Dr. Duke's Blog

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Written by Dr. Duke

Created: 10 October 2012

There wasn't much economic news today, but that didn't stop the market from sliding further down. SPX lost $9 to close at $1433 while RUT closed down $1 at $827. Trading volume was largely unchanged with 2.4 billion shares of the S&P 500 trading. Trading volume increased 1% on the NYSE and increased 9% on NASDAQ. RUT traded down to touch its 50 dma at $825 but then bounced. SPX is nearing its 50 dma at $1426, but held support at $1430 today. Interestingly, the VIX closed unchanged on the day at 16.3%. Does that suggest the downward trend of the past three sessions is bottoming out? At a minimum, it indicates the big players are not buying a lot of protection.

The FOMC's Beige Book came out in the afternoon, but it didn't move the markets - no surprises: The economy is slowly recovering; some areas are better and some are worse, blah, blah, blah.

My October iron condor stands at a P/L of -$320 with delta = +$103 and theta = +$161. The November position is up $1,100 with delta = +$35 and theta = +$52.

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Written by Dr. Duke

Created: 09 October 2012

The traders returned from their holiday and volume shot back up to normal, but the mood turned gloomy after both the World Bank and the International Monetary Fund (IMF) forecast a slowing global economy. SPX dropped $14 to close at $1441 and RUT closed at $828, down $10. Trading volume on the S&P 500 increased from Monday's anemic levels, but just hit the 50 dma at 2.4 billion shares. Trading on the NYSE was up 37% and trading on NASDAQ increased 39% on the lows on Monday. Volatility edged up a little over one point to 16.4%; this is still a reasonably low volatility number, so traders have not hit the panic button as yet.

Alcoa kicked off the earnings season with a better than expected report, but warned that the coming quarters will be impacted by the slowing of China's economy. Rioting in Greece continues and the IMF predicts that the Greek debt will reach 171% of GDP this year and increase to 182% next year. The IMF report states that the target of the bailout of 120% of GDP will be almost impossible to reach by 2020. I cannot understand how it is that the plight of Greece and Spain has not registered on us here in the states.

My Oct condor is now under pressure again with recent market weakness; the P/L stands at -$340 with delta = +$101 and theta = +$127. The Nov position stands at a P/L of +$700 with delta = +$26 and theta = +$66.

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Written by Dr. Duke

Created: 08 October 2012

Trading volume fell dramatically as many traders took the Columbus Day holiday off work. Trading volume on the NYSE fell 27% and dropped 26% on NASDAQ. Trading in the S&P 500 dropped to 1.7 billion shares, well below the 50 dma at 2.4 B. SPX closed down $5 at $1456 and RUT dropped $4 to close at $838. Volatility expanded a bit with the VIX rising almost one point to 15.1%. SPX remains trapped between the highs set in mid-September and the lower edge of the bullish trend line of the past several months. The 50 dma is down at $1424.

There was no economic news to push the market today. The Fed's beige book comes out Wednesday; unemployment claims report on Thursday and then PPI and consumer sentiment numbers are released Friday. So no huge events are scheduled for this week, unless there is a big surprise in one of those reports. And, of course, we always have the possibility of market moving news coming out of Europe. Europe's debt situation and economic slowdown have moved to the back burner along with the fiscal cliff worries. For my fellow Mad Magazine fans, "What, me worry?" I loved that magazine when I was younger.

My Oct iron condor on RUT is limping along with a P/L of $180, barely in the black and delta = +$48 and theta = +$67. By contrast, the Nov position is already up 6%. So we wait to see if anything changes when everyone returns to Wall Street tomorrow.

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Written by Dr. Duke

Created: 05 October 2012

Have the bulls run out of steam? Or was today just a case of traders taking their profits before relaxing for the weekend? The jobs report was on everyone's mind before the open this morning, and I think it should be described as reasonably positive with 144k new jobs and the unemployment rate decreasing to 7.8%. Like much of the economic data we have been seeing for a while, it is weak, but at least moving in the right direction. SPX promptly ran to $1471 but then the bears clawed it back to close at $1461, virtually unchanged on the day. RUT lost $2 to close at $843. Trading volume decreased with 2.4 billion shares of the S&P 500; trading on the NYSE dropped 10% and trading on NASDAQ increased 3%. The VIX dropped down to 13.7% during the euphoria this morning, but then climbed back to close at 14.3%, down about 0.2 points.

