Dr. Duke's Blog

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Written by Dr. Duke

Created: 20 July 2012

 This market is playing out like one of those novels you read on the beach this summer - many interesting characters and just when you think the bad guy has left the story, he surprises you with his resurrection. In our novel the European debt crisis returns to the stage, this time focusing on Spain's debt issues. This derailed the mini rally we had going in the S&P 500 for the past few sessions. SPX gave up $14 to close at $1363 on 3.0 billion shares, a pretty hefty increase in volume, but it was expiration Friday. RUT closed at $792, down $11. Trading volume on the NYSE was up 16% and volume on the NASDAQ was up 3%.

SPX broke a significant resistance level at $1375 yesterday, but was unable to hold that today, pulling back into the sideways trading range. Corporate earnings are holding up reasonably well during this earnings cycle, but growth in both earnings and revenue is slowing. In addition, companies are being very cautious with their future guidance. I continue to think this market is caught in between some powerful forces. On the one hand, governments around the world are printing money to shore up their economies, plus global corporations have trimmed their balance sheets significantly the past couple or three years, so earnings are holding up in spite of signs of economic softening, if not outright recession. And then of course, we have the looming fiscal cliff here in the states with the inmates in charge of the asylum in Washington. In short, I think these forces are opposite in nature, but roughly balanced. Thus, we have brief rallies and then, just as the shorts have covered, the market heads back down. I'm not sure what will change in that picture for the balance of the year. 

My July iron condor position expires worthless this weekend; RUT settled at $795.27 (SPX settled at $1370.28). My Aug iron condor position stands at a net gain of $1,800 with position delta = -$33 and position theta = +$65. What a difference a day makes! With the expiration of the July position, our Flying With The Condor™ service stands at a year to date gain of 35%. By comparison, the S&P 500 is only up 8% for the year. That comparison will make me enjoy my weekend a bit more. Have a great weekend. Savor all the many beautiful things that surround you.

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Written by Dr. Duke

Created: 18 July 2012

 The markets rallied pretty strongly today. SPX tacked on $9 to close at $1373 while RUT gained $6 to close at $805. Volume ticked up modestly with 2.7 billion shares of the S&P 500 trading; trading volume on the NYSE edged up 4% and trading volume on NASDAQ was up 2%. The VIX moved down to 16.2%. I don't have a precise tally, but it seems to me that the earnings reports thus far in this cycle have not been compelling; most, if not all, of the guidance has been pessimistic or at least cautious. Bernanke's recent testimony underscored the weakness of the economy. So why is the market trading upward? It seems the only possible answer is the expectation that the Fed will begin a new round of quantitative easing and boost the economy and the markets. How many days will pass without Fed action before the markets trade back downward?

SPX hit $1375 today before pulling back to close at $1373. $1375 is where the market stalled in early July. Can it break that resistance level this time? I still believe we have too many headwinds to move this economy and the markets forward. Even if the Fed rides to the rescue once again, how much effect will it have? On the other hand, most corporations have become very lean and efficient the past few years, so earnings may not be growing, but they aren't collapsing either. My expectation is to see the market trade largely sideways between these relative positives and negatives. But the boys and their computers will inject a lot of chop and volatility into the picture, so be careful. It is going to be a rough ride.

My July iron condor continues to coast into expiration. The Aug positions stands at a P/L of +$240 with delta = -$91 and theta = +$112. The 850/860 call spreads remain about one standard deviation OTM, so no adjustment is required as yet. But the position is showing the effects of the recent rally.

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Written by Dr. Duke

Created: 17 July 2012

 Throughout history, man has tried to predict the future by reading tea leaves and all sorts of things. But today, we traders are sophisticated; we read Bernanke. Traders listened to every word of his testimony before Congress today and interpreted every gesture and expression. Consequently, the markets swung back and forth dramatically - must have been fun for the day traders. SPX closed at $1364, up $10 after trading as low as $1345 and as high as $1365. RUT closed up $3 at $799. 

Bernanke's gloomy view of the economy fueled speculation of another round of quantitative easing, so the markets ultimately traded up today. Bernanke is still on the hill tomorrow, so we may be in for more of this volatility, but it is unlikely he will surprise the markets with anything new tomorrow. My favorite take-away from today was Senator Schumer telling Bernanke to "get to work" to solve these economic problems; isn't this Senate the body that has failed to propose a budget for three years now? And we pay these people?

Trading volume popped up with 2.6 billion shares of the S&P 500 trading; trading volume on the NYSE was up 17% and volume on NASDAQ was up 23%. The VIX traded below 17%, closing at 16.5%. Industrial production increased 0.4% in June and capacity utilization inched up to 78.9% in June, but I don't think traders noticed these reports; all eyes were on Bernanke, hoping for a Fed bailout.

My July iron condor continues to cruise toward expiration with both spreads several standard deviations OTM. The Aug iron condor on RUT at 650/660 and 850/860 stands at a P/L of +$520 with position delta = -$71 and position theta = +$103. As the delta indicates, we are getting some mild pressure on the call spreads, but we are still far from triggering an adjustment. The Bernanke watch continues...

