Dr. Duke's Blog

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Written by Dr. Duke

Created: 25 March 2013

The futures were positive this morning on the news of the Cyprus bank bailout and the markets opened higher as one would expect. But the euphoria didn't last long. SPX hit up against its all time high near $1565 by 10 am and crumbled from there. SPX closed at $1552, down $5 but RUT remained unchanged at $946. Volatility remained unchanged with the VIX at 13.7%.

Most market observers attributed the reversal this morning to concerns that other European banks may be subject to similar bailout requirements, taxing large depositors, and this prospect may begin a flight out of the European banks. Bank stocks in Europe traded down.

There wasn't any economic news today, but tomorrow brings a host of data with durable goods, Case-Schiller, consumer confidence, and new home sales. It should be interesting.

My April iron condor position stands at a net P/L of -$2,110 or -11% with delta = -$5 and theta = +$107.

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Written by Dr. Duke

Created: 22 March 2013

The markets bounced back into positive territory today with SPX moving up $11 and closing at $1557. RUT was more muted with a two dollar increase to $946. Trading volume continues to be weak with 2.2 billion shares of the S&P 500 stocks (the 50 dma is 2.5B). Trading on the NYSE dropped 10% and trading volume on NASDAQ dropped 1%.

A large proportion of financial news was devoted to the Cyprus banking crisis this week. Traders seem to have discounted the negative effects since the markets were consistently in positive territory today, even though no resolution of the Cyprus problems is expected until early next week. SPX opened higher this morning, and then traded higher all day, including a last minute spurt that took it near its intraday highs for the close. SPX came close to completely recovering all of the losses from yesterday. That doesn't sound like a market that is worried about Cyprus.

The bullish strength underlying this market was demonstrated once again this week. Given the chorus of analysts and gurus calling for correction, this seems all the more surprising. Perhaps the recent bullish excesses will be gradually absorbed via some sideways consolidation action. In spite of all of the wringing of hands this week, SPX never came close to its solid support level at $1530.

Volatility dropped a bit today with about a half point drop in the VIX, down to 13.6%. Historically, this remains a low volatility environment. By comparison, the volatility index for the Russell 2000 index, RVX, ranged from about 24% to 32% last year, but has remained largely below 20% this year, with only two exceptions in late February. RVX closed at 17% today.

My April iron condor on RUT at 880/890 and 990/1000 remains underwater by about 13% with delta = -$12 and theta = +$108. With both spreads being greater than one standard deviation OTM with less than a month to go, this position is in moderately good shape. However, the adjustments to date have consumed much of the potential profit for this position.

Enjoy the weekend.

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Written by Dr. Duke

Created: 20 March 2013

Bernanke reassured traders that he isn't going to remove the punch bowl from the party anytime soon and the markets resumed the rally. SPX closed at $1559, up $10 and RUT gained $9 to close at $952. Markets were up at the open today, having put Cyprus behind them, but hit new intraday highs after the FOMC minutes were released at 2 pm ET. But trading volume remains weak with 2.3 billion shares of the S&P 500 stocks trading today. Trading on the NYSE was down 10% and trading volume fell 6% on NASDAQ.

The FOMC reported a view of a strengthening economy, but did not feel confident about ending the quantitative easing until further evidence of recovery is confirmed. As expected, interest rates remain unchanged. That would appear to give the bulls a green light to continue this strong rally. Of course, that also fuels the predictions of many analysts that this rally has run too high and too quickly to not be subject to a correction soon. The Cyprus alarm appeared to possibly be the correction trigger, but the market quickly dismissed the news.

The Cyprus incident does show how close to the sell trigger traders are in this market. No one wants to give back the gains of the past few months. But when so many analysts are warning of a correction, will the market just keep climbing?

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Written by Dr. Duke

Created: 18 March 2013

Cyprus' plan to tax bank deposits to fund its banking bail-out spooked global markets overnight, but you could see the futures beginning to strengthen even before the markets opened this morning. SPX dropped to its low for today of $1545 in the first three or four minutes of trading and then recovered much of that loss by early afternoon. But then the markets weakened with SPX closing at $1552 for a loss of $9. RUT lost $5 to close at $947. As one might expect, the uncertainty tossed into the markets by the Cyprus news punched up the VIX two points to 13.4%, but that remains a relatively low level of volatility.

Trading volume dropped off as expected from Friday's quadruple witching highs with 2.2 billion shares of the S&P 500 stocks. Trading on the NYSE dropped 51% and trading decreased 30% on NASDAQ. In the last fourteen trading sessions, trading volume in the S&P 500 stocks has only exceeded the 50 day moving average twice. Today's drop back to 2.2 billion shares is back in the range of relatively low trading volume we have been observing - this is the one measure that isn't consistent with a bull market.

