Dr. Duke's Blog

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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.

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Written by Dr. Duke

Created: 13 February 2013

The markets just keep on trucking higher. Today was certainly a little more muted, but there is no sign of the correction so many expect. Perhaps that consensus is the sure sign that the bull run will continue. SPX gained $1 to close at $1520 while RUT tacked on $3 to close at $921. RUT's chart continues to outpace SPX, which in and of itself is a bullish sign. However, trading volume is still weak with 2.4 billion shares of the S&P 500 stocks trading. Trading on the NYSE was flat today and volume was up 3% on NASDAQ.

SPX hit its highs in the first couple of hours of trading this morning, but then pulled back and traded more weakly the rest of the day. As SPX hit its low for the day about one hour before the market closed, the bulls rallied and pushed the market back into positive territory. SPX traded as low as $1516 and as high as $1525 before closing at $1520. Today's candlestick was the classic doji, which often communicates a balance between the bulls and bears, or a measure of indecision. But shorting this market has been a mistake for a long time, so I will want to see some confirmation before suggesting this doji is signaling a market top.

Retail sales were up 0.1% in January, which wasn't anything to write home about, but was in line with analyst expectations.

I offer a warning for any Neanderthals in the audience - tomorrow is Valentine's Day. Enjoy!

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Written by Dr. Duke

Created: 11 February 2013

SPS broke out of its recent trading range Friday, but it was on much lower trading volume. This morning SPX opened weakly, trading down as low as $1513 before strengthening to close at $1517, down only $1 for the day. RUT also dropped off $1 to close at $913. But trading volume fell off once again with only 1.8 billion shares of the S&P 500 trading today while the 50 dma is 2.5B. Trading on the NYSE dropped off by 10% and trading on NASDAQ dropped 15%.

With more and more of the talking heads predicting a pullback or correction, this market's strong bullish bias appears to continue unabated. Just as the markets opened weakly this morning, it didn't take long for the major averages to bounce back. The run since mid-November has been unusually strong, but the correction has not yet appeared. However, a few weeks of sideways trading might serve just as well to give this market time to consolidate. But the sequester deadline of March 1 is coming closer and that may provide the stimulus for a market sell-off. Or perhaps S&P will counter the Justice Department's suit with a downgrade of our treasury bonds - that would be a market moving event.

I closed the 930/940 call spreads of my February condor today for $0.35. Assuming the 820/830 put spreads expire worthless this coming weekend, that will complete the February position with a 5% gain. No significant economic news is scheduled for a couple of days, so this market may just trade as it did today - choppy and sideways. We'll see.

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Written by Dr. Duke

Created: 08 February 2013

The Standard and Poors Index broke out of its trading range to new highs this morning and held those highs into the close. But before you get too excited, note that this break-out occurred with a big decrease in volume.

SPX closed up $9 at $1518 and RUT gained $6 to close at $914. Trading volume fell off to 2.2 billion shares of the S&P 500 stocks; the 50 dma stands at 2.5B. Trading volume fell 15% on the NYSE and dropped 7% on NASDAQ. As one might expect in the midst of all of this euphoria, the VIX dropped a half point to 13.1%. Apparently, traders don't think the threat of sequestration and treasury bond downgrades are anything to be concerned about. But as Clint Eastwood said on CNBC this morning, if the politicians in Washington don't think this is a problem, why should we?

There wasn't any significant economic news today, but it appeared that the Linked In and AOL earnings announcements encouraged traders. I must admit that I don't get it.

My Feb condor continues to wander along near break-even with a gain of $339 (+2%) with position delta = -$190 and position theta = +$176. I plan to take my best friend of 45 years to dinner at our favorite place, sip a glass of wine, and try to put the market and politics behind me. Enjoy your weekend.

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Written by Dr. Duke

Created: 06 February 2013

The markets opened in the red this morning, traded back into the black and then traded back down until about 2 pm ET when a rally developed and ran steadily into the close. SPX closed up $1 at $1512 while RUT gained $3 to close at $911. VIX dropped about a third of a a point to 13.4%. Trading volume dropped back down today, with 2.6 billion shares of the S&P 500 stocks trading. Trading volume on the NYSE decreased 2% and volume on NASDAQ declined 7%.

As I watch CNBC, it seems that everyone is now talking about a pullback or correction. Hmm... The market usually does its best to confound the majority opinion. Maybe this bull still has legs (whether it makes sense or not).

My Feb iron condor on RUT remains roughly at break-even with delta = -$169 and theta = +$260. I find it interesting that we are not being subjected to the incessant "sky is falling" chant in the media. As the fiscal cliff was approaching, one would conclude the end of the world was upon us. But the country's debt continues to spiral out of control, the President denies we have a spending problem, the economy continues to sputter, and we can't even muster enough responsibility to pass a budget.

But some of you connoisseurs of fine literature may recall Alfred E. Neuman's wise words, "What - me worry?"

