Dr. Duke's Blog

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Written by Dr. Duke

Created: 24 January 2013

The markets appeared to be taking a breather today, but this has been a dangerous market to bet against. SPX is up about 7% just since 12/31 - that is a significant rally. SPX ran as high as $1502 today, but pulled back to close at its open at $1495, for no change on the day. RUT closed up $3 at $900. The SPX chart is a classic doji candlestick, the indicator of indecision, or a balancing of the bulls vs. bears tug of war. Dojis often, but not always, appear just before a trend reversal on the chart. With the strength of this market, I hesitate to predict any reversal; but it does have to at least slow down and trade sideways once in a while. Trading volume was up a bit today with 2.7 billion shares of the S&P 500 stocks trading. Trading on the NYSE was up 7% and volume jumped up 19% on NASDAQ, probably reflecting the carnage in AAPL. I studied AAPL at length yesterday, but just could not convince myself that any trade was even remotely safe. If some of you were willing to place the bearish bet, congratulations. I was tempted to make the classic, "it can't trade lower" bet, but finally decided that the bloom was off this rose, whether it made sense or not.

Initial unemployment claims hit a new low today at 330k claims. This is the lowest report since January, 2008.

The VIX moved up slightly to 12.7%, still very low historically.

My Feb iron condor on RUT stands at break-even with delta = -$95 and theta = +$133.

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Written by Dr. Duke

Created: 22 January 2013

The bulls are clearly in charge. This morning, the market opened weakly and traded down a bit as the existing home sales report wasn't in line with analyst expectations. But then the major indexes solidified and headed higher. SPX gained $7 to close at $1493 after trading as low as $1481. SPX closed at its high for the day - classic bullish behavior. RUT ran up $6 to close at $899. VIX increased a bit this morning, but then stabilized at 12.4%, no change on the day. The only weak component to this bullish market was trading volume. Trading in the S&P 500 came in at 2.6 billion shares, a decline from Friday, but still above the 50 dma. Trading volume on the NYSE was down 6%, while NASDAQ was also down 5%.

Existing home sales came in for Dec at an annualized rate of 4.94 million; analysts were expecting 5.1 million. Now, some analysts are predicting increased housing prices because of supply constraints. That seems amazing to me; we have had only bad news about real estate for so long.

My Feb condor position on RUT remains above water at a 3% gain with delta = -$72 and theta = +$96 on 20 contracts. I closed the 910/920 calls today and rolled them up to 930/940.

Since the first of the year, this has been a classic bull market in the sense that it has continued upward in spite of a host of reasons we should be bearish. We are trading upward in spite of no agreement on taxes, spending or the debt ceiling. Yes, everyone agreed on tax rates, but many voices are now calling for more revenues. And the President insists we don't have a spending problem. And the GOP has agreed to raise the debt ceiling without spending cuts. Unemployment in Europe is at record highs. These chickens will come home to roost someday, but this market is continuing higher...

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Written by Dr. Duke

Created: 18 January 2013

The markets opened weakly this morning with SPX losing about $5 before recovering to close at $1486 for a gain of $5 on the day. Virtually all of that gain came in the last 45 minutes of trading today. RUT closed at $893, up $2. After yesterday's break-out on SPX, today's strong close was even more bullish, but virtually any measure tells us this market is overbought. It has surprised me that the debt ceiling and spending debates have not taken a toll on this market. Apparently, traders are taking all of the rhetoric with a grain of salt. VIX actually fell a bit further today, closing at 12.5%. This is a record low; you have to go back to the summer of 2007 to find lower values of the VIX. This low level of VIX further confirms the complacency of the large institutional traders - they are not concerned about the political battles.

RUT settled at $889.72 today and SPX settled at $1481.36. Hopefully, none of you carried positions into expiration that were anywhere near those values. I recommend my Two Sigma Rule: close any spread on the Friday before expiration week that is less than two standard deviations OTM. The difference between the Thursday close and the settlement price on RUT last year averaged $4.46. Since one standard deviation a week out is typically around $6 to $9, this is a conservative rule.

My Feb condor on RUT stands at a net gain of $600 or +4% with delta = -$191 and theta = +$141 (20 contracts).

Next week is going to be exciting. GOOG, AAPL, IBM, ISRG and others all report earnings next week. There will be many opportunities for some speculative trades if that's your bag. As long as you don't bet the farm, a little speculation can be fun. The exchanges will be closed Monday. Enjoy the long weekend.

