Dr. Duke's Blog

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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.

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Written by Dr. Duke

Created: 07 December 2012

Even a surprisingly good jobs report wasn't enough to cause this market to break out. The non-farm payroll report surprised analysts with 146k new jobs and reported unemployment dropping to 7.7%. But the labor department calculates this rate unlike any normal person. The unemployment rate dropped because they decided that over 500k people dropped out of the labor force and therefore don't count as unemployed. The so-called U-6 rate of unemployment includes those who have given up looking for work and is over 14%. I guess they don't think we can handle those numbers. The markets opened upward this morning on the basis of this surprising jobs number, but the euphoria was short-lived. Then concerns about the fiscal problems facing this country took center stage. SPX traded as high as $1420 before dropping back to close at $1418, up $4. RUT closed unchanged at $822.Trading volume contracted with 2.3 billion shares of the S&P 500 stocks trading. Trading on the NYSE dropped 2% while trading volume on NASDAQ decreased 6%.

The University of Michigan consumer sentiment survey also poured cold water on the market with a reading of 74.5 for November, down substantially from 82.7 in October.

The intraday high on SPX is near the April highs. SPX is trading in a narrow channel from about $1405 to $1420. Today's close is just above the 50 dma at $1417, so we have resistance coming from both the 50 dma and the highs from earlier this year. Looking the other way, we have support at the 200 dma at $1386. That level was tested last week, but SPX bounced back upward.

For the past several days, RUT has been trading along its 50 dma (at $817 today), but intraday trading in RUT today didn't reach down to the 50 dma. RUT, like SPX, is trading sideways in a pretty narrow range.

My Dec iron condor on RUT remains underwater by about 15% with position delta = -$90 and position theta = +$204.

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Written by Dr. Duke

Created: 05 December 2012

SPX is trading back and forth across that strong support/resistance level at $1410. Out of the last nine days of trading, SPX has been just above $1410 three times and just below six times. SPX traded over a wide range today, $1398 to $1416, and closed at $1409, up $2. RUT dropped $2 to close at $821. Trading volume surged upward to 3.1 billion shares of the S&P 500 stocks today. Trading on the NYSE was up 19%, but trading on NASDAQ was only up 1% - that NASDAQ number seems odd given today's huge downward move in AAPL. VIX dropped almost a full point to close at 16.5%.

ADP reported 118k new jobs, down from last month's 157k. This may be a bleak forecast of Friday's jobs report. The ISM services index was basically unchanged at 54.2 and factory orders dropped to an increase of 0.8% in October after rising 4.5% in September.

From my take on the various news reports, it seems we are starting to accept this fiscal cliff scenario as more and more likely. Now we are starting to see reports assuring us that it won't be so bad. The White House is insisting on raising taxes on the wealthy and offers vague promises for spending cuts sometime in the future. As we add 4 billion dollars to the national debt each day, Nero fiddles. The great irony is that Obama's tax increase will do nothing to solve our fiscal problems; it only makes the envious feel better.

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Written by Dr. Duke

Created: 04 December 2012

SPX closed at $1407, down $2. This is slightly below the $1410 support level. It is probably too early to declare that support level broken, but it is something to watch at tomorrow's open. RUT traded as low as $816 but recovered to close at $822, up $1 on the day. Trading volume was flat to slightly up with 2.5 billion shares of the S&P 500 trading, up slightly from yesterday but still under the 50 dma. Trading on the NYSE was up 1% and volume was up 7% on NASDAQ. VIX moved up a half point to close at 17%.

There was no significant economic news today, but it probably would not have mattered anyway. Everyone in the market is focused on the fiscal cliff posturing. As far as I can tell, the negotiations have yet to start.

My Dec iron condor stands at a net loss of $3,960 with position delta = -$94 and position theta = +$214. Tomorrow's ADP report may give us a preview of Friday's jobs report, but, absent an extreme surprise, I doubt that it will move the markets much. So grab your popcorn and watch the political fiscal cliff show. But remember: this is like professional wrestling, don't take it too seriously.

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Written by Dr. Duke

Created: 03 December 2012

The Standard and Poors 500 Index pulled back to support with a close at $1409, down $7 and RUT closed at $821, down $1. But trading volume fell off dramatically with 2.3 billion shares of the S&P 500 stocks trading.  Trading volume fell 22% on the NYSE and dropped 19% on NASDAQ. Volatility rose almost a full percentage point with VIX closing at 16.6%.

The ISM manufacturing index reported out at 49.5, a large decline from last month's 51.7. Construction spending rose 1.4% in October, a bright spot in recent economic reports. The ADP private payroll numbers are due out Wednesday and the non-farm payroll report, aka the jobs report, comes out Friday morning before the markets open.

My Dec iron condor on RUT has been adjusted several times now and stands at a net P/L of - $4,020 on 20 contracts (-18%) with delta = -$134 and theta = +$147. I will roll up the 690/700 put spreads to salvage a portion of this trade later this week.

Based on my reading of the political tea leaves, the probability of going over the fiscal cliff seems greater every day. Even if everyone declares a deal accomplished, it won't substantively address the economic problems facing us. We won't be able to avoid a second recession in 2013. In case you are one of those who believed the President's "fairness" rhetoric, consider this factoid. If we confiscate all of the wealth of the Forbes 400, it will pay off the debt we are generating for only one year. We are generating 4 billion dollars of new debt each day...