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Written by Dr. Duke

Created: 05 February 2013

The Standard and Poors 500 Index opened this morning right at yesterday's close and ran upward all day, nearly closing at yesterday's open. SPX closed up $16 at $1511; RUT gained $9 to close at $908. VIX decreased about one point to 13.7%. Trading volume popped up with 2.8 billion shares of the S&P 500 stocks trading today; trading volume was up 7% on the NYSE and up 15% on NASDAQ.

So what can we say about this market? What changed from yesterday to today? And today's bullish move was on a reasonably strong increase in volume - all very bullish signs. On days like this, the talking heads on CNBC amaze me. It seems like it doesn't matter what the market does, they act like this is all very rational and can be easily explained. I don't think so.

The only economic news today was the ISM Services Index, reporting at 55.2 for January, slightly down from the previous reading of 55.7. The market's enthusiasm today certainly wasn't based on this report. It seems like all of the economic indicators are flat or "slowly recovering". But the market roars ahead.

My Feb iron condor stands at break-even with delta = -$145 and theta = +$235. Delta of the short 930 calls is at 12, so this position is in pretty good shape and time is starting to run short. Theta is starting to pump money into the position. But what happens tomorrow? That is exceedingly difficult to predict. Non-directional trading is looking better and better.

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Written by Dr. Duke

Created: 04 February 2013

The markets opened lower this morning, following the lead of European markets, based on political problems in Spain and Italy. The instability in Greece continues to worsen. SPX closed down $17 at $1496 and RUT closed at $899, down $12. SPX gave up a few more points in the last few minutes of trading, closing at its low for the day. As one might expect, VIX moved up to 14.7%. Trading volume fell from last week with 2.5 billion shares of the S&P 500 stocks. This is right at the 50 dma. Trading volume fell 14% on the NYSE and declined 7% on NASDAQ.

Tomorrow's open will be critical to answer the question of how severe or modest the correction might be. If SPX opens at $1495 and holds that level, then we could trade sideways for a bit and allow this over heated market to stabilize. If it falls through $1495, the next support level is $1470. In that case, the correction could be more severe. But we may all be surprised and see this strong bull reassert itself, as it has been doing for several weeks against all reason.

My Feb condor stands at a 2% gain with delta = -$68 and theta = +$194. So we wait and see what tomorrow brings.

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Written by Dr. Duke

Created: 31 January 2013

The markets delivered a mixed message today with the S&P 500 declining a bit, but the small cap Russell 2000  regained a bit of yesterday's loss. SPX dropped $4 to $1498 while RUT gained $5 to close at $902. In the meantime, VIX was unchanged at 14.3%. Trading volume bumped up with 2.8 billion shares of the S&P 500 stocks trading; trading increased 7% on the NYSE and increased 8% on NASDAQ.

Economic news was mixed with initial unemployment claims coming in at 368k, up 38k from last week and continuing unemployment claims also increasing by 23k. On the other hand, the Chicago PMI increased to 55.6 for January from last month's 50.0.

Looking to the SPX chart, yesterday's harami candlestick was followed by a decline today, suggesting a reversal in the recent trend, or at least a breather. And a breather at this point after a historic run higher would certainly not be a surprise.

My Feb condor stands roughly at break-even with delta = -$113 and theta = +$193. This weekend's time decay should be helpful.

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Written by Dr. Duke

Created: 30 January 2013

It seemed like the markets were just trading sideways yesterday and this morning, waiting on the FOMC announcement this afternoon. Bernanke surprised traders by saying the economic recovery has stalled, but remained committed to the stimulus programs in progress. In fairness, Bernanke said this pause in the recovery is temporary, but I don't think the market was expecting him to even suggest the recovery was pausing. Of course, the announcement that 4th quarter GDP has contracted by 0.1% was a surprise. This was the first contraction since the 2nd quarter of 2009. Analysts were expecting an increase of 1% following the 3.1% rise in the 3rd quarter. Perhaps Bernanke felt it necessary to take a more negative tone in light of this GDP number. As a reminder, economists consider two sequential contractions in GDP as the basic definition of a recession. Hmm...

SPX closed down $6 at $1502 and RUT closed at $897, down $10. VIX increased a point to 14.3%. The fact that the markets didn't drop more than they did underscores the strength of this market. A key measure of this market's resilience will be the jobs report Friday. ADP reported an increase of 192k in private payrolls for January, up from the previous +185k. Maybe that indicates a positive non-farm payroll number. Earlier this week, the Conference Board's consumer confidence survey reported out at 58.6 for January; this is the lowest reading since November of 2011. The recent peak was in October at 73.1. Trading volume dropped off from yesterday with 2.6 billion shares of the S&P 500 trading (the 50 dma = 2.5B). Trading on the NYSE was flat and trading volume was up 2% on NASDAQ.

My Feb condor on RUT stands at a net P/L of +$560 or +3% with delta = -$61 and theta = +$156 on 20 contracts. The theta/delta ratio is back in line, but if the bullish trend resumes, it will be a race to expiration. With 15 days until expiration, each day bleeds out a fair amount of time value, but a few powerful gains in the market might push me to close the position. We are getting a little short on time to be hedging. We'll see.