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Written by Dr. Duke

Created: 16 January 2013

Markets continue to trade sideways as the debt ceiling debate heats up. SPX closed unchanged at $1473 while RUT lost $2 to close at $882. VIX dropped a touch to 13.4%. So traders aren't fleeing for the exits, but they aren't buying either.

The Fed's Beige Book was released today with nothing new - the economy is slowing recovering; I think we have heard that somewhere.

The CPI data for Dec was released with 0.0% change. Industrial production came in for Dec up 0.3% and capacity utilization was flat at 78.8%. All in all, the same news we have been hearing: slow and steady, nearly flat, low or no economic growth.

I watched an interview today with a Boston College professor of economics, Lawrence Kotlikoff. He proposes looking at the government's debt based on a balance sheet like we would use for a business: assets and one side and liabilities on the other. He uses CBO numbers for the next ten years of tax revenue (assets) and the next ten years of government obligations (social security payments, etc.). On that basis, he says our deficit is 211 trillion dollars not sixteen. On that basis, the professor claims we are in worse shape than Greece. I'm not an economist, so I don't know the pros and cons of this approach, but even the traditional economic reporting I see isn't pretty. Bernie Madoff was a piker compared to our politicians.

My Feb condor stands at a net gain of $980 (7%) with delta = -$102 and theta = +$147.

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Written by Dr. Duke

Created: 15 January 2013

The markets traded underwater all day, but surged in the last hour of trading to make a small gain on the day. SPX closed higher by $2 at $1472 and RUT gained $5 to close at $885. VIX remains flat at 13.5%. Trading volume remains weak with 2.4 billion shares of the S&P 500 stocks trading, remaining below the 50 dma. Volume rose 4% on the NYSE but was flat on NASDAQ.

Retail sales came in at an increase of 0.5%, an improvement over the previous month's 0.3% increase. The PPI dropped 0.2% in December. The Empire State manufacturing survey was again in negative territory for Dec with a -0.2% reading. This was better than the previous month's -0.8%, but this is the sixth month in succession of contraction in this survey of manufacturing.

The most interesting news of the day was Germany's announcement that they are moving their gold reserves back to Germany; some will come out of the New York Federal Reserve Bank, and some will come out of France's central bank. What does this say about trust between the global banks? Maybe things are worse in Europe than we thought? Maybe Germany is worrying about our government's solvency?

There certainly is plenty to worry about... In the meantime, my Feb iron condor remains in the black. I positioned this one a little tighter than normal, so I can afford to close it early for a reasonable gain. I don't want to be exposed to this market for too long these days.

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Written by Dr. Duke

Created: 14 January 2013

The markets are holding right at resistance. In fact, given the onslaught of political posturing and refusal to negotiate about the debt ceiling, the market is holding up surprisingly well. I suppose the conclusion is that traders don't yet take the rhetoric seriously. SPX closed at 41471, down $1 and RUT also lost $1 to close at $880. VIX remained flat at 13.5%. Trading volume was mixed with a drop in the trading of the S&P 500 stocks to 2.2 billion shares and a drop of7% on the NYSE. But trading on NASDAQ increased 5%. Maybe that was the furious trading in AAPL on the reports of iPhone 5 sales falling off.

Today didn't bring any economic data for the markets to pore over. Tomorrow we get retail sales and the PPI.

My Feb iron condor on RUT at 820/830 and 910/920 stands at a P/L of +$440 or +3% with delta = -$82 and theta = +$140 on 20 contracts.

It seems like we have moved from one death watch (fiscal cliff) to another (debt ceiling). Fun, fun...

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Written by Dr. Duke

Created: 10 January 2013

For the last several sessions, traders have been taking a “wait and see” view of the markets. SPX has bumped up against resistance around $1465 for several days. This morning, that pattern reappeared, with SPX opening, trading up to about $1469, and then pulling back to $1461. But then the surprise: the markets strengthened around 2:30 ET and started trading upward to close at $1472, up $11 and finally breaking the highs set in 2012. So we are left with the question I posed above: Is this break-out for real? Trading volume remains at the 50 day moving average, so that is one data point arguing against the break-out. Can the markets break out with the backdrop of the debt ceiling debate? Maybe they can; it doesn't have to make sense.

New unemployment claims rose slightly this week to 371k, underscoring the fact that our country’s economic recovery is weak at best. This is a fragile economy. The debate about the prospects of another recession continue.