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Written by Dr. Duke

Created: 29 November 2012

The rumor mill and sound bites continue to be the principal drivers for this market, to the chagrin of anyone trying to trade. SPX closed at $1416, up $6 and RUT traded up to $823 for a gain of $10. VIX closed today down about a half point at 15.1%. Trading volume was flat with 2.4 billion shares of the S&P 500 stocks trading. Trading volume was down 3% on the NYSE and up 3% on NASDAQ.

Economic news continues to be flat to modestly positive; this recovery is taking forever to get us back out of the woods. I fear we may hit another recession before we have fully recovered from the last one. Initial unemployment claims remain essentially flat at 393k and continuing unemployment claims were reported at 3.3 million. Third quarter GDP growth was revised upward to an annualized rate of 2.7%, a pleasant surprise. And pending home sales grew 5.2% in October, continuing the glimmer of hope for real estate.

SPX has been flirting with resistance at $1410 for the past several sessions and closed right at resistance yesterday. Today SPX opened there and never looked back, closing at $1416. During today's trading, SPX almost reached the 50 dma at $1422 (it traded as high as $1420). But this market is extremely volatile. SPX almost traded down to the 200 dma yesterday; in two days of trading, we almost spanned the distance between the 200 dma and the 50 dma. Every news article quoting someone in D.C. is moving the market. And to think we have about thirty days of this craziness to endure!

My Dec iron condor on RUT stands at a net loss of $4240 or 20% with position delta = -$144 and theta = +$98. Even if the current spreads expire worthless, I am looking at an 8% loss for December. This month's trading has been characterized by whip saws back and forth - the minute I hedge, the market turns; then when I remove the hedge, the market turns again. I angered the trading gods somehow...

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Written by Dr. Duke

Created: 28 November 2012

The markets traded down this morning, but reversed course later in the day and made a significant push upward in the last hour of trading. SPX closed at $1410, up $11 while RUT closed up $6 at $814. Trading volume of the S&P 500 stocks remained beneath the 50 dma and was essentially unchanged from yesterday at 2.4 billion shares. Trading on the NYSE was up 4% and trading volume was down 2% on NASDAQ. The VIX traded up as high as 17% this morning, but settled to 15.5% by the close.

New home sales came in flat for October at 368k. Tomorrow brings unemployment claims and a second estimate of third quarter GDP.

SPX closed at resistance at $1410, where it closed last Friday and where it opened Monday. This was a strong support level in late October before the market broke through support and traded down strongly. Do the bulls have the momentum to break through resistance here? Unfortunately, this market is being jerked back and forth by whatever sound bites come out of D.C., so it is exceedingly difficult to predict the short term trend. One could even argue that an agreement to avoid the fiscal cliff is priced into the $60 rise of the past couple of weeks.

My Dec iron condor on RUT is feeling the pressure with a P/L of -$2,560 with delta = -$202 and theta = +$137. I may have to close and roll my call spreads tomorrow. We'll see.

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Written by Dr. Duke

Created: 27 November 2012

Today marked the third day SPX hit at or near resistance at $1410 and then closed lower. SPX traded as high as $1409 today before being pulled back in the last two hours of trading to close at $1399, down $7. RUT traded stronger than its big brother all day and closed down $1 at $808. The VIX increased less than half a point to 15.9%. Trading volume on the S&P 500 increased a bit from yesterday to 2.4 billion shares, but is still running below the 50 dma. Trading on the NYSE was up 11% and trading volume on NASDAQ was up 10%.

Durable goods orders were flat for October. The Case Schiller housing price index increased 1.5% in October. The Conference Board's consumer confidence survey increased a bit to 73.7 for Nov, up from 73.1. So economic data was flat to modestly positive; but if that buoyed the market, it didn't last long.

The European finance ministers appear to have worked out a new debt refinancing deal for Greece, although the accord must still be ratified by several government Parliaments. But it is very doubtful that any of these deals are going to save Greece. The question I am wondering about is: what are the global ramifications of Greece defaulting on all of this debt?

My Dec condor stands at a net P/L of -$890 with delta = -$114 and theta = +$89. The 830/840 call spreads remain under pressure with delta of the 830 calls at 24, but the position is hedged with long Jan 830 calls.

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Written by Dr. Duke

Created: 26 November 2012

The market bullishness of Friday didn't continue into today's trading, but it certainly didn't sell off either. SPX opened at $1409 and traded as low as $1398, but recovered much of that loss to close at $1406, down $3. RUT gained $2 to close at $809. The VIX stands roughly unchanged at 15.5%.

SPX has been trading upward for the last several sessions, although we appear to be bumping up against resistance at $1410; that level served as solid support in late October before the plunge after the election broke through to the downside. It is difficult to draw a good trend line on this chart. Even though the last several sessions have been very bullish, I am cautious. The potential for negative news out of either Europe or D.C. is very high. In my opinion, this market is on thin ice.

We didn't have much in the way of economic reports today, which may have accounted for the lack of direction in the markets. Durable orders and Case Schiller both report tomorrow.

My Dec iron condor on RUT stands at a P/L of -$1,170 or -6% with delta = -$117 and theta = +$95. I hedged this position during Friday's strong move upward. Given the economic situation facing us, it is surprising that I am hedging call spreads.