Dr. Duke's Blog

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Written by Dr. Duke

Created: 02 January 2013

Wall Street obviously was thrilled with the Senate's tax package being voted in by the House at the eleventh hour. The market's extremely positive reaction was a little surprising to me since the fundamental spending/debt problems remain unaddressed by this legislation. The additional revenues will add up to about $300 billion this year. When you are generating new debt as fast as we are, that isn't even a drop in the bucket.

SPX ran up $36 to close at $1462 - wow! RUT closed at $873, up $24. These are huge gains by any measure. Trading volume also spiked upward with 3.1 billion shares of the S&P 500 stocks trading today. Trading volume on the NYSE was up 29% and volume on NASDAQ was up 37%. If you take a look at the one minute chart on SPX today, it was very unusual. Normally, there is a lot of choppiness throughout the day, but today SPX spiked up at the open and largely traded sideways until the last half hour or so, with very little volatility.  Most of the one minute candlesticks were just a few cents in height. It was one of those rare one sided markets.

Economic data was mixed today, but I don't think anyone in the markets even noticed one way or the other. ISM's manufacturing index rose to 50.7 for December from the previous month's 49.5, but construction spending slowed by 0.3% in November; analysts had predicted a 0.6% increase.

The market truck ran over my Jan iron condor this morning, forcing me to close and reopen spreads on both sides. The position remains largely underwater, but hopes for a positive month are gone. Now I am fighting to minimize my losses - not a nice way to start the new year. Losses are the cost of doing business for traders. But I still haven't learned to take losses very well.

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Written by Dr. Duke

Created: 28 December 2012

A couple of weeks ago, I compared this fiscal cliff drama to one of the classic Greek tragedies where all the main characters die in one way or another and the play ends with everyone left standing mourning their losses, cursing the gods and so on. I was joking, but now I'm not so sure. Today, it finally became apparent that the president really has no intentions of averting the fiscal cliff; he has calculated that the ensuing mess will be blamed on the Republicans, so how could a politician pass up that opportunity? You think I'm wrong? How else can we explain that only today did the president finally call together in a single meeting the majority and minority leaders of both houses in the White House. This is the first time since the election that this group has met. I don't call that leadership.

But the reality is starting to dawn on the markets and they are trading downward. SPX closed at $1402, down $16 and RUT closed at $832, down $5. The only good news is that trading volume remains low; only 1.7 billion shares of the S&P 500 stocks traded today. Trading volume was down 8% on the NYSE and was down 15% on NASDAQ. So panic has not yet set in; the large institutional traders haven't started running for the doors. But they are hedging their portfolios. VIX jumped up to 22.7% today.

Economic data of late hasn't been terrible, but I think it has been largely ignored; all eyes are on Washington. New unemployment claims are stubbornly running around 350k month after month. The new home sales reports yesterday were upbeat; the pending home sales today were a little disappointing with an increase of 1.7% for Nov (October's increase was 5%). The Case Schiller Index reported a nice 4.3% rise in housing prices earlier this week. So the economy continues to muddle along and slowly recover. But next week??

My January iron condor on RUT at 700/710 and 870/880 stands at a P/L of -18% with delta = -$104 and theta = +$154.

Enjoy your holiday weekend and don't let these political and economic problems worry you too much. Focus on what's important. Best wishes for a happy and prosperous new year.

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Written by Dr. Duke

Created: 21 December 2012

 The fiscal cliff play continues. This may turn out to be a classic Greek tragedy for those of you who remember those plays from high school. In any case, many traders started to worry seriously today that maybe a deal wasn't forthcoming anytime soon. The markets opened roughly at yesterday's close but traded down from there. SPX closed at $1430, down $14, but traded as low as $1423 before recovering somewhat. RUT lost $5 to close at $848. VIX inched up a bit to 17.8%. Trading volume was up on this expiration Friday with 3.7 billion shares of the S&P 500 stocks trading. Volume was up a whopping 115% on the NYSE and increased 48% on NASDAQ.

