Dr. Duke's Blog

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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.

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Written by Dr. Duke

Created: 11 April 2013

The stock market opened higher today, and continued higher until late morning and then faltered. SPX traded as high as $1597 and then traded sideways and slightly lower the balance of the day, closing at $1593, up $6. RUT followed a similar pattern, but RUT fell off more dramatically in the afternoon, closing the day at a $1 gain at $947. Trading volume bumped up a little with 2.5 billion shares of the S&P 500 stocks trading; this is right at the 50 dma. Trading on the NYSE was down 6% and trading volume increased 4% on NASDAQ. VIX was essentially unchanged at 12.2%.

IBD moved their market signal to "Confirmed Uptrend" late yesterday on the strength of yesterday's rally. Initial unemployment claims dropped 42k to 346k and continuing claims dropped 41k to 3.1 million. Perhaps that buoyed trading this morning. Tomorrow brings retail sales, the PPI and consumer sentiment numbers.

As I look at the SPX chart for the past four days, all I can say is Wow! Almost straight up! It does make one worry a bit that the party has to end, but previous bull markets often lasted longer than anyone thought reasonable - remember the dot-com days? One aspect of this rally I am enjoying is that we hear almost nothing about the idiots in Washington these days.

My iron condor positions are doing well. It looks like the April position may pass the Two Sigma Rule tomorrow and continue into next week; it is highly probable that both Apr spreads will expire worthless. The May position stands at +$1240 with delta = -$25 and theta = +$73.

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Written by Dr. Duke

Created: 10 April 2013

SPX hit new historic highs today and trading volume bumped up from yesterday, although it remains below long term averages. The intraday picture was very steady with a strong open that just continued to climb all day, even into the close. Perhaps the FOMC minutes encouraged traders; the minutes showed a majority of committee members support continuing the bond purchases through mid-year. SPX closed up $19 at $1588 and RUT jumped on board with a $17 gain to close at $946. Trading volume increased with 2.4 billion shares of the S&P 500 stocks trading. Trading volume on the NYSE increased 5% and increased 18% on NASDAQ. Volatility dropped a bit, with the VIX ending the day at 12.4%, down about half a point.

Today's huge run upward will probably add fuel to those arguing for an impending correction, but this market has steadily climbed higher in spite of all naysayers.

My Apr condor position stands near break-even with a P/L of -$500 and position delta = +$3 and position theta = +$110. The May position is up $1400 with position delta = -$5 and position theta = +$59. Will the profit takers come in tomorrow after this run to historic highs?

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Written by Dr. Duke

Created: 09 April 2013

Analysts have been predicting a correction for several weeks now. At every slight pull back, CNBC assembles a crowd of gurus who are arguing about how far down the correction will take us. But today was another of those surprisingly strong market days. SPX opened slightly in positive territory this morning and chopped sideways until just before noon, when it began a slow and steady climb. SPX reached $1574 before slowing a bit to close at $1569, up $6 on the day. RUT was more subdued with a loss of $2, closing at $929. So SPX remains firmly within the trading range of $1545 to $1570, established over the past several weeks. RUT's chart doesn't look as positive; RUT has yet to climb back to the $940 to $960 trading range that it established in parallel with SPX during the latter part of March. While RUT followed SPX's lead and climbed to an intraday high in late afternoon trading, it gave it all back in the last hour.

Trading volume was up from yesterday's anemic levels, but remains below long term averages. Trading in the S&P 500 hit 2.3 billion shares, up from yesterday's two billion but still well below the 50 dma. Trading volume was up 14% on the NYSE and was up 13% on NASDAQ.

So what can we make of this market? Is it safe to be bullish?  I think the Fed's continuing QE will hold up this market. But the risk is some dire European debt crisis news, a downgrade of U.S. debt or something else we don't expect. The result is a sideways consolidation move that is successfully burning off the excess euphoria from earlier this year. So I am cautiously bullish. Choose your stocks carefully and use tight stops.

My Apr condor stands at a net P/L of -$1100 or -6% with delta = +$51 and theta = +$166. The May position stands at a P/L of +$1120 or +6% with delta = +$21 and theta = +$56.

