Dr. Duke's Blog

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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.

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Written by Dr. Duke

Created: 15 February 2013

The markets opened pretty flat this morning and traded sideways until late afternoon when they sold off dramatically. SPX traded down to $1514 before the bulls came to the rescue once again and recovered most of the losses to close at $1520, down $2. RUT lost $1 to close at $923. Even though the markets traded off, traders still see any pullbacks as buying opportunities. This dipping back to about $1514 and then closing around $1520 is becoming a common pattern of late for SPX. I think this has two messages: 1) this market has traded very high very fast, so a little breather is healthy, and 2) whenever there is a pullback of any kind, buyers appear, so this bullish trend still has legs. Trading volume was flat today with 2.8 billion shares of the S&P 500 stocks trading. Trading was up 9% on the NYSE, but down 3% on NASDAQ.

I keep thinking the impending March 1 deadline for sequestration will take its toll on this bull market, but thus far, traders seem to be trusting that a deal will be struck at the last minute. Or maybe there is a school of thought that the sequester will be good for us by forcing the spending cuts Congress seems unable to seriously contemplate.

The Empire manufacturing survey reported out at +10.0, an improvement from last month's -7.8. Industrial production for January dropped slightly by 0.1% and capacity utilization was flat at 79.1%. The University of Michigan consumer sentiment survey came in at 76.3 for February, up from 73.8 in January.

The settlement value for SPX for February expiration is $1523.06 and RUT settled at $928.61. Those of you who gambled on leaving our Feb 930/940 call spreads open won your bet, but that was a risky play. My Feb iron condor on RUT ended at a +5% gain - not wonderful, but I was happy to salvage that gain in this incredibly bullish market.

The exchanges will be closed Monday. Enjoy your long weekend.

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Written by Dr. Duke

Created: 14 February 2013

The markets opened downward this morning based on some weak economic data from Europe, but the bulls quickly recovered and pushed the markets upward. SPX dropped to $1514 but then rallied and closed at $1521, up $1 on the day. RUT closed up $3 at $924. Trading volume bumped up a bit with 2.8 billion shares of the S&P 500 stocks trading. Trading on the NYSE increased 6% and also increased 6% on NASDAQ. VIX declined about one third of a point to 12.7%.

Initial unemployment claims decreased by 27 thousand to 341k and continuing claims decreased 130k to 3.1 million. We have a heavy dose of economic data tomorrow with the Empire manufacturing survey, industrial production, capacity utilization, and consumer sentiment data all reporting. JP Morgan decreased their GDP forecast for 2013 from +2.1% to +1.9%, based on a pessimistic forecast of the sequestration debate in Washington.

Some of you may recall the property tax referendum in CA many years ago. The state and local governments whined and predicted all kinds of dire consequences, but once they realized it was inevitable, they found the waste in their budgets and slashed it. The firefighters and teachers remained employed after all the dust settled. Maybe sequestration will force the same hard and painful budget reductions in Washington. But I guarantee the media will carry nothing but horrible stories of what will be lost between now and March 1. Have you seen any government office that couldn't afford to cut at least 10% of their expenses? They might have to drop their cousins off the payroll, but I think it could be done easily.

In the meantime, what about this bullish rally? It looked pretty dark this morning, but the bulls didn't miss a beat and quickly turned it around. SPX does seem to have flattened here at $1520, but there are few signs of a serious correction as yet. Recent candlesticks are getting some long lower shadows, but that is the only sign of any weakness. And that may only be my imagination.