The fact that SPX bounced back from its intraday lows was positive, but one has to wonder how much of the recent price increase in the market will be sold off once a fiscal cliff deal is struck. Or will a huge bull market erupt on the news? That is hard to predict. It appears to me that 2013 will be a tough economic year regardless of the deal ultimately reached in D.C.

Durable orders increased 0.7% in November, not quite as robust as October's 1.1% rise, but not too bad either. The University of Michigan Consumer Sentiment indicator dropped to 72.9 from 74.5 - not too surprising given all of the drama unfolding around the fiscal cliff. Some of the surveys I have seen suggest most people don't even know what is involved in "going over the cliff", they just infer from all of the media attention that it must be Armageddon.

SPX settled at $1433.59 and RUT settled at 846.02 so the puts of my December condor expired worthless, leaving the Flying With The Condor™service up 19% on the year. We beat the S&P 500 at +14%, but I gave away a lot of my gains over the past few months.

Trading hours will be cut short on Monday and the exchanges will be closed Tuesday.

Enjoy the holiday with your families. Merry Christmas.

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Written by Dr. Duke

Created: 19 December 2012

Some of you may have read or heard analysts beginning to discuss what many call the Goldilocks view of the current markets: we should be bullish because 1) rising taxes and reduced spending will stimulate growth in the economy, 2) the Fed will continue their quantitative easing programs but no inflation will result, and 3) the government can easily afford the higher interest rates that are coming after our debt is downgraded. In other words, the bullish trend is a fantasy, a Goldilocks story. The markets have been trading higher since mid-November (running over my December condor in the process), but some analysts are questioning whether the euphoria has been over done or is misplaced entirely. I am inclined to agree with this point of view, but it is dangerous to get in front of this train.

SPX gave back most of yesterday's gains, closing down $11 at $1436 while RUT traded flat at $848. Perhaps a little more ominously, VIX moved up almost two points to 17.4%. Trading volume dropped off from yesterday with 2.7 billion shares of the S&P 500 stocks trading; volume fell 9.8% on the NYSE and decreased 4% on NASDAQ.

Housing starts for November came in at 861k, down from 888k in October, but building permits jumped to 899k from the previous month's 868k. So the thesis of a slow real estate recovery appears to be supported by this data. Probably the emphasis should be on the word, slow. And, if the tax reform discussions include dropping the mortgage interest deduction, that may push real estate back off the cliff again. Many of my friends hold mortgages simply for the tax deduction and my younger friends would not be as attracted to buying a house without that tax advantage. A lot of construction and finance industry jobs are dependent on a healthy real estate market.

I closed the call spreads in my December condor today, taking the largest loss of my trading career - ouch! But, at the expense of my pride, and so you can learn from my mistakes, here goes. My Dec condor on RUT started at 880/890 and 710/720. When the market plunged after the elections, I was at the point of hedging my put spreads. But the move downward and all of the fiscal cliff drama spooked me, so I repositioned my condor: I rolled the calls down to 830/840 and the puts down to 690/700. That looked good for a few days, but then the market turned and roared upward. I rolled the 830/840 calls to 850/860 and eventually closed them for a big loss. But note the moral of the story: if I had simply left the original condor alone and hedged the put spreads just as I always do (my normal rules), that condor would be standing at a gain of about 17-19%. So the lessons are: 1) develop your trading system of rules, 2) follow the rules with discipline, and 3) put your emotions aside.

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Written by Dr. Duke

Created: 18 December 2012

Traders apparently believe all is well in D.C. and are beginning to take strong bullish positions. It surprised me today when we didn't see some profit taking this afternoon. SPX closed at $1447, up $16 and near its high of $1448. RUT gained $13 to close at $848. Trading volume spiked upward with 3.2 billion shares of the S&P 500 trading. Trading volume on the NYSE was up 20% and volume was up 5% on NASDAQ. VIX dropped almost a point to 15.6%. There was minimal economic news today, so this rally is presumably based on a deal to solve the fiscal cliff. Optimism that is well seems surprising to me, but you can't argue with the tape. I was waiting for the sell-off this afternoon to unload my December call spreads, but it never materialized, so I am facing the prospects of a serious loss here. We'll see what tomorrow brings.

