Dr. Duke's Blog

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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.

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Written by Dr. Duke

Created: 05 March 2013

If you watch CNBC, you had to be impressed with all of the hoopla surrounding the Dow's new all time high. They even scheduled a special program for this evening in commemoration. SPX closed up $15 to close at $1540 and RUT gained $11 to close at $927. Trading volume was up marginally at 2.4 billion shares of the S&P 500 shares, still below the 50 day moving average. Trading volume was up 4% on the NYSE and was up 10% on NASDAQ. VIX dropped a half point to 13.5%.

The bulls remain in charge of this market but one of the missing factors that worries many analysts is the lack of volume. If you take a look at the SPX chart, you will see that the down days in the market in recent weeks displayed higher trading volume while the last three days recorded below average trading volume as SPX traded higher. I am not suggesting you get in front of this train, but I am suggesting some caution. Today's run may convince IBD to change their "Market in Correction" label, but this volume picture is one of the reasons they have remained in correction mode.

The ISM Services index reported today at 56.0 for February, up from January's 55.2. This gain was a bit higher than analysts expected and probably helped fuel today's rally. Tomorrow brings the Fed's Beige Book and ADP's payroll numbers. Now we watch to see how strongly the market moves tomorrow - will the bulls continue to drive or will some profit taking calm things down a bit? The sequester couldn't stop this market; what can?

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Written by Dr. Duke

Created: 04 March 2013

 The markets were pretty choppy today, but the bullish pressure was unabated with SPX closing at $1525, up $7. RUT was less bullish all day, closing up $2 at $917. SPX closed right at or near a decision point on the chart. SPX hit highs just above $1530 week before last, so today's close is nearing resistance. It will be interesting to watch if SPX can break through to new highs above $1530. If you survey the major technical indicators for the market (put/call ratios, P/E ratio and dividend yield of the S&P 500, etc.), I think it is fair to say you would end up with a neutral to bearish posture. But, on the other hand, this market has been overbought for some time and has continued higher.

The CBOE volatility index, VIX, opened at 16.2% this morning, and dropped all day to 14.0%. The recent volatility in VIX demonstrates the nervousness of the market these days; the market may be trading higher, but traders are watching over their shoulders for the other shoe to drop, likely in Washington. VIX is still at relatively low levels, but it has spiked higher in recent days and then, just as quickly, dropped back down.

Trading volume declined today, even as the markets traded higher, with 2.2 billion shares of the S&P 500 stocks trading today. Trading volume on the NYSE and NASDAQ both dropped 8% today. A market move higher on declining volume is not bullish.

Today was a slow day in terms of economic data. The ISM Services Index reports tomorrow. Wednesday brings the FOMC Beige Book and the ADP payroll data, which will be the first clue for the jobs report Friday.

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Written by Dr. Duke

Created: 01 March 2013

Well, here we are on March 1 and I don't see any swarms of locusts or any of the other predicted calamities. You doomsday preppers may have a bit longer to wait for the collapse of civilization. The markets opened weakly this morning with the S&P 500 trading as low as $1501 before bouncing back to close at $1518 for a gain of $4 on the day. RUT gained $4 to close at $915. VIX dropped to 15.4%, a bit lower than yesterday's close. After spiking up over 19% on Monday, VIX has calmed quickly. Trading volume dropped off a bit with 2.5 billion shares of the S&P 500 trading; this is slightly below the 50 dma at 2.6B. Trading volume on the NYSE dropped 8% and volume decreased 5% on NASDAQ.

Today's economic data were a mixed bag with personal income declining 3.6% in January, but the University of Michigan consumer sentiment survey inched up to 77.6 for February from January's 76.3. The ISM Index bumped up a little over one point to 54.2 in February but construction spending dropped 2.1% in January after a 1.1% increase in December.

I hope you all have a great weekend.

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Written by Dr. Duke

Created: 26 February 2013

The markets bounced back weakly today, recovering only a small amount of the losses of the past four trading sessions. SPX closed $9 higher at $1497 and RUT gained $4 to close at $900. Trading volume dropped off a bit from yesterday with 2.7 billion shares of the S&P 500 trading. Trading volume fell 5% on the NYSE and dropped 4% on NASDAQ. It appears that support at $1495 on SPX and $895 on RUT held today, but one has to still be concerned as the Friday sequester deadline approaches. The tone of this market has changed.

Bernanke spoke to the Senate today but it isn't clear if that had a significant effect on the markets one way or the other. Traders appear to be of two minds when it comes to the Fed; they love the stimulus of the markets, but then turn and grumble about the long term effects of the money presses running for so long. I sometimes wonder if we have many free market capitalists left - it's a dying breed. Santelli seems pretty lonely on CNBC.

My Mar condor stands at a P/L of +$1,166 or 7% and position delta = -$3 and theta = +$93 (20 contracts). I took a speculative shot at the PCLN earnings announcement with a Mar iron condor at 600/610 and 750/760. At this point, it looks like a good trade with PCLN trading at $700 after hours.

I used to hold a negative opinion of the fans of the Jerry Springer show as they sat ringside and watched families fight and say all manner of ugly things. But now I realize this is the new normal - just turn on the evening news and listen to the politicians. And to think we used to call them statesmen. What became of reasoned discourse?

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Written by Dr. Duke

Created: 25 February 2013

We witnessed just how nervous this market is this afternoon. The markets opened this morning trading upward; SPX reached $1526 before a slow decline began that accelerated as the afternoon wore on with SPX closing at its low for the day, $1488, down $28. RUT lost $20 to close at $896. And trading volume spiked up with 2.8 billion shares of the S&P stocks. Trading on the NYSE was up 19% and volume increased 21% on NASDAQ. I took a look at VIX this morning and noted that it was up to about 15%, which isn't really too high, but it seemed a little ominous. Of course, it continued to rise as the markets sold off, ending the day at 19%, up almost 5 points.

