Dr. Duke's Blog


Do you know any trading coaches who publish the results of their trades daily, as the trade progresses? Dr. Duke analyzes the market and reviews the progress of his iron condor spreads in the Flying With The Condor™ service each day in this blog. If you have questions about any of the trades, Ask Dr. Duke.

The Flying With The Condor™ account gained 39% in 2011, while the S&P 500 traded unchanged and +19% in 2012, again beating the S&P 500 at +14%. In 2013  the Flying With The Condor™service came in at a gain of 13.3%, but the S&P 500 was up 30%. We recently closed the February condor for a gain of 7%, bringing our 2014 performance to -0.3%, as compared to the S&P 500 that is down almost 6%. Download our track record for the details.

Dr. Duke practices what he preaches! You are entering the "No Hype Zone"!

The Bulls Are Running
Written by Dr. Duke   
Tuesday, 22 April 2014 16:09

Markets continued their climb higher today. SPX tacked on $8 to close at $1880 and RUT gained $13 to close at $1156. Volatility remained unchanged with the VIX at 13.2%. Trading volume rose, but this is in comparison to the weak post-holiday trading yesterday. Trading in the S&P 500 stocks came in at 2.1 billion shares, higher than Monday's showing but well below the 50 dma at 2.3B. Trading volume fell 21% on the NYSE and dropped 20% on NASDAQ.

Existing home sales came in flat for March at 4.59 million (annualized).

SPX and RUT have been on a steep rise for the past five or six trading sessions. SPX traded as high as $1885 intraday, reaching the neighborhood of its closing high at $1891 on April 2nd. But RUT is way behind SPX in this race back higher, and has not yet even reached where it opened the year at $1161, much less its 2014 closing high of $1209. This primarily reflects the fact that RUT corrected over 8% in this most recent pull back, as compared to SPX pulling back 4%. But neither index has shown much hesitation in its race higher thus far. I was a little surprised at today's market strength given the escalating tensions in the Ukraine.

My RUT May 1060/1070 put spreads are gaining nicely in this run higher, but I have been unable to find a safe place to establish May call spreads as yet. RUT has been trading higher much too strongly. But I have a potential 8% gain with the put spreads alone and feel no rush to add call spreads to the position.

Out of the Woods?
Written by Dr. Duke   
Wednesday, 16 April 2014 15:09

The markets opened strongly this morning, and for a change, remained strong throughout the day. SPX traded up through its 50 dma and closed at $1862, up $19. RUT gapped open this morning and closed up $12 at $1132. For the record, that only happened because I closed my April put spreads yesterday.

Volatility continued to pull back with VIX losing one and a half points to close at 14.2%. Trading volume fell off from yesterday's highs with 2.2 billion shares of the S&P 500 stocks trading today, falling just below the 50 dma at 2.3B. Trading volume dropped 15% on the NYSE and decreased 23% on NASDAQ.

The question for us to consider: Is this pull back over?

1) How far have we corrected? We are down 4.0% on SPX and 8.1% on RUT on a closing basis. By comparison, the February pull back was 5.7% and 7.4%, respectively. Many analysts will argue this was not an adequate correction, given recent market bullishness.

2) Today's gap open higher was accompanied by decreased trading volume - not reassuring.

3) SPX built strong support at $1815 on Friday, Monday and Tuesday. Tuesday's price action was particularly bullish; SPX traded down to $1816, but then traded 27 points higher. RUT behaved similarly, bouncing off the 200 dma on Friday, Monday and Tuesday. Both indexes gapped open higher this morning.

4) The FOMC beige book appeared to give traders encouragement. Yellen has committed to holding interest rates low even after the economy begins to recover. And don't forget that the Fed is still pumping $50B per month into this economy.

My take is that this pull back is over, but I am not so sure we will see the "straight up" type of bull run we saw so many times in 2013. I am remaining cautious for one other critical reason. Throughout 2013 and so far in 2014, this market has displayed huge price volatility - the price action where we have seen the markets trade fifty points downward and then recover those fifty points within just a few days. For that reason, I am looking at sideways to slightly bullish trades, but I remain cautious.




