Dr. Duke's Blog

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Written by Dr. Duke

Created: 07 September 2012

I admit to being surprised at the market's huge spurt upward yesterday, apparently on the back of Draghi's press conference in Europe. First of all, no one really thinks the European debt issues have been solved. Moreover, the German courts have not yet ruled on the constitutionality of the bailout funds. So declaring victory appears naive at best. Today this was followed with a weak jobs report with only 96k new jobs; analysts were expecting around 130k - 140k. But the market seemed to ignore the bad news. SPX gained $6 to close at $1438 while RUT closed at $842, up $4. Trading volume dropped a bit from yesterday with 2.7 billion shares of the S&P 500 stocks trading (still well above the 50 dma at 2.4B). Trading on the NYSE dropped 6% and trading volume decreased 9% on NASDAQ. Perhaps the poor jobs report has fueled hopes for Bernanke to come to the rescue next week.

I hedged my Sept condor yesterday morning and then repositioned both spreads in the afternoon. I hedged with the Oct 840 calls and then closed the 650/660 put spreads and rolled them to 790/800 and closed the 850/860 call spreads and rolled them up to 860/870. That position stands at a P/L of -$3,320 with delta = -$65 and theta = +$215. I hedged the Oct condor on RUT today with the Nov 880 call; that position stands at a P/L of -$350, with delta = -$48 and theta = +$70.

Shake off the last two days of tension and enjoy the weekend with your family. There will be plenty of time next week to fret about our trading.

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Written by Dr. Duke

Created: 05 September 2012

It seems as though much of the financial news for the past few months has been about the market waiting on something: FOMC meetings, ECB meetings, jobs reports, an announcement of QE III, etc. Now we are supposedly waiting on the ECB meeting tomorrow, but I doubt anything of substance can come of that until the German courts rule on the constitutionality of the bail-out funds. Then we will be waiting on the jobs report Friday; then we will wait on the FOMC meeting next week. Why do traders appear to be so indecisive and tentative? That's a tough question to answer, but here's my stab at it. I believe traders, regardless of their political stripes, realize this economy is in the toilet and isn't showing any signs of improving anytime soon. On the other hand, the large corporations that make up our stock market shed people several years ago when this economic spiral started; they have reduced their costs and continue to make reasonable profits, although revenue growth is hard to find. So there isn't a strong case to either buy or sell this market. Layer the election uncertainties on top of that and you have a lot of traders hiding under their desks. They alternate between fear of missing out on gains and fear of losing their clients' money. So many are jumping in and out of the market like the nervous chipmunks scurrying around my back yard. And many are simply sitting in cash, waiting for "normalcy" to return. But I think that is wishful thinking - we are in a "new normal".

SPX chopped sideways throughout the day, closing down $2 at $1403 and RUT lost $1 to close at $821. Trading volume was flat with 2.2 billion shares of the S&P 500 trading. Trading on the NYSE was up 4% and trading volume on NASDAQ was down 2%.

Tomorrow brings the ADP private payrolls number, which many will take as a precursor to Friday's non-farm payrolls report. Chances are these data will simply support the muddling along we have seen in recent months: not a disaster but certainly not evidence of a strong recovery either.

My Sept iron condor on RUT stands at a P/L of -$720 with position delta = -$148 and position theta = +$157. The October condor stands roughly at break-even with delta = -$52 and theta = +98. Non-directional trading looks pretty good in these choppy markets. So we wait on the other shoe to drop...

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Written by Dr. Duke

Created: 04 September 2012

Today's trading started out pretty weak as SPX fell to $1397 by mid-morning. But the last two hours of trading were another story: SPX recovered most of its losses to close at $1405, down $2 on the day. RUT had a similar intraday pattern, but its afternoon recovery did not falter at all. RUT gained $10 to close at $822. But RUT continues to trade below its May highs while SPX has traded back down to its May highs. Trading volume was mixed, but roughly flat from Friday with 2.1 billion shares of the S&P 500 stocks trading; trading volume on the NYSE was down 6%, but trading on NASDAQ was up 10%. VIX bumped up about half a point to 18%.

The ISM manufacturing index report was released for August at 49.6, down from the previous month. This is the third month of manufacturing contraction and is the lowest reading of this index since July of 2009. Construction spending dropped by 0.9% in August, after a 0.4% increase in July.

It almost seemed as though the negative economic data encouraged the bulls that Bernanke was going to unveil QE III at next week's FOMC meeting.

My Sept iron condor is standing at a P/L of -$800 with delta = -$152 and theta = +$154. Today's strong run by RUT squeezed this position once again. The October condor position stands at a net gain of $440 with delta = -$42 and theta = +$86.

I hope you enjoyed your Labor Day weekend. Now it's back to work... but remember to be thankful for a job. It's tough out there.

