Dr. Duke's Blog

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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.

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Written by Dr. Duke

Created: 28 January 2013

As the S&P 500 approached the $1500 mark last week, it prompted a series of news reports speculating on a pull back or correction at these levels. Friday's tape was very bullish, closing the day firmly in the $1500+ territory, but today's tape was a little more tentative, with SPX pulling back as low as $1496 and closing at $1500, down $3 on the day. RUT traded slightly more bullishly, adding $1 to close at $907. All in all, this market rally appears very solid. But no one can deny that we have moved upward a significant distance in a short period of time, so some traders are bit nervous that the good times may end. Trading volume was weak today with 2.4 billion shares of the S&P 500 stocks trading; the 50 dma stands at 2.5B. Trading on the NYSE declined 4% and increased 1% on NASDAQ.

Volatility has increased the past couple of days, closing at 13.6% today, increasing almost one point. This probably only shows the effects of institutional traders adding some protection to their portfolios to protect recent gains; after all, puts are cheap right now.

Mutual fund inflows have been on the rise toward the end of 2012 and hit $55 billion in January, an all time record. The next highest level was $54B in February 2000, just before the beginning of the bear market in March that year. That seems ominous, but maybe we are making too much of that data. Money has been flowing out of bonds into stocks for some time and that trend isn't likely to slow as long as interest rates remain so low.

The FOMC begins its two day meeting tomorrow, so we will probably see a sideways market as traders wait on Bernanke's remarks Wednesday afternoon. The only thing I see that might significantly affect the markets coming out of that meeting would be any suggestions of trimming or ending the Fed's quantitative easing programs.

My Feb condor on RUT remains 5% underwater with delta = -$157 and theta = +$178. Theta is starting to heat up a bit, but the call spreads remain tight, bordering on adjustment.

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Written by Dr. Duke

Created: 25 January 2013

The markets continue in overdrive. SPX closed at $1503, breaking the psychological barrier at $1500. It is interesting to note that about five minutes before the close, SPX remained below $1500. RUT continues to lead SPX. RUT traded as high as $905 yesterday but then pulled back. Today, RUT closed at a high of $905. These moves higher are significant: since 12/31, SPX has gained 7% and RUT has even outdone that with an 8.5% increase. These are huge moves in a little less than four weeks. And the gains are even greater if you measure from the low back in November. Many traders have been caught unawares by this massive bull run. Personally, I admit that I have been focused on the fiscal cliff, debt ceiling, spending debates and the prospects for a second recession before we have recovered from the first one.

This is a classic example of the market “climbing the wall of worry”. This situation is treacherous for the trader. He can jump on the bandwagon and take bullish positions. The danger is that after such a strong run, the likelihood of a strong correction is growing. So any bullish position needs to be protected with tight stops. Many technical measures suggest this market is overbought, but markets can continue to trade higher even when it defies the analysis. So it may be too early to predict an end of the party. But I do think caution is in order.

My Feb condor is getting squeezed by the relentless move upward. It stands at a 5% loss with delta = -$145 and theta = +$160. If the market doesn't slow next week, I will need to make some adjustments.

We finally have snow here in Chicago. I did my first shoveling of the winter this morning; the landscape is much prettier with snow.

Have a great weekend.

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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.