Whiplash City
Written by Dr. Duke   
Tuesday, 15 April 2014 16:10

The markets opened upward this morning, then collapsed to hit lows around 1pm ET, and then turned around and proceeded to steadily climb all afternoon. SPX closed at $1843, up $12 and RUT closed up $4 at $1119. The VIX lost a half point, closing at 15.6%. Trading volume rose strongly today with 2.5 billion shares of the S&P 500 stocks trading. Volume jumped 18% on the NYSE and rose 27% on NASDAQ. I am tempted to conclude that this afternoon's steady climb had that strong volume underscoring the move, but I'm unsure that any of the normal rules apply to this market. A strong march upward with increased volume and a drop in volatility would normally be a bullish sign, but this is a fickle market.

SPX traded down as low as $1816 before rebounding. This is the third day for SPX to find support around $1816. Also note that SPX closed above the old support, now resistance, at $1840 - that's a positive sign. RUT broke down through its 200 dma, but bounced upward. Again, RUT has spent the last three days treating the 200 dma as support. All of this adds up to support for this market and an end to the recent pull back. But I remain cautious.

The CPI for March was released with an increase of 0.2%, and the Empire manufacturing survey collapsed in April to 1.3 from March's 5.6. Such a large move makes me wonder if there was an error somewhere. The NAHB housing market index remained steady at 47 for April, up one point.

For those of you trading am settlement options like SPX and RUT, don't forget that the exchanges will be closed this Friday, so tomorrow is the last day you can trade those positions before going into expiration. The settlement prices will be determined on Thursday this week.

I took advantage of RUT's strength this afternoon and closed my April put spreads. RUT may trade higher tomorrow and make me regret that, but I decided safer was better. Actually, I have been kicking myself for not closing them last week, but that's another story.

Is the Slide Halted?
Written by Dr. Duke   
Monday, 14 April 2014 16:14

Retail sales reported an increase of 1.1% for March, a nice improvement from the 0.7% increase in February. This boosted the market open this morning; the bears attempted to pull the market's gains back down this afternoon, but weren't entirely successful. SPX closed up $15 at $1831. RUT closed at $1115, up $4. Volatility fell off  a bit with the VIX dropping one percentage point to close at 16.1%.

SPX opened Friday at $1831, traded down and closed at $1816. This morning, SPX opened at $1818, just above Friday's close, and closed today exactly at Friday's open, $1831. So we have one more example of the market almost precisely recovering the previous day's losses the very next trading day. These whiplashes make it difficult to hedge positions. I hedged my condors Friday and then sold those hedge options this morning.

RUT traded down today and bounced off the 200 dma at $1106 before recovering to close above Friday's close. Again, RUT is trading weaker than SPX. Judging from what I hear on CNBC and read in verious places, the tone of most analysts has turned markedly bearish from just a few weeks ago when everyone was signing from the bulls' hymnal. Is that the clue for a reversal?

Tough Week
Written by Dr. Duke   
Friday, 11 April 2014 15:01

Today's trading capped off a rough week in the markets. Tuesday and Wednesday brought nice spurts back to the upside, and may have reassured traders that the worst was over. But Thursday dashed those hopes with a $39 drop, slicing through long-term support at $1840. Trading opened down again this morning, but markets tried to make it back into positive territory around mid-morning. That positive move was met by the bears with more selling, driving the markets lower once again. SPX closed today at $1816, down $17. RUT closed at $1111, down $16. Volatility rose just over one point today, with the VIX closing at 17%.

Several aspects of this week's sell-off aren't typical or expected. First of all, many blue chip stocks like IBM have held up rather well throughout this debacle. IBM opened the week at $192 and closed today at $195. If you have been watching the financial news and watching the major market averages, that is probably surprising. I haven't done the research, but I don't think I have ever seen a market sell-off as severe as this week's together with minimal increases in volatility. The VIX is still under 18% and spent most of the week under 16%. One other surprising aspect is that there doesn't seem to be a significant news or economic report that triggered the selling. Biotech, high tech, and the market darlings all took it on the chin with the largest losses by far.