Most analysts believe the elections in Italy triggered this slide because the election results increased the probability of Italy reneging on its tough measures to get their financial house in order. The fear is that recession in Europe will spread globally. Other analysts attribute at least part of the slide to the impending sequester deadline on Friday. The administration is predicting all kinds of dire consequences of sequestration, loss of TSA employees and air traffic controllers at the airports, fewer border agents, and on and on. Our government currently spends about 3.5 trillion dollars and the sequester will cut 85 billion dollars. To put this in perspective, this is equivalent to my business budget being 3.5 million dollars and I am asked to cut 85 thousand dollars out of my spending. For anyone who has ever run an organization of any size, this is trivial. It is highly unlikely one would have to even cut any people's jobs to get 85k out of a 3.5M budget. And we aren't talking about fine-tuned organizations here. This is the Federal government - there is waste everywhere. We are witnessing political theater at its best. The politicians are trying to scare voters into thinking there is no reasonable choice - we can't reduce spending; we must raise taxes! We can't wait! It's an emergency! OK, I'll put my soapbox away.

Back to the markets, the question on our minds is: how far will it drop? SPX traded right down close to support at $1485. So I will be watching the open tomorrow to see if it breaks below $1485; the next well defined support level is around $1475. If we break that level, it gets pretty ugly, threatening to wipe out all of this year's gains. The SPX 50 dma is at $1477 and the 200 dma is at $1410. A correction of 10% from the high at $1530 would wipe out all of this year's gains, taking us down to $1377, a level last seen in mid-November. I don't think there is any rational basis for a correction of that magnitude, but one can lose a lot of money talking about what's rational.

The market slide is helping my condor positions; the March iron condor on RUT stands at a P/L of +$766 or +4% with position delta = -$8 and position theta = +$114 (for 20 contracts). Fortunately, my put spreads are down at 810/820, still about $75 OTM. I'm sure CNBC will have a full cast of doomsayers on tomorrow. I will watch Doomsday Preppers this evening to prepare...

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Written by Dr. Duke

Created: 22 February 2013

The markets jumped back and recovered yesterday's losses, but trading volume dropped off markedly. SPX gained $13 to close at $1516 and RUT gained $11 to close at $916. VIX fell a little over one point to 14.2%. SPX opened in positive territory but traded largely sideways until late morning, when it gradually strengthened for the balance of the day, closing at its high for the day.

Analysts have been looking for a correction and thought Thursday's drop was the beginning, but... maybe not. However, we have the sequester drama playing out in full next week, so it will be interesting to see where the market goes next week as we approach the March 1 deadline.

An interesting side note to today's bounce back upward was the lack of trading volume with only 2.4 billion shares of the S&P 500 stocks trading; the 50 dma is at 2.6B. Trading volume dropped 16% on the NYSE and dropped 23% on NASDAQ. It makes me wonder what is coming next week. Today was a bounce back with only modest conviction. Maybe all the bulls took off for a long weekend.

My Mar condor stands at a P/L of +$566 or +3% with delta = -$77 and theta = +$123. Rest up and enjoy the weekend; next week will be interesting.

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Written by Dr. Duke

Created: 20 February 2013

The markets looked weak, but not extraordinary until the last hour or so of trading. SPX dropped $19 to close at $1512 and RUT dropped off $19 to close at $914. Trading volume increased a bit to 2.8 billion shares of the S&P 500 stocks; trading on the NYSE increased 18% and trading on NASDAQ increased 8%. Today's drop puts SPX back in the trading range of about ten days ago, when it was trading between $1495 and $1512. Tomorrow's opening will be interesting. The sell off today was triggered by some comments in the FOMC minutes to the effect that the Fed's support of the markets may end sooner rather than later. As one might expect, VIX spiked up to 14.7%, up 2.4 points. But this is still within the range so far this year.

My Mar condor stands at break-even with delta = -$40 and theta = +$114. We'll see if the bulls see this as another buying opportunity tomorrow.

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Written by Dr. Duke

Created: 19 February 2013

 As our President paints a "sky is falling" scenario over the sequestration his party set in motion, this market just continues to climb higher. Market analysts continue to label this market "overbought" and predict a correction, but the markets haven't checked their email. SPX climbed another $11 today, closing at $1531. RUT is trading even stronger, up $9 at $932. Trading volume on the S&P 500 isn't available as I write this, but preliminary data on the exchanges suggests trading volume declined today. Normally, a decline after expiration Friday would be normal, but trading volume on Friday was unusually low. No one can deny the strength of this bullish rally, but the volume has been anemic.

There wasn't any significant economic data to propel this market today; the only report I saw was the National Association of Home Builders Index coming in at 46, down slightly from January's value of 47.

My March iron condor at 810/820 and 950/960 on RUT stands at a P/L of -$790 (-4%) with position delta = -$132 and position theta = +$108. I hedged the position today with some Apr 950 calls.

It seems to me there is increasing evidence that sequestration will occur March 1 and maybe it isn't as big a deal as we have been led to believe. I never ran any organization that couldn't take a few per cent off the top without causing any real damage. After all, we are talking about 85 billion dollars in cuts - remember the scale of this government behemoth - it is running over a trillion dollars (1000 billion) in the red each year. 85 billion is nothing. Therefore, the prospect of this Washington debate impacting the markets may have been overblown... but we'll see. I remain cautious.