As I self-analyze my position, I think I have violated my own rules about not predicting the markets, i.e., trading non-directionally. The debt and spending situation for our government is out of control, and I have yet to see any proposals being discussed in Washington that begin to address these problems in a meaningful way, e.g., raising taxes on everyone at $250k and up only funds the government for a couple of weeks or less. So I think I have been predicting lower markets without explicitly making the prediction. I will pay the price for that oversight.

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Written by Dr. Duke

Created: 17 December 2012

Traders became more bullish today on news that Boehner was meeting with Obama and had offered to raise taxes on those making more than one million dollars per year. In my opinion, the notable news was the absence of any concessions from Obama. If we trust his press secretary, it appears the President is not yet in negotiation mode. So traders may take this market back down tomorrow; who knows? It is a rough market to be trading.

SPX ran up $17 to close at $1430 and RUT tacked on $11 to close at $835. Trading volume moved up modestly with 2.5 billion shares of the S&P 500 stocks trading; this is an increase from Friday, but remains below the 50 dma. Trading volume increased 8% on the NYSE and volume increased 6% on NASDAQ.

The only economic news (hard data as opposed to fiscal cliff watching) was the Empire Manufacturing Survey; it came in at -8.1 for December, a little worse than the previous -5.2. That isn't the right direction!

My Dec iron condor stands at a P/L of -$2,600 with delta = -$174 and theta = +$643. Today's move up pushed it further in the hole, but the theta decay is getting huge so each day makes a big difference. So we wait until tomorrow to tune back into the Fiscal Cliff soap opera. I have a prediction: a deal will be struck; it will include real tax increases but nebulous promises about cutting spending in the future.

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Written by Dr. Duke

Created: 14 December 2012

Markets continued sideways or downward as all eyes are focused on Washington, looking for a deal to avoid the so-called fiscal cliff at the first of the year. There wasn't much news today, except the obligatory "sky is falling" articles. SPX lost $6 to close at $1414 while RUT closed unchanged at $824. Volatility inched up a half point with the VIX at 17%.

There was some economic news today, although it was over-shadowed by the fiscal cliff vigil. The Consumer Price Index (CPI) dropped 0.3% in November and industrial production increased 1.1%. Capacity utilization increased from 77.7% to 78.4%. So all of this data was modestly positive. It seems to support the same old conclusion: the economy is recovering, but at a historically record low rate.

My Dec iron condor stands at a P/L of -$1,760 or -8% with delta = -$55 and theta = +$212. The call spreads remain a little over one standard deviation OTM and the put spreads are almost three standard deviations OTM. I decided to leave the call spreads open over the weekend to benefit from additional time decay. The risk is that a fiscal cliff deal is reached and the market spurts upward, but we have a pretty good safety buffer at this point, so I think it is a high probability move.

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Written by Dr. Duke

Created: 13 December 2012

The mood on Wall Street darkened further as traders considered the Fed's announcement in more detail. Several months ago I was surprised by the Fed's willingness to promise low interest rates for a specific period of time. At that time, I wondered: what if inflation rears its head during that time period? Now Bernanke has tied that promise of lower rates to unemployment below 6.5%. The more I think about the Fed's posture, the more I worry. I preferred the days when the FOMC was basically a "black box" that just issued interest rate announcements periodically.

Of course, the news reports from D.C. are not helping the mood on the street. Now I'm beginning to see articles about why going over the cliff is either 1) no big deal, or 2) will be painful, but good for us. I actually think there is some truth in the latter position; perhaps the fiscal cliff does what no politician has the courage to tackle. The fact that we are seeing those articles shows how we are collectively beginning to think that no agreement will be reached. There is probably a betting line in Vegas; I wonder what the odds are of an agreement?