Given the relative insignificance of Cyprus, today's market action demonstrated how nervous these markets are - we have been setting records in this bullish run, and that very fact has traders watching over their shoulders. The slightest twitch is resulting in flurries of sell orders.

Economic reports were scarce today, but the FOMC meeting starts tomorrow and reports out on Wednesday. But it appears unlikely that Bernanke is going to change much, if any, of the language in their report. Traders will be watching for hints of the Fed pulling back from their stimulative posture, but Bernanke has been much more transparent than previous Fed administrations. He has been very clear about the criteria they will use to begin raising interest rates and phasing out the quantitative easing programs, and it isn't likely to happen anytime soon.

Today's market reaction to the Cyprus news makes one wonder what will happen if we have a truly negative news event...

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Written by Dr. Duke

Created: 15 March 2013

The markets opened in the red this morning and basically chopped sideways all day. If you were waiting for a correction, this certainly wasn't it, since we saw only very modest losses today. SPX dropped off $3 to close at $1561 and RUT lost $1 to close at $952. VIX ended the day unchanged at 11.4%, so traders haven't changed their bullish outlook.

As one might expect for a quadruple witching expiration, trading volume was elevated today with 3.5 billion shares of the S&P 500 stocks. Trading on the NYSE was up 106% and trading volume increased 33% on NASDAQ.

Many economists have been predicting that the flood of monetary stimulus by the Fed will spur inflation, but minimal evidence has appeared thus far. Yesterday's PPI report came in with an increase of 0.7% and the CPI came in today with an increase of 0.7% for February. Is this the beginning of some inflationary pressure? If so, this could force the Fed's hand sooner rather than later.

Industrial production increased 0.7% in February and capacity utilization ticked up to 79.6 for February from 79.2. The University of Michigan consumer sentiment numbers  for March decreased to 71.8 from 77.6. The Empire manufacturing survey decreased to 9.2 for March from the previous month's 10.0. So the economic data today was mixed, and some suggested that the softening consumer sentiment data was the cause of today's market weakness but, in the absence of much more negative data, this bullish rally appears very solid.

SPX settled at $1557.08 and RUT settled at $953.58 for March. This confirms the worthless expiration of my March 810/820 put spreads, locking in an 8% gain for my March iron condor position.

Enjoy your weekend.

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Written by Dr. Duke

Created: 14 March 2013

Markets opened strongly this morning, presumably boosted by the unemployment claims data. SPX jumped about $6 out of the box and then climbed a bit more in afternoon trade. What was a little surprising was a bump of over a dollar in literally the last minute of trading. On the one minute chart, SPX had traded down to $1562 and then jumped to a little over $1563 in that last minute. I'm not sure what caused that last minute spurt. SPX closed at $1563, up $9 and just under its all time high of $1565. RUT showed the same last minute spurt and closed up $9 at $953. Trading volume was up from yesterday, but remains relatively low. Trading in the S&P 500 came in at 2.2 billion shares as compared to the 50 dma at 2.6B. Trading on the NYSE was up 13% and trading volume on NASDAQ was up 5%.

The initial unemployment claims came in at 332k, down 10k and this surprised analysts who were predicting a good result, but not quite this good. Continuing unemployment claims also dropped to 3.0 million, down 89 thousand.

I will be watching tomorrow to see what happens if SPX punches through $1565 or hesitates before making that break-out. No one can deny the strength of this bull market, but one has to worry about the potential bad news out of Washington with respect to the debt ceiling debates and the debt rating agencies standing in the wings. I continue to be concerned about a sudden and severe pull back. We'll see.

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Written by Dr. Duke

Created: 13 March 2013

I am in Phoenix and will be traveling back to Chicago later today, so I am posting my blog early, before the market closes. I was invited to speak for the POINT options trading group here in Phoenix last evening. For any of you who live in this area, I recommend you check out this group - a very knowledgeable and supportive group of options traders. If I lived down here, I would be part of this group.

With a little over two hours until the market closes, SPX is trading at $1555, up $2 and RUT is trading at $943, up $3. Trading volume remained relatively low yesterday with about 2.3 billion shares of the S&P 500 stocks trading. In fact, trading volume in the S&P 500 has only touched the 50 day moving average once in the last ten trading sessions. And the preliminary indications suggest another low volume trading day today. Perhaps I am not the only trader that remains a bit apprehensive of this market, in spite of a continuing push higher. The markets traded lower this morning, but then recovered to begin making gains by late morning, but the trading volume remains low.