When I draw the trend line on the SPX chart from early June to today, this bullish trend lines up very nicely. But now SPX is getting squeezed between the previous highs around $1465 and the trend line around $1445. When I saw the jobs report this morning, I thought that might be the impetus to break out to new highs, but that wasn't the case. I wonder what news we have in store for next week and which way this market may tip?

My Oct RUT condor stands at a P/L of +$60 with delta = +$49 and theta = +$118. My Nov iron condor at 750/760 and 910/920 stands at a P/L of +$1,100 with delta = -$0.5 and theta = +$57. That is about as delta neutral as you can get!

Enjoy the weekend. Remember to pause in your list of chores around the house and spend some quality time on what's really important in your life.

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Written by Dr. Duke

Created: 03 October 2012

The markets continue to basically chop sideways, but today it was on increased volume. SPX traded up $5 to close at $1451 while RUT lost $2 to close at $839. RUT has been running right along the support level at $840 for the past week; this was the resistance level held until the Bernanke announcement on 9/13. VIX dropped a bit to 15.4%, so that measure of fear is relatively complacent. Trading volume on the S&P 500 increased to 2.7 billion shares and trading increased 7% on the NYSE and increased 8% on NASDAQ.

The ADP employment report came in at 162 thousand new jobs and that boosted the market this morning, but the indexes lost much of that in the afternoon. The ISM Services index also buoyed traders with a increase from 53.7 to 55.1. An interesting tidbit was in the details of the ISM report: a decline of 2.7% in employment in the services industries.

Another drag on the market was HP warning of decreasing revenues and earnings. It seems like several blue chip companies have now warned about the upcoming earnings announcement cycle - FedEx started the trend a few weeks ago. I would argue that HP is a special case of a declining company, but FedEx is harder to ignore.

My Oct iron condor at 790/800 and 900/910 stands at a P/L of -$420 with delta = +$67 and theta = +$110. Chances are we won't see much market action tomorrow as traders wait for the jobs report Friday. But that assumes everything in Europe remains quiet.

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Written by Dr. Duke

Created: 02 October 2012

Trading volume declined as the markets largely traded sideways today. SPX closed up $1 at $1446 and RUT closed unchanged at $841. Trading volume on the S&P 500 dropped to 2.4 billion shares, beneath the 50 dma. Trading on the NYSE dropped 7% and trading volume declined 11% on NASDAQ. VIX ran up to 16.5% today, but then retreated to close at 15.7%, down almost one percent.

We didn't have any significant economic news today. But tomorrow brings the ADP private employment report, and many traders will use that as a forecast of Friday's non-farm payrolls report. Tomorrow also brings the ISM services index; it will be interesting to see if it turned more positive as its manufacturing counterpart did yesterday.

My Oct condor position stands at a net loss of -$400 with delta = -$56 and theta = +$100. The adjustments have chewed up much of the potential gains for this position; the maximum gain at this point would be around 7%.

The bulls and bears appear to roughly balanced in power; news and economic data may tip the markets either way. There seems to be a strong case for either side of this argument.

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Written by Dr. Duke

Created: 01 October 2012

The ISM manufacturing index surprised analysts this morning with a reading of 51.5 for September, the first sign of expansion after three months of contraction. This prompted a big market rally with SPX surging as high as $1457 before the bears pulled it back down. SPX closed at $1444, up $4 and RUT gained $3 to close at $840. VIX increased 0.6 points to 16.3%; the VIX dropped as low as 15.1 this morning before the bears came back to play.

The SPX candlestick looks like a shooting star, but the body is a bit large for the purist. But the trading activity depicted by that candlestick isn't encouraging. The bulls drive the market quite a bit higher, but then the bears are able to pull the market almost all the way back - not good. Trading volume was basically flat with 2.6 billion shares of the S&P 500 trading; trading volume declined 10% on the NYSE and dropped 4% on NASDAQ.

Construction spending dropped 0.6% in August. Maybe we got ahead of ourselves with the ISM report; after all, it wasn't long ago we were given the anemic 1.3% GDP growth for the second quarter. Today's trading is just one more indicator of the extreme volatility of this market. Imagine if we get a truly bad bit of news...

