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"!

Why Am I So Nervous?
Written by Dr. Duke   
Monday, 20 October 2014 17:30

SPX has now traded higher for three consecutive days following the severe downdraft last Wednesday. SPX closed today at $1904, up $17. RUT also traded higher, gaining $13 to close at $1095. VIX is now back down to 18.6%, losing over three points today. But I remain nervous. This market has been trading nervously for the past two years. Look back at the number of sudden drops over a week of trading sessions, only to be followed by a recovery straight up over just a few days. At least we had the fiscal cliff concerns in January of last year. I'm not sure what is causing this market to be so nervous. But the fact of the matter is that it doesn't take much to start a selling spree. So I am cautious.

Trading volume fell off from expiration Friday, but that decline is also evidence of some calming after last week's panic. Trading in the S&P 500 stocks dropped to 2.1 billion shares. Trading declined 26% on the NYSE and dropped 24% on NASDAQ.

My November iron condor on SPX is back to break-even and will continue to move into the black as volatility contracts. Those puts are now $80 OTM, but I still worry. One of the things that concerns me is a retest of support. Normally, when a stock or index declines and then appears to bounce back higher, it trades back down and tests that support level before trading higher. But it is true that the SPX hasn't displayed that behavior with the rapid pull backs of the past couple of years. So maybe it will just trade higher and not look back. One thing's for sure - this isn't a time to take my eye off the ball.

Is the Correction Over?
Written by Dr. Duke   
Friday, 17 October 2014 16:22

The S&P futures were up double digits in positive territory as I checked them first thing this morning - almost the opposite of Wednesday morning. SPX tacked on $24 to close at $1887, but RUT lost $4 to close at $1082. Hmmm... That worries me a bit. RUT started this bounce back earlier this week. Maybe we aren't out of the woods just yet. Take a look back at the fall of 2011 on your favorite charting service (I like StockCharts.com). SPX hit bottom on August 8th with a close of $1119; for the next 3 days, SPX traded up and down, repeatedly testing that support level. Then it rose and one might have concluded all was well. But it retested support with a close at $1124 on August 19th. And, then a month later on September 22nd, it closed at $1130. On October 3rd, SPX dipped down and closed at $1099 before it finally began its climb higher. Wednesday's plunge was scary, and we are all anxious to say the boogyman is gone, but he may be awaiting a sequel - remember Michael in Halloween? My point is simply this; don't let your guard down.

Volatility backed off by over three points with the VIX closing at 22%, but that is still a relatively high number. Trading volume also fell off a bit with 2.9 billion shares of the S&P 500 stocks trading today - again, volume pulled back, but it is still well above average. Trading volume dropped 12% on the NYSE and decreased 14% on NASDAQ.

Housing starts came in at annualized rates of 1017k for September and building permits matched that with 1018k. The University of Michigan consumer sentiment survey reported at 86.4 for October, up a bit from last month's 84.6.

I am glad to see this week end, and I doubt that I am alone. Enjoy your weekend and rejuvenate. This correction may have some life left in it. But there is no need worrying about that until Monday.

When Does a Correction Become a Crash?
Written by Dr. Duke   
Wednesday, 15 October 2014 14:48

The S&P futures were down about $30 when I first looked at them this morning. SPX opened at $1874, which was surprisingly only a couple of dollars lower than yesterday's close, but then the wild ride began. SPX dropped about $36 in the next few minutes, appeared to recover but then began a slow decline to its low for the day at $1821 around 1:30 pm ET. The buying dominated the rest of the day's trading with SPX closing at $1862, down $15. It is surprising to see that SPX only lost $15 when all of the dust settled. RUT actually closed with a gain of $11 at $1072. RUT's chart seems to suggest it is forming a bottom around $1050; you have to go back to the pull back in October of 2013 to match that price. RUT's weakness led this market down. Is RUT leading the bounce?

As expected in a market like we had today, VIX spiked up over 31%, but settled down to close at 26.2%. Trading volume shot through the roof with over four billion shares of the S&P 500 trading today. Trading volume rose 25% on the NYSE and rose 24% on NASDAQ. Is this a sign of the classic "capitulation"?

The minutes from the last FOMC meeting were released this afternoon. Maybe that led to the buying we saw after 2 pm ET. Retail sales declined 0.3% in September , a big change from the 0.6% increase in August. PPI was flat last month and reported a decline of 0.1% for September. The Empire manufacturing survey came in at 6.2 for October, a dramatic shift downward from last month's 27.5 - this almost looks like a data error.

At the bottom of the market this afternoon, my put hedges were doing their job and my SPX Nov condor position was at break-even. But we have some spurious prices posted at the close for SPX, so don't be surprised if your broker statement looks a bit weird. My Nov SPX condor is positioned at 1810/1820 and 2090/2100. The SPX Nov 2090 calls were posted with a closing ask price of $9.60. So my call spread is being shown as losing $370 per contract! That short call is $228 OTM!!

What a day!