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Written by Dr. Duke

Created: 05 April 2013

The jobs report came in lower than virtually anyone predicted; on CNBC, Santelli was the pessimist with a prediction of 150k, but then the report came in at +88k; surveyed economists expected about 190k. Perhaps even more pessimistic was the labor participation rate coming in at 63.3%, the lowest reading since 1979. This measures the number of people who are either employed or actively seeking employment. Almost 500k dropped out since the last report. But, lest you panic, these employment data have so many adjustments and revisions, that it is hard to get too excited about any one report.

As you might expect, the surprise jobs report pushed futures lower and the major indexes opened significantly lower. SPX traded as low as $1540 before starting to rebound. Likewise, RUT traded down to $910, but then slowly traded upward all day to close at $923, down only $2 on the day and very close to the 50 dma at $924. SPX closed at $1553, down $7. This places SPX right in the middle of the trading range of the past several weeks. So after opening down $18, SPX closes down $7. Considering how bad this jobs report was, that's incredible price action. Trading volume popped up a bit with 2.5 billion shares of the S&P 500 stocks trading (right at the 50 dma) and trading was also up on NYSE, with an increase of 11%. Trading volume on NASDAQ moved up 10%.

So what can we make of today's trading? My interpretation is this: traders considered the jobs report and recent economic data as evidence of a weakening economy and initially took some of their risk off the table, but then they considered what this evidence does for the FOMC. It strengthens the Fed's case for quantitative easing, so traders are reassured that the Fed's support of this market will continue through QE and low interest rates. So the party continues, but probably a bit moderated.

I removed the hedges on my April condor position today; it remains down about 11% with delta = +$87 and theta = +$155. The put spreads are about one standard deviation OTM and the calls are about two standard deviations OTM with two weeks to go. My May condor stands at a P/L of +$720 or +4% with delta = +$32 and theta = +$47.

Enjoy your weekend.

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Written by Dr. Duke

Created: 03 April 2013

SPX opened at the neutral line this morning, but then slow, but steady, selling started that did not end until about 20 minutes before the close when it hit its low for the day. SPX dropped off $17 to close at $1554. RUT declined even more, percentage-wise, with a close at $919, down $16. To my surprise, the VIX didn't pop up as much as I would have expected, closing at 14.2%, up about one and a half points.

Trading volume jumped up today with 2.7 billion shares in the S&P 500 stocks, finally breaking through the 50 dma. Trading on the NYSE jumped 23% and volume increased 15% on NASDAQ.

Before the market opened this morning, ADP reported an increase of 158k private sector jobs in March, down from last month's 237k and down significantly from analyst estimates around 200k. This report has already promptly one economist to lower his estimates for Friday's jobs report. The ISM Services Index reported out at 54.4 for March, down from last month's 56.0. Some financial headlines are blaming the ADP report for today's market slide, but the market didn't really react at the open; it almost seems like traders required several hours to slowly decide to lessen their market exposure. Concerns over North Korea's antics are another possibility, but South Korean stocks seem to be holding up reasonably well. Maybe all of the talk about a correction had traders nervous and it didn't take much to get the selling ball rolling.

The RUT chart looks pretty negative. The candlestick pattern of the past three sessions is known as "Three Black Crows" - each succeeding candlestick starts within the body of the previous candlestick and trades lower. This indicator suggests we are headed lower. RUT broke support at $940 yesterday and broke through support at $935 today. RUT's next support level is around $910 and then $895.

I bought some ATM puts to protect my positions today. I will likely leave them in place through Friday morning (post jobs report).

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Written by Dr. Duke

Created: 02 April 2013

SPX bounced back upward this morning and put to rest the naysayers looking for a correction. SPX ran up $8 and closed at $1570. On the other hand, RUT decreased $4 to close at $934. Volatility gave back yesterday's increases with VIX closing at 12.8%. Trading volume popped up from yesterday's anemic levels, but remains relatively low with 2.2 billion shares of the S&P 500 stocks trading. Trading increased 13% on the NYSE and also increased 7% on NASDAQ.

The fact that RUT diverged from SPX's rise today is another indicator of the sideways consolidation range remaining in control. The Fed's pumping up of this market can't be ignored, but many traders are becoming cautious. This is keeping the bulls in check. You also see this in the relatively low trading volume of the past several weeks. If traders were as bullish as one might conclude from all of the euphoria about new market highs, we should be seeing strong trading volumes to accompany the rising prices. But unless we have some seriously bad news that surprises traders, I think the sideways consolidation range established over the past three weeks will likely continue.