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Written by Dr. Duke

Created: 30 August 2012

Is the market waiting on Bernanke's speech tomorrow? Or have traders given up hope for another round of quantitative easing? The markets basically have traded sideways this week on lower volume, but today's markets were pretty weak. SPX lost $11 to close at $1399 while RUT dropped $9 to close at $809. Today's close on SPX was close to the lows last Thursday and Friday. Trading volume has continued weakly with 1.7 billion shares of the S&P 500 trading. Trading volume was flat on the NYSE and down 4% on NASDAQ. VIX increased another percentage point today to close at 17.8% - perhaps a little anxiety in front of Bernanke's speech at Jackson Hole?

The big question is the market's reaction to Bernanke's speech. If he maintains his posture of saying the Fed will intervene when and if they think it necessary, will the market tank? Or is that baked into the prices at this point? It would surprise me if Bernanke changes his posture, but who knows? He is receiving a lot of political pressure to intervene. I think those politicians are looking for someone else to blame for their own failure to lead.

The jobless claims data appear to be roughly flat - so that's good news to a degree. But I looked at a long term plot of jobless claims with a 4 week moving average and was a bit shocked. If you draw the typical trend lines as you would on a stock's price chart, you will see that jobless claims have been trending sideways without improvement since late December of 2011 - that just blows my mind. I somehow had lulled myself into thinking we were slowly recovering; that may be the view through the rose colored glasses. It is worse than I thought.

Both my Sept and Oct iron condors on RUT stand roughly at break-even at this point. The Sept condor has a position delta of -$88 and theta = +$124 while Oct has a delta of -$18 and theta = +$82. I am looking forward to the three day weekend - all of us delta neutral traders love to listen to the time of our positions decaying away over long weekends.

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Written by Dr. Duke

Created: 29 August 2012

Traders appeared to be anticipating some good news from the release of the Fed's beige book this afternoon. The SPX traded upward in the early afternoon, but then steadily declined after the release of the FOMC minutes (the beige book). SPX closed up $1 at $1410 on lower volume. RUT advanced $4 to close at $818. During the trading session, RUT traded up to resistance at $820 before pulling back. Trading volume was weak across the board with 1.8 billion shares of the S&P 500 trading. Trading volume dropped 2% on the NYSE and declined 7% on NASDAQ.

The VIX rose 0.6 points to close at 17.1%. VIX has steadily rose from an intraday low of 13.5% to today's 17% over the past eight trading sessions. This suggests traders are getting nervous as the markets keeping bouncing off resistance and not breaking out to new highs. This move higher in VIX, coupled with low trading volume suggests the bulls are losing their conviction to drive this market.

My Sept iron condor on RUT stands at a P/L of -$500 with delta = -$124 and theta = +$124. The Oct condor stands at break-even with delta = -$34 and theta = +$85.

Is this the calm before the storm?

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Written by Dr. Duke

Created: 28 August 2012

The markets continue to just toy with the earlier highs of this year and seem unable to either break through to higher highs or pull back. SPX closed down $1 at $1409 while RUT gained $4 to close at $814. The VIX inched up to 16.5%. Trading volume was up marginally from yesterday with 1.9 billion shares of the S&P 500 stocks trading (the 50 dma is 2.5B). Trading volume on the NYSE was up 6% and volume on NASDAQ was down 2%.

The Case Shiller housing price index rose 0.5% in June, a nice improvement from the 0.7% decrease in the previous month. Consumer confidence dropped to 60.6 in August from 65.4 in July - that isn't surprising. We have high unemployment coupled with a dysfunctional government and a political campaign that is setting new records for irrelevance. Increasingly, the investment theme I am hearing on CNBC is focused on the "fiscal cliff". Buying gold and burying it in the back yard is back in fashion.

While I was at the University of Florida, the Students for a Democratic Society (SDS) were always demonstrating and causing trouble. One student ran for student government president and said he was from the Students for an Apathetic Society (SAS). After the election, he said he was disappointed at the number of students who came out and voted for him - he wished they were more apathetic. We all knew those elections weren't serious, so a little satire was fun - but now our national politics seem equally laughable, and this is very serious. Perhaps we have been too apathetic?

My Sept RUT iron condor stands at a P/L of -$120 with delta = -$105 and theta = +$102. The Oct condor is up $500 with delta = -$23 and theta = +$72. Keep in mind that historically, we are entering a dangerous time of the year for the markets - remember last fall? Watch your positions closely and use tight stops. I don't know where this market is going, but it could get ugly.