If you take a look at the SPX chart, you have to be impressed with those lower shadows on the candlesticks the past few days. SPX has started out weaker the last three mornings and dipped down to around $1548 before recovering, but that level is holding so far. This shows the underlying bullish strength of this market, while the sideways trading at low volume is characteristic of the market's weariness after such a strong rally upward. Markets always take pauses on their climbs higher; sometimes those pauses take the form of a strong correction; sometimes the market just trades sideways for a period of time - the so-called "consolidation" phase.

Retail sales came out with a gain of 1.1% for February, surprising analysts with this strong showing - but the markets opened weakly on the backs of that data. I don't recall a market environment quite like this. The strong gains we have seen recently would normally be causing euphoric excess - the classic "betting the farm" syndrome. But traders recognize the Fed's supporting role in this rally and seem to be nervous that the punch bowl will be taken away and spoil the party. The market's reaction to the Italian elections a couple of weeks ago demonstrates the nervousness of this market. Be careful.

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Written by Dr. Duke

Created: 11 March 2013

The markets were pretty lazy today and started out in the hole but moved into positive territory by noon. SPX made a new high at $1556, up $5 on the day, but RUT closed flat on the day at $943. It seems like this market is slowing as SPX moves closer to its historic high. Now the question (for me at least) becomes how this market consolidates these highs - a big correction or just a sideways move for a while? A correction is more likely if we get surprised by some bad news; in the absence of that, maybe today's market is more typical: small gains and small losses for a few weeks or months.

Trading volume continued to be pretty weak; trading on the NYSE dropped off 13% and volume was up 1% on NASDAQ.

There wasn't any economic data to move markets today, and I don't see any market moving data coming out this week, although a surprise is always possible. Retail sales will be released Wednesday; unemployment claims and PPI report on Thursday and then CPI comes out Friday.

In the meantime, the market grinds higher??

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Written by Dr. Duke

Created: 08 March 2013

The non-farm payroll report, aka the jobs report, was generally more positive than expected with 236 thousand new jobs. The unemployment rate dropped to 7.7%, but a large factor in that drop was 130 thousand people dropping out of the search for work. One of the quirks of our government's method for calculating unemployment is that they use a survey of households to determine the labor force participation rate - as that number decreases the unemployment rate decreases. We don't count as unemployed those people who have given up searching for work. If the labor participation rate were 66%, as it was in December of 2007 before all hell broke loose, the unemployment rate today would be 10.7%. That may help you reconcile what you are seeing in your neighborhoods with the published unemployment rates.

A large factor in the increase in the jobs number was a bump up in construction due to a rebounding real estate market. And that is certainly welcome news. The positive jobs report surprise continued to fuel this bullish market run even higher. SPX tacked on another $7 to close at $1551 and RUT closed at $943, up $8. VIX dropped another half point to 12.6%.

Trading volume continues at anemic levels. Trading in the S&P 500 was 2.4 billion, still below the 50 day moving average. The last time we saw above average volume was on February 25th when the market pulled back, and the following day when it bounced. Trading on the NYSE dropped 1% and decreased 4% on NASDAQ. This trading volume picture seems odd. I see reports of the individual investor returning to the markets and bonds being sold to move to equities. That is consistent with a bull market, but where is the trading volume?

I applied my Two Sigma Rule to the March position today, but the 810/820 put spreads are far, far OTM, so I left them open to expire worthless. I closed the call spreads a little over a week ago.

Enjoy your weekend.

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Written by Dr. Duke

Created: 06 March 2013

SPX opened higher this morning, traded into the red around noon, and then it rebounded, only to be pulled back down by the close of trading. SPX gained $2 when it was all said and done, closing at $1541. RUT gained $3, closing at $930. VIX remained unchanged at 13.5%. Trading volume was flat to slightly down with 2.4 billion shares of the S&P 500 trading (flat from yesterday and below the 50 dma). Trading volume increased 1% on the NYSE and decreased 7% on NASDAQ.

ADP released their private employment report today and it was a favorable surprise to most analysts with 198 thousand jobs added in February. This buoyed the market this morning, but it didn't seem to hold. ADP's numbers suggest that the jobs report Friday may also be favorable and we may even see unemployment tick down a bit. In the absence of some surprising news out of Washington or Europe, this bull market may continue to surprise traders and move higher.

I decided to take a flyer on AAPL today, buying the Jan 2014 500/600/700 call butterfly. The beauty of this trade is a very broad range of profitability and plenty of time to be right. Several of the notable "names" in the hedge fund world are bullish on AAPL from these levels - we'll see.