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Written by Dr. Duke

Created: 16 July 2012

 Bernanke is scheduled to testify before Congress tomorrow and it appeared that traders were waiting on some news of another round of quantitative easing. The markets opened lower this morning and basically traded sideways all day with lower volume. SPX closed down $3 at $1354 and RUT lost $4 to close at $797. Trading volume dropped with 2.1 billion shares of the S&P 500 trading today (the 50 dma = 2.8B). Trading volume decreased 9% on the NYSE, but increased 5% on NASDAQ. Earnings numbers and guidance thus far have not been overly optimistic. When you couple that with some of the recent weak economic data such as the jobs and retail sales reports, we get weak sideways trading on lower volume.

The VIX ended the day at 17.1%, so that suggests that traders aren't too fearful. But clearly, they aren't buying with both fists either.

My July iron condor on RUT essentially stands at its maximum 16% gain at this point with both spreads far OTM and expected to expire worthless this weekend. The Aug position stands at a P/L of +$580 with delta = -$73 and theta = +$95. Traders will be watching for any clues that Bernanke is going to initiate another round of quantitative easing, so we are probably in for some intraday volatility tomorrow and the next day as Bernanke testifies before Congress.

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Written by Dr. Duke

Created: 13 July 2012

 After six successive downward trading sessions, the markets finally had a positive day. SPX opened at $1335 and traded steadily upward all day. In fact, today's trading was the least choppy that I have seen in quite a while. SPX closed at $1357, up $22 and RUT closed up $11 at $801. The VIX dropped almost two points to close the day at 16.7%. That's pretty low and suggests relatively low levels of fear in the market. I am a little surprised we have put the European debt scare behind us so quickly. But today's rally occurred on much lower volume. Only 2.3 billion shares of the S&P 500 traded today; trading on the NYSE declined 17% and trading volume on NASDAQ dropped 22%.

China's GDP announcement this morning encouraged traders; it came in at an annualized rate of 7.6% for the first quarter and that was a bit better than analysts expected. The PPI came in at +0.1% for June and the University of Michigan customer sentiment survey came in at 72.0 for July, down a bit from last month's 73.2.

Those data points don't seem like the impetus for a $22 rally on SPX, but it is what it is.

I applied the Two Sigma Rule to my July RUT iron condor positions today and both spreads passed and will remain open. But the calls are just outside two standard deviations so I will watch them closely. We may close them next week. The July position stands at a net gain of $2,720 with delta = -$7 and theta = +$23. The August iron condor on RUT stands at a P/L of +$180 with delta = -$80 and theta = +$91. As evidenced from the delta/theta ratio, the call spreads are a little tight at about one standard deviation OTM. A possible adjustment may be in the works if the market continues upward as bullishly as it did today.

Assuming the July spreads expire worthless next weekend, our Flying With The Condor™ service will be up 35% for this year, as compared to the S&P 500 index, which is currently up 8% for the year.

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Written by Dr. Duke

Created: 12 July 2012

 Is this market finding support or simply grinding lower? That is the big question. SPX closed down $7 at $1335 and RUT lost $3 to close at $790. Trading volume bumped up today with 2.7 billion shares of the S&P 500 trading (the 50 dma is 2.8B). Trading rose 8% on the NYSE and also rose 5% on NASDAQ. The VIX opened at 18.8%, moved up to 19.5%, but then settled down to 18.3% after the markets recovered this afternoon.

SPX traded down to $1325, but rebounded to close at the 50 dma at $1335. And this occurred on higher volume. Can I interpret this as the market finding support? Or am I just whistling in the dark?

Initial unemployment claims dropped 26 thousand this week to 350k, while the number of continuing claims remained essentially flat at 3.3 million (down 14k). These mediocre numbers may have contributed to the negative mood of trading this morning, but somehow, the markets overcame that weak opening.

My July iron condor stands at a net gain of $2,620 with delta = -$10 and theta = +$75. I will apply the Two Sigma Rule tomorrow to determine if either spread should be closed; at this point, we may end up allowing both spreads to go into expiration to expire worthless. The Aug position stands at a P/L of +$860 with delta = -$47 and theta = +$77.

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Written by Dr. Duke

Created: 11 July 2012

 Markets traded largely sideways today until the release of the FOMC minutes this afternoon. After traders saw no mention of QE III being in the works, the markets sold off. A mini-rally in the last few minutes of trading pushed markets close to where they started the day. SPX closed at $1341 for no change on the day and RUT dropped $3 to close at $792. Trading volume was flat with 2.5 billion shares of the S&P 500 trading; trading on the NYSE dropped 1% and trading on NASDAQ dropped 4%.

The VIX spiked up to 19.2% this afternoon as the market tanked, but recovered to close at 18%, essentially where it started the day.

SPX traded down and bounced off the 50 dma (just as it did yesterday), so this is looking like a pretty solid support level.