From SPX's closing high on April 2nd through today's close, SPX is down 4%. While 4% is typical of last year's several pauses, most analysts look for pull backs on the order of 7-10% to qualify as a "correction". So, that leaves us with the question for Monday: Is the worst over or will the markets be trading lower next week?

Try to forget about the markets and enjoy the weekend. They tell us we may enjoy temperatures above 70 degrees for the first time here in Chicago . I had decided the ice age had started, but maybe I was wrong.

Written by Dr. Duke   
Monday, 07 April 2014 16:48

IBD officially declared this to be a "market in correction" on Friday. The market apparently heard about that and complied today with SPX losing $20 to close at $1845. RUT traded even weaker on a percentage basis, losing $18 to close at $1136. Volatility finally popped up a bit to 15.6%, up 1.6 points, but this still isn't really in correction territory for volatility. At the low of the February pull back, VIX was over 21%, and VIX hit 18.2% just a couple of weeks ago on March 14th.

RUT broke support at $1147 today, the high from December. The next support level is the high from November at $1123, and then the grand daddy of targets for a correction would be the February 5th low at $1083. RUT now stands at a 6% pull back from its March 4th high. RUT traded down more strongly than SPX again today with a decline of 1.6%, compared to SPX's 1.1% decline. SPX has a strong support band at $1840 to $1850, and the 50 dma is at $1839. SPX landed right in the middle of that band today after trading as low as $1841. If it breaks through $1840 tomorrow, this could get ugly (or uglier).

We saw several short lived pull backs last year, but SPX and RUT ran more in parallel. This pull back has been principally in RUT and the NASDAQ thus far. And trading volume moderated today. Trading in the S&P 500 was about the same as Friday with 2.6 billion shares, but trading on the NYSE was only up 4% and trading volume on NASDAQ declined 3%.

So far, this has appeared to be a sell-off associated with taking profits in the high fliers of the past year. Heaven help us if we get some market-rattling news. Market psychology has turned.

Selective Sell-Off
Written by Dr. Duke   
Friday, 04 April 2014 14:02

 The non-farm payrolls report, aka, the jobs report, was released before the market opened this morning, and it appeared to be roughly in line with expectations with +192 thousand jobs and the unemployment rate remaining unchanged at 6.7%. The S&P futures rose a bit and the market opened an hour later with the S&P 500 up about $7, hitting its high for the day at $1897 around 10:30 am ET. Then the other shoe dropped. All of the broad market averages began a steady decline for the balance of the day. SPX closed down $24 at $1865. But RUT was much weaker, closing at $1153, down $28. Early indicators were for a significant increase in trading volume with a 32% increase on the NYSE and a 29% increase on NASDAQ. But volatility didn’t increase as much as one might expect, with the VIX closing at 14.0%, up 0.6 points.

This raises the question: Is this the long awaited correction or is it just the expected round of profit-taking after such a strong bull market? I am inclined toward the latter view for the following reasons:

SPX lost 1.3% today, but RUT lost 2.4% - small caps were being sold preferentially.

SPX lost 1.3% today, but NASDAQ lost 2.7% - high tech winners and momentum stocks like NFLX were being sold preferentially.

SPX took a large loss today, but didn’t even attempt to challenge strong support levels at $1840 and $1850.

RUT hit $1150 as its intraday low today, well above the recent pull back low and the support level set by the late December high.

VIX was up less than one percentage point and closed just under 14% - the big institutional traders aren’t hedging very strongly, if at all.

IBM closed today’s trading at $192, only down one dollar in this market.

Today was full of red ink, but RUT has been trading weaker than the rest of the market for the past couple of weeks; it never did approach its all-time highs earlier this week as SPX was setting records. RUT has been showing us weakness in the small cap space; but the question remains whether the small cap sell-off leads to more general market correction. I am encouraged by VIX remaining low today and stocks like IBM showing relative strength. We'll see.

Enjoy your weekend.

New Highs
Written by Dr. Duke   
Wednesday, 02 April 2014 16:09

SPX set a new all-time high yesterday and set another high today, rising $5 to close at $1891. RUT  rose $4 to $1193. As I noted yesterday, RUT is lagging its big brother; for RUT to set a new high, it will have to trade above about $1210, still another $17 higher. So RUT has returned to the middle of its previous trading range, but SPX is in rarefied air. The VIX was unchanged today at 13.1%.