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Written by Dr. Duke

Created: 27 August 2012

It isn't hard to hear many analysts deliver what appear to be sound arguments for the bearish case in this market, but the bears have yet to take any of the recent opportunities to drive the market significantly lower. SPX opened and immediately sold off this morning, but the bears couldn't hold it down. By noon, SPX was trading around $1414. SPX did weaken in the last hour or so of trading today and closed down $1 at $1410. RUT moved up $1 to close at $810. In spite of the market averages holding up rather well, VIX increased by over a percentage point to close at 16.4%. This divergence in VIX makes me wonder, but just looking at the price action leads me to believe the bulls are still in control of this market.

No significant economic news was reported today; tomorrow brings some housing price data and consumer confidence numbers. The Fed beige book is due out on Wednesday, but I don't think anyone expects any surprises there. Whatever you may think of Bernanke, he deserves credit for trying to be much more open than his predecessor.

My Sept iron condor on RUT at 650/660 and 850/860 stands at a P/L of +$200 with position delta = -$90 and position theta = +$89. As the Greeks show, this position is still being pressured on the call side. My Oct iron condor on RUT was opened August 21 at 710/720 and 880/890 and now stands at a net P/L of +$580 with delta = -$9 and theta = +$66.

Trade what the market gives you, not your predictions.

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Written by Dr. Duke

Created: 23 August 2012

The recent story in the markets has been the last minute rushing in by the bulls to recover much, if not all, of the market's losses. But today's charts were quite different - the market indexes basically trended downward all day. If you can believe the talking heads, traders are losing faith in Uncle Ben coming to the rescue. 

SPX lost $11 today to close at $1402 while RUT closed at $806, down $7. SPX has broken that $1405 support level that it struggled to break through when it was resistance on the way upward. RUT appears to have stopped just above the $800 - $805 support level. CNBC appears to have found all the bears to interview the last few days. Suddenly, we are hearing all the reasons why the Goldman forecast of $1250 is probable, why a recession is coming and so on. As those of you who follow me know, I see many reasons for this market to be trading sideways at best and have been very skeptical of this rally. But sometimes it just seems like media in general think we are all adolescents with 30 second attention spans.

VIX moved up one percentage point to 16%, so nothing earth shattering is happening on the volatility front.

My Sept iron condor stands at a P/L of +$180 with delta = -$82 and theta = +81. So my call spreads remain under pressure while the put spreads are nearly worthless. It is tempting to roll them up, but what if the gloom and doom crowd is right? 

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Written by Dr. Duke

Created: 22 August 2012

 I am reading many analyst reports either predicting a pullback or describing yesterday's action as the pullback. But it seems to me that analysts are discounting the bulls - they are just unflappable. Yes, it is true that SPX pulled back yesterday after breaking this year's highs, but it sure didn't collapse. And look at today's price action; after trading as low as $1407 (not very low), the bulls jumped back on board and pulled SPX up to close even on the day at $1413. RUT dropped $3 to close at $813, but this market is holding up rather well. In fact, I still find it surprising that we can have a bullish trend with the number of significant headwinds we are facing, both domestically and globally. But we are.

Some have suggested that reading the FOMC minutes this afternoon gave the bulls hope that the Fed will intervene to prop up the market; maybe that fueled the afternoon rally. But I am a little skeptical that the Fed has any bullets left or is willing to use them. A separate question is whether they should use them.

Existing home sales bumped up by 100k to 4.47 million in July, so that was encouraging. But we are a long ways from declaring the real estate problem solved.

My Sept iron condor position closed the day about $500 underwater with a position delta = -$107 and theta = +$102. So we continue to watch the bullish run that defies explanation.

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Written by Dr. Duke

Created: 21 August 2012

 The markets opened strongly this morning and appeared to be on a mission to break this year's previous highs. SPX traded as high as $1427 this morning, breaking the April highs of this year; one has to go back to the spring of 2008 to match $1427. But it was almost as though that effort was too much for the markets, as they pulled back sharply. SPX closed down $5 at $1413 and RUT was almost flat, losing $1 to close at $815. Trading volume bumped up a bit to 2.4 billion shares of the S&P 500, but that is still below the 50 dma. Trading increased 17% on the NYSE and was up 8% on NASDAQ. The pullback resulted in VIX increasing one percentage point to 15%.

No economic news appeared to be responsible for either the bullish run this morning or the pull back. Perhaps breaking the April highs triggered a lot of profit taking from the recent run upward. I find it interesting how the economic woes of Europe are no longer in vogue. I still see articles and books about Europe's debt issues and our own looming "fiscal cliff", but the market seems oblivious.

My Sept iron condor stands at a P/L of -$1,060 with delta = -$128 and theta = +$100. Today's whipsaw in the markets cost me $1,080 in hedging my position today. But what can you do but follow your rules? Sometimes you are the windshield of that big BMW cruising without a care and sometimes you are the bug on the windshield.