2013

The markets pulled back a bit today, but still held recent highs. SPX closed down $5 at $1589. RUT fell $4 to $943. The high in 2000 was about $1552 and then it peaked at $1576 in 2007. So the question on many technical analysts' minds is: Are we headed off into brand new highs, or is this market going to pull back before continuing a bullish run? Some analysts point to the history of bear markets lasting 15 to 17 years, so they see this market pulling back before heading to new highs down the road. What may be different now is the huge Fed presence; that may keep this bull healthy much longer than might be expected based on history. But that makes me worry about the hangover after the overindulgence.

Trading volume was mixed with a decline in the volume of the S&P 500 at 2.2 billion shares; trading volume rose 5% on the NYSE, but dropped 20% on NASDAQ. VIX remained flat at 12.1%.

Retail sales came in lower by 0.4% in March, but the PPI dropped 0.6%, calming inflation fears. Consumer sentiment dropped to 72.3 from last month's 78.6. All in all, today's economic data were not impressive.

I applied my Two Sigma Rule to the April 880/890 put spreads and the Apr 990/1000 call spreads. Both were about 2.5 standard deviations OTM, which should be quite safe at this point. But this market worries me, so I closed the put spreads today. With the expiration of the call spreads next week, that will close out the April iron condor position at a loss of 2%. I could have allowed the put spreads to expire worthless next week and that would have resulted in a result roughly at break-even, but I worry about some bad news coming out over the weekend and making it more expensive to get out of those puts next week. I'm probably being too cautious, but I will sleep better this way. My May condor is doing well with a P/L of +$1,280 (+7%) and position delta of -$12 and position theta of +$76.

Enjoy your weekend. The way things look, I won't be working in the yard this weekend. Spring hasn't come to Chicago yet.