My Oct condor stands at a P/L of -$520 with delta = +$65 and theta = +$83. Remember: we are working our way toward another jobs report Friday.

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Written by Dr. Duke

Created: 28 September 2012

Most traders were watching for the results of the Spanish bank stress tests; they figured that was the most likely bad news that might hit today, but that news item turned out rather positively. But then the Chicago PMI came in at 49.7, down from 53.0 and the University of Michigan consumer sentiment survey declined to 78.3 from 79.2. So SPX fell as low as $1436 and then chopped sideways most of the day to close at $1441, down $6. RUT followed suit, closing down $6 at $837. If one draws the trend line below this run on SPX since early June, you will see that SPX is just bouncing along that line the past few days. A break down through $1430 would be the first warning sign that the upward trend may be in trouble. RUT appears to be a bit weaker (not a good sign for the overall market) since it is just below resistance at $840 which was where it sat after Draghi's press conference and before Bernanke's announcement. But to a first approximation, both indexes are roughly at the pre-QE III levels. The VIX rose to 15.7%, up almost one point.

All in all, the market is looking rather tentative as we get close to earnings season and we have already had several warnings from some leading companies, such as FedEx. A few poor earnings announcements could prove to be a problem for this market.

My Oct iron condor on RUT at 790/800 and 900/910 stands at a P/L of -$1,220 with delta = +$56 and theta = +$111.

Enjoy your weekend.

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Written by Dr. Duke

Created: 27 September 2012

I know I pointed out that we bounced off support yesterday, but today, SPX gains $14 to close at $1447 and RUT tacks on $10 to close at $844. What stimulated that huge move? Spanish government officials announced a new budget that will focus on spending cuts and reform. So yesterday the Greeks were rioting and Spanish bond yields went over 6%, and the market tanked. Today, Spanish officials say the right things and everything is now rosy? Good grief! How do you trade this market? My theory is that the high frequency trading algorithms are pushing these extreme market moves. The program picks up a few key words in a news story, triggers a large buy and then it snowballs. That sure makes it a stressful day for us ordinary humans trying to trade in this environment. It certainly isn't too surprising that a lot of individual investor money remains on the sidelines. Between Madoff and the computers, it's a spooky place.

Initial unemployment claims dropped to 359k, which is a move in the right direction, but all of the other economic news was negative. Durable orders dropped 13%; GDP for the second quarter only gained 1.3% on an annualized basis (down from 1.7%) and pending home sales dropped 2.6% after a 2.4% gain last month.

SPX solidly bounced off support and pushed itself back well into the upward trend band, but trading volume fell off to 2.2 billion shares of the S&P 500. Trading on the NYSE was down 16% and trading on NASDAQ dropped 1%.

My Oct condor position stands at a P/L of -$980 with position delta = +$47 and position theta = +$106.

So what happens tomorrow? Draghi is photographed frowning and the market plummets?

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Written by Dr. Duke

Created: 26 September 2012

The market opened weakly this morning, based on worries out of the Euro Zone. The Greeks were rioting in the streets, protesting the government's austerity measures necessary to receive their bail out funds. Meanwhile, yields on Spanish bonds exceeded 6% as investors worry about that economy needing a bail out as well. New home sales here in the states didn't help. They came in at an annualized rate of 373k; that was a 0.3% decline from July and analysts were expecting 380k.

SPX dropped as low as $1431 by mid-morning, but then struggled back upward a bit to close at $1433, down $8. RUT dropped $5 to close at $834. SPX now stands where it was after Draghi's press conference on Sept. 6 and before Bernanke's QE III announcement Sept. 13. After the run up on 9/6, SPX established support at $1430; today's action appeared to suggest that the $1430 support level held.

If the rally since early June is based on quantitative easing and now the consensus is turning to a conclusion that the Fed is out of ammo, and worries about Europe are returning, then we have a lot of ground that could be lost. Maybe that Goldman Sachs prediction around $1285 isn't that far off after all? That could be ugly.

I hedged my October iron condor on RUT today and it stands at a P/L of -$1,095 with position delta = -$7 and position theta = +$32. The small delta reflects the effects of the hedge, but you will see that theta was also reduced - that's the trade-off. But amid all of the worries in this market at this time, having such a small delta is comforting.

Be careful out there.