SPX lost $9 to close at $1419, right at the support level set by the April highs. RUT dropped $5 to close at $824. Trading volume backed off with 2.4 billion shares of the S&P 500 stocks trading. Trading volume on the NYSE declined 3%, but increased 6% on NASDAQ. Volatility rose almost a point with VIX ending the day at 16.6%.

My Dec condor now stands at a net loss of 9% with delta = -$75 and theta = +$234. RUT's pull back and this position's large theta are whittling down this position's loss to something more reasonable.

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Written by Dr. Duke

Created: 12 December 2012

The Speaker of the House had only pessimistic remarks this morning about the negotiations on avoiding the fiscal cliff. That appeared to pull the markets back a bit after a positive open. Then Bernanke took the floor and announced additional easing from the Fed, plus surprising everyone by tying the low interest rates to unemployment rates. The markets appeared to jump a little after the FOMC announcement, but then traded off after Bernanke's press conference. SPX ended the day at $1428, up $1 and RUT lost $6 to close at $829. The VIX remains at 16%, basically a "middle of the road" number - not panic, but not complacency either. Trading volume was down a bit with 2.7 billion shares of the S&P 500 trading. Trading volume increased 5% on the NYSE but dropped 6% on NASDAQ.

SPX traded as high as $1439 before selling off in late afternoon trade. Maybe the $1430 resistance level from early September and early November will be hard to break. There is no denying the bullish trend on the chart since mid-November. The markets appear to have been assuming a deal was forthcoming on the fiscal cliff. Today's sell-off after returning to the pre-election highs may signal a loss of confidence that a deal will be done after all.

My December iron condor position stands at a loss of 15% with delta = -$162 and theta = +$318. the delta of the 850 calls retreated to 15, but those spreads remain uncomfortably close to the fire. Trading in this volatile market is taking its toll on everyone. Several of my friends have taken off for the holidays. They needed a breather.

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Written by Dr. Duke

Created: 10 December 2012

For the past four trading sessions, volume in the S&P 500 stocks has been declining while the market has been trading higher - not much higher, but higher none the less. SPX closed at $1419, up less than a dollar while RUT increased $4 to close at $826. My guess is that this reflects the markets' presumption that a deal of tax increases and spending cuts will be reached to avoid the so-called fiscal cliff. I'm not so sure. Obama has certainly made it clear he is willing to go over the cliff if Republicans don't agree to "tax the rich". But Obama has also been very clear about deferring any talk of spending cuts into next year. So what has changed? Isn't this the same impasse that has been going on for years and years? Eventually the Republicans cave in and the debt keeps rising. But the market doesn't trade on politics; it trades on economic realities. And that reality doesn't look very promising no matter which of our favorite characters win this public power struggle. The Challenger Job Cuts report told us last week that employers announced plans to cut 57k jobs in November. That tells me that businesses see this economy weakening and don't expect the fiscal cliff debates to help them, so they are not waiting; they are preparing for hard times now.

The current SPX price is very near the high reached this year in April. RUT is still trading about $20 below that April high. Let's assume a deal is reached in Washington. The markets will spike upward, but how long before traders realize that the economy is still in trouble? My point in all of this is to be very conservative in your fiscal positioning. Many talking heads are telling you what stocks to buy to rally after the deal is reached, but beware. It may be short-lived. Whether you are buying blue chip, dividend paying stocks, or selling iron condor spreads, keep your stops tight and lighten up your positions. Whenever in doubt, take the safer course.

My December iron condor position on RUT currently stands at a 14% loss with position delta = -$124 and position theta = +$263. That large theta is whittling down the loss as time passes. Assuming we don't have to close the 850/860 calls (the delta of the 850 calls = 13), this position will close for a 5% loss. Not a cool way to end the year, but that's the trading game. The key is to minimize the loss so I can continue to trade next year.