Tomorrow we will receive the ADP private employment numbers, leading to speculation about Friday's jobs report. That jobs report could bring a surprise, but that doesn't seem likely, given the recent economic news and data. It hasn't been rosy, but it hasn't been terrible either. An extremely negative surprise in the jobs report is the only possibility to trigger the widely discussed correction. More likely, we will continue to trade sideways and slightly higher.

My April iron condor continues to slowly improve its position with a current P/L of -$1,590 with position delta = +$53 and position theta = +$121. My May position at 840/850 and 1010/1020 stands at a 6% gain with delta = +$10 and theta = +$45.

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Written by Dr. Duke

Created: 01 April 2013

After SPX closed at a new all-time high on Thursday, everyone was ecstatic. But SPX gave it back today, closing down $7 to $1562. It could have been worse; about 20 minutes before the close of trading, SPX traded as low as $1558, but rebounded a bit into the close. RUT traded down even more sharply with a $13 loss down to $939 (a 1.4% loss versus a 0.4% loss). Today's close put SPX firmly back into its former trading range, but RUT dipped a bit below its trading range, down as far as $935 before recovering to close right at the bottom edge of the trading range of the past three weeks. Surprisingly, trading volume sunk even further, with 1.9 billion shares of the S&P 500 stocks trading. Trading on the NYSE dropped off 22% and trading volume on NASDAQ decreased 7%. Maybe traders took Monday off to extend the long weekend.

The ISM Manufacturing Index reported out at 51.3 for March, a decline from February's 54.2. Analysts were expecting it to remain flat. Readings above 50 indicate that more manufacturers are expanding rather than contracting. The new orders portion of the ISM Index was even more disheartening with a decline from 57.8 to 51.3. Perhaps this news, together with fewer traders on the floors, contributed to today's pullback. It will be interesting to see if there is any follow through lower in tomorrow's markets.

VIX popped up nearly a full point to 13.6%; this modest increase in volatility doesn't support the idea of a big correction starting to take hold.

My Apr iron condor on RUT stands at a loss of 7% with position delta = +$32 and position theta = +$105. All in all, I am inclined to think this market will continue to trade within the range it has defined over the past three weeks. This Friday's jobs report may be an important signal. If the market continues sideways or higher on a mediocre report, the bulls are still in charge (or should I say the Fed continues to hold the market up?).

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Written by Dr. Duke

Created: 28 March 2013

SPX tried to break out to new highs this morning, only to be pulled back, but then the bulls reasserted themselves and SPX closed up $6 at $1569, a new all-time high for this index. RUT was more muted with a one dollar increase to close at $952. VIX dropped a half point to 12.7%. Trading volume bumped up a bit to 2.3 billion shares of the S&P 500. Trading on the NYSE was up 22% and trading on NASDAQ was up 13%. With tomorrow's holiday, the exchanges will be closed, so today was the last trading day for the quarter. That explains the increase in trading volume as institutional managers positioned their funds for the end of quarter statements. If this was the usual "window dressing" by fund managers, then we may see a bit of a pull back on Monday.

Today's higher close on SPX was a break-out of the recent trading range from $1550 to $1565. But I'm skeptical that will hold. Look at RUT. This index of small and mid-cap stocks has also traded in a tight sideways range for the past 2-3 weeks, from $940 to $955. But RUT has been much more quiet as SPX continues to make these highs. Normally I would expect to see RUT leading the bullish charge.

Initial unemployment claims came out this morning at 357k, up from last week’s 341k. Continuing unemployment claims dropped 27k from last week. Fourth quarter GDP came in at a modest growth of 0.4% annualized, and the Chicago PMI reported out at 52.4 for March, down from 56.8 in February. These economic data reinforce the case that this bullish market is built on the FOMC, not economic fundamentals. Our economy is slowly recovering, but it certainly isn’t in the boom mode that this bullish market run might suggest.

So we wait to see what April brings. It is worth considering that the past three Aprils brought significant downdrafts in the markets... interesting.

Enjoy your long weekend.