If you watch CNBC, you may be thinking the "end is near" because it seems like they have uncovered every bearish commentator they could find. But the chart doesn't suggest that. We have been largely trading in a broad sideways channel since mid-May. Now when we were looking at the chart on May 20, when it had steadily and steeply declined since May 1, that was scary. This market certainly isn't in a bullish trend, but it is far from a bearish trend as well. That is why I focus on the key support levels for the S&P 500. When these are broken, we know we are in for some tough times in the market. However, it is true that the current market is fragile. Some unexpected bombshell out of Europe could easily tip us over the edge, especially if we continue to see mediocre earnings reports such as Alcoa's.

My July iron condor on RUT at 610/620 and 850/860 stands at a net gain of $2,660 on 20 contracts with delta = -$11 and theta = +$44. The Aug position at 650/660 and 850/860 stands at a net gain of $320 with delta = -$60 and theta = +$92. We have the unemployment claims report tomorrow, but I doubt that report will be either good enough or bad enough to do much with this market.

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Written by Dr. Duke

Created: 10 July 2012

 The S&P 500 opened higher this morning and then began to deteriorate, steadily dropping all day long. SPX closed at $1341, down $11. RUT also shed some points, closing at $795, down $10. Trading volume remains somewhat subdued, but rose from the lower levels Monday and over the holiday week. About 2.5 billion shares of the S&P 500 traded today, up a bit from yesterday, but still below the 50 dma of 2.8B. Trading volume jumped 19% on the NYSE and rose 18% on NASDAQ. The VIX rose almost a full point to close at 18.7%.

SPX has a solid support level at $1335 and the 50 dma at $1337. So it was encouraging for the bulls to see the SPX hit a low of $1336 and then bounce to close at $1341.

My July condor on RUT stands at a P/L of +$2,580 with delta = -$14 and theta = +$64. Both July spreads are well over two standard deviations OTM. The Aug position on RUT stands at a P/L of -$40 with delta = -$80 and theta = +$88. The Aug 850/860 call spread is now about one standard deviation OTM, so the pressure has been relieved (for now).

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Written by Dr. Duke

Created: 09 July 2012

 The heat appears to have even affected the markets. They are just slowly trading sideways and somewhat downward - much as we are inclined to slow down a bit and take it easy in the summer heat. SPX closed down $2 at $1352 and RUT closed at $805, down $2. Trading volume was flat with 2.1 billion shares of the S&P 500 trading. Trading volume increased 7% on the NYSE, but was flat on NASDAQ. 

Today was a slow day for economic data reports; in fact, this week will be pretty slow until Thursday's unemployment claims numbers. Surprisingly, the VIX increased a bit from Friday, but closed at 18%, still a pretty low level.

I am watching the 50 dma at $1338 for SPX. That should act as support. On the other hand, breaking through the recent highs at $1375 would be a bullish sign. However, I am inclined to think neither will happen. I don't see any news with the potential to really kick this market into rally mode. Some unexpected surprises out of Europe could push us downward, but I think the best bet is that we continue to "muddle along".

My July iron condor on RUT stands at a net gain of $2,300 or +15% with position delta = -$39 and theta = +$93. The August position stands at a P/L of -$1,040 with delta = -$104 and theta = +$93. The Aug 850 call is riding right along the edge with a delta of 18. 

Now go get something cold to drink and relax on the patio. Think about AAPL - up again today in a weak overall market.

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Written by Dr. Duke

Created: 06 July 2012

 For the second month in succession, the jobs report came in much weaker than expected with only eighty thousand new jobs. The unemployment rate stayed constant at 8.2%. The markets traded off in response with SPX losing $13 to close at $1355. RUT dropped $10 to close at $807. Trading volume continued low, probably a result of the holiday week. Trading in the S&P 500 stocks came in at 2.1 billion shares, well below the 50 dma at 2.8B. Trading volume dropped 12% on the NYSE and rose 2% on NASDAQ. 

SPX traded down as low as $1348, but recovered somewhat in late afternoon trading. SPX traded in the range of about $1310 to $1360 through most of June, and it appears the index is now back in that trading range. SPX managed to punch through resistance at $1370 before the holiday, but could not hold it. RUT's pattern is somewhat different. RUT spent most of June in the range of $735 to $785, but broke out much more strongly than SPX and appeared to even threaten to break the highs around $825 set in late April. So RUT remains in thin air even after today's pull back. Will RUT's new trading range be $725 to $825? I am focusing on these support and resistance levels because it isn't clear if this brief bullish run of the past several trading sessions is over or not. Some are even predicting a bearish push to much lower levels. Don't forget the Goldman Sachs call for $1285. I am inclined to think a choppy sideways trading range is the most likely result of the current mix of tepid economic data with underlying recessionary fears.

My July RUT iron condor stands at a P/L of +$2,220 with delta = -$49 and theta = +$81. Since there is so much less time remaining in the July position, today's pull back helped a lot. The call spreads are now about one and a half standard deviations OTM. The August condor stands at a P/L of -$1,180 with delta = -$98 and theta = +$84. I hedged this position before the holiday, but removed that hedge this afternoon. But this condor is far from out of danger. The Aug 850 calls still have a delta just under twenty.

Enjoy your weekend.