The Russell 2000 Index (RUT) has generally followed SPX by trading sideways the past few sessions, and closed up $2 at $881 today. RUT has been trading stronger than SPX in that it broke its own 2012 highs in mid-December. But today, RUT appeared to lag behind SPX.

Earnings announcements will probably determine the short term market direction until the debt ceiling talks begin to get serious. American Express announced layoffs today of 5,400 employees; AXP announces earnings January 17. Some of the major banks report next week.

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Written by Dr. Duke

Created: 09 January 2013

The markets continued the recent pattern of trading sideways as SPX closed up $5 at $1461 and RUT closed at $880, up $5. Trading volume was flat with 2.5 billion shares of the S&P 500 stocks trading today; this is right at the 50 day moving average (dma). Trading volume was also flat on NASDAQ and up 3% on the NYSE. VIX inched up 0.2 points to close at 13.8%.

SPX traded up to resistance at $1465 this morning but then steadily declined into the close. Alcoa's better than expected earnings report set the stage this morning for a favorable market, but it wore off quickly. Some favorable earnings reports and optimistic guidance would be helpful for this market, but we don't have any significant blue chips reporting this week. Next week some of the big banks and Goldman Sachs report. Those reports may move the markets.

We are hip-deep in forecasts and predictions this time of the year. I am seeing a surprising number that are predicting a strong market for 2013. Given the headwinds constraining our economic recovery and the debt/spending debate, those predictions appear a little too optimistic to me. The only significant economic data expected for the balance of this week are tomorrow's unemployment claims. Analysts are predicting flat numbers on the order of 365k initial claims.

Increased theta decay as we near expiration (about $280 today on my 20 contract position) is helping my Jan iron condor on RUT to lessen its losses, which now stand at about 35% - rough beginning for the new year.

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Written by Dr. Duke

Created: 08 January 2013

The markets continue to basically trade sideways to slightly down. SPX lost $5 to close at $1457 while RUT held up better, losing $1 to close at $875. Trading volume popped up a bit with 2.6 billion shares of the S&P 500 stocks trading; trading volume rose 4% on the NYSE and rose 2% on NASDAQ. VIX remains relatively low at 13.6%.

Perhaps the prospect of the debt ceiling debate and the ratings agencies waiting on the sidelines to down grade our bonds has traders a bit concerned. The earnings announcements in the next few weeks will also have an influence on this market, especially the guidance offered for the next quarter. For all those reasons, it isn't too surprising to see the market trudging sideways.

I have to cut this blog short this evening due to other commitments.

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Written by Dr. Duke

Created: 07 January 2013

After such an enthusiastic beginning to the new year last week, it seems traders' enthusiasm is waning. SPX closed at $1462, down $5 and RUT lost $3 to close at $876. Trading volume was flat to declining with 2.3 billion shares of the S&P 500 stocks trading today. Trading volume was flat on the NYSE and dropped 3% on NASDAQ. VIX jumped up a bit this morning to 14.5%, but settled back down to 13.8%, near the open this morning.

Alcoa kicks off the earnings season tomorrow and estimates of earnings for this quarter have been steadily dropping. Fourth quarter earnings projections back in October were for growth of 9.2%, but that has dropped to an anemic 2.7%. That is starting to temper traders' appetite for risk. This series of earnings announcements could be taken as opportunities to sell and lock in gains, but that action may largely rest on the guidance given during the reports. The back drop of the debt ceiling fight that is starting to heat up may temper guidance.

If the early sound bites are meaningful (maybe it is empty posturing), the parties on both sides of the aisle are digging in for a serious fight over the debt ceiling. I thought the recent tax battle was bad enough, but this is shaping up as an even nastier battle. Unfortunately, significant numbers of both parties are dissatisfied with the last deal, so this negotiation is starting out in the hole as leaders on both sides try to appease the various factions of their parties. I am starting to think the network hosts of the Sunday political talk shows are part of the problem. Have you noticed how they like to goad whomever they are interviewing into taking an extreme position and drawing a line in the sand? It makes for great headlines, but I don't think it serves us very well.

Turning to the SPX chart, a technical analyst has to take note of the resistance level at $1465 set back in mid-September and tested in early October. For the past several trading sessions, it appears as though SPX has been struggling to break through that resistance. It is interesting that the trading volume on SPX has declined every day in this new year. It popped nicely on January 2, but SPX volume has been steadily retreating since then.

My January condor position continues its underwater journey; the higher theta as we near expiration is helping work off some of the losses, but the position will be a loss when it is all said and done.