Trading volume dropped off today with 2.0 billion shares of the S&P 500 stocks trading. Trading declined 5% on the NYSE and increased 2% on NASDAQ. Trading volume in the S&P 500 has only exceeded to 50 dma twice since the beginning of March. We are trading higher, but cautiously.

ADP released their estimate of private payroll changes for March today at 191 thousand new private jobs. The other positive news was an increase in factory orders of 1.6% in February, as compared to the one percent decrease in January. That, of course, was good news for the market and helped continue the rally. It seems like the only thing that might slow this rally would be a dismal jobs report on Friday. For now, it's full speed ahead.

The Bulls are Running
Written by Dr. Duke   
Tuesday, 01 April 2014 18:00

The markets appear to have broken through the upper resistance levels to set new highs today; I will feel more confident about that statement if we hold these prices tomorrow. SPX closed up $13 at $1886, eclipsing earlier closes this year at $1878 and even the intraday highs around $1884. RUT followed suit with a large increase of $16 to close at $1189, but remains far from its earlier highs around $1209. Much more damage was done to RUT from March 24th to the 27th. RUT fell completely out of its consolidation trading range whereas SPX managed to hold support levels.

Volatility continues to fall with the VIX losing almost a full point to close at 13.1%.

Part of the market's enthusiasm probably came from the ISM manufacturing survey that rose in March to 53.7 from 53.2 and construction spending increasing 0.1% in February versus January's 0.2% drop. These aren't huge numbers by any means, but the sum effect of recent comments from Yellen and assurances that the Fed has the market's back are being taken as very bullish. It is hard to argue with that viewpoint. When I drive around my area and see the large number of vacant storefronts and evaluate the "real" unemployment data, I believe that tells a different story. We may be able to argue about the underlying economics, but I can't ignore the obvious bullish nature of this market.

The Apr 1100/1110 put spreads I entered on 3/24 have boosted my April iron condor to a gain of $3,440 or +22% on the capital now at risk (I closed the Apr 1270/1280 call spreads on 3/24). I opened my May position with the 1060/1070 put spreads on 3/28 and that position is now up 7%, so May is off to a good start. The question now is whether this market will ever pause long enough for me to sell May call spreads.

So now we continue to watch to see if this bull can continue. I may be skeptical, but I have to play what I see.

Trapped in the Middle
Written by Dr. Duke   
Monday, 31 March 2014 16:49

The markets have been like a ultra-fast hockey match and my neck is getting tired trying to follow it back and forth. That is a little facetious because many of my trades benefit from this sideways trading range. SPX has looked pretty solid lately, but RUT's decline was a bit worrisome. But the markets were happy with Yellen's comments today and so all is well - but, really, did you learn anything new? All we can do is watch for a break-out in either direction and trade accordingly. SPX gained $15 today, closing at $1872. All of that gain was accomplished in the first thirty minutes of trading; then SPX just chopped sideways for the rest of the day. But RUT applied some big-time salve today, regaining $21 of recent declines, closing at $1173.

Volatility dropped off a bit (but it never rose very much) with the VIX closing at 13.9%, down a half point.

Now that we have Yellen's testimony behind us, we are looking forward to Friday's jobs report. But it is becoming clear (to me at least) that this market is most likely going to find a reason to trade higher regardless of the actual data in the jobs report. I can hear the cynics out there saying that this is exactly the way the market behaves just before it goes over the cliff. Maybe, but I don't think the economy is that bad. I don't think it is good by any means. And I am amazed at how the media have all donned rose colored glasses since Obama entered office. Remember the continuous stream of negative news stories about three dollar gasoline when Bush was in office?

I think this is an excellent environment for the classic diagonal bull call spread. And if you add a put, I think it is pretty safe from the possible correction event.

The bottom line: watch for SPX to break $1840 on the way down or breaking $1885 to make new all-time highs. In the meantime, play sideways to slightly bullish trades.

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