Signs of Hope?
Written by Dr. Duke   
Tuesday, 14 October 2014 15:20

After yesterday afternoon's severe sell-off, I was surprised to see SPX open in positive ground this morning and then trade up as high as $1899 by noon today, but then the bears came back and started driving it lower. It looked like another repeat of yesterday's trading action. SPX hit its low for the day just thirty minutes before the close. But unlike yesterday, SPX bounced weakly during those last few minutes and avoided another close at the lows of the day. SPX closed at $1878, for a gain of $3. RUT traded more strongly, gaining $12 to close at $1062. The VIX dropped off almost two points to 22.8%. We are far from being out of the woods, but there were some encouraging signs in the trading action today.

Trading volume increased a bit today with 3.0 billion shares of the S&P 500 trading today. Trading volume rose 6% on the NYSE and increased 1% on NASDAQ.

There were no significant economic reports today, but the reasonably positive earnings announcements from the big banks (JPM, C, and WFC) were thought to have contributed to the morning's bullish price action. Goldman Sachs will report Thursday evening.

I was annoyed to see the market bounce back so strongly this morning since I had hedged my November position late yesterday. But that is the nature of the trading game. I compromised and removed half of my hedging options. I was pleased with that compromise as the market traded off this afternoon. These hedge options are costing me money, but hopefully they will allow me to salvage some gains from the November condor position on SPX. I have begun to nibble (emphasis on nibble) at some bullish trades today. Logic tells me we should be near the bottom - but logic is overrated in this game.

The Baby Fell Out of Bed
Written by Dr. Duke   
Monday, 13 October 2014 15:56

The markets seemed reasonably normal this morning. In fact, at one point, RUT was actually up several dollars and outperforming SPX. That seemed positive, but that all changed around 2 pm ET. SPX traded down hard for the last two hours, closing at its low for the day, $1875, down $31. RUT didn't fare as badly, trading down $4 to close at $1049. Trading volume declined from Friday with 2.8 billion shares of the S&P 500 stocks trading. Trading volume dropped 1% on the NYSE and decreased 12% on NASDAQ. Volatility spiked up over three points with the VIX closing at 24.6%.

I think it is safe to say that the "buy the dip" crowd have been flushed out of the market - or they are in a lot of pain. There was no economic data to account for this afternoon's rout. Most analysts attributed it to SPX trading below the 200 dma and triggering a number of sell orders. SPX has not broken the 200 dma in about two years.

My Nov 1810/1820 put spreads are far OTM, but those spreads aren't nearly as safe as as I once thought. I hedged the position with Dec puts today, and may close the put spreads soon if this continues. My hedge puts gained 15% just in the last hour of trading today. That helped ease the pressure on the Nov iron condor position.

It is hard to predict what event, if any, may kick in support for this market. Since it is difficult to point to the impetus for the collapse, it is equally difficult to predict what may end the bloodshed.

Presumably, you have already hedged your positions or closed them out as appropriate; now we wait out the storm.

Are We There Yet?
Written by Dr. Duke   
Friday, 10 October 2014 16:05

All of us parents know this question well - it happens on every trip in the car greater than twenty minutes. I thought of that question this afternoon as I watched this market drop farther yet.

You take your financial life in your hands when you walk away from this market for the last two hours of the day - sometimes it runs up huge; sometimes it drops like a rock. Today was the latter. SPX opened the day down just a touch and traded largely sideways. The VIX pulled back; everything appeared serene. It had me thinking that it's slowing; maybe the worst is over. But then SPX lost over twenty points in the last two hours of trading. SPX closed at $1906, down $22. RUT also closed down at $1053, down $15. The VIX popped up over two points to 21.2%. After trading as high as $1937 this morning, SPX closed at its low for the day - very bearish. Trading volume spiked upward, underscoring the bearish move. Over three billion shares of the S&P 500 stocks traded today; trading increased 3% on the NYSE and jumped 24% on NASDAQ.

If you are looking for the dire economic report that triggered this latest sell-off, forget it. There isn't one. As you know, I have been critical of this very weak economic recovery that I consider largely government induced. But the economy isn't rolling over into a recession. I'm unsure what's driving this decline; in these situations, all traders become technical traders. Fundamentals just don't explain it.

This market almost suckered me into selling some November put spreads today. Fortunately, I decided to give it more time to show its true character. This has been a very tough week in the markets. Traders need to be treated for whiplash.

I'm taking my girlfriend to dinner and a movie, leaving the market behind.

My Head Is Swimming
Written by Dr. Duke   
Thursday, 09 October 2014 15:49

I don't think I am alone in being bewildered by this market. I feel like a mouse in the middle of a sumo wrestling match. Today SPX lost $41 to close at $1928 and RUT traded down $29 to $1068. Let's review: SPX traded down $30 on Tuesday, then it traded up $34 on Wednesday. then we lost $41 today. "Good grief", said Charlie Brown. I'm not sure anyone has a good answer for it, but the facts are that more one percent moves in the stock market occur in October than any other month. But I think recent markets are setting records for the huge whipsaws back and forth. Thirty and forty dollar moves on the S&P 500 back to back, and in opposite directions, are largely unprecedented. This market is rattling even the institutional traders. Over 2.6 billion shares of the S&P 500 traded today. But just to keep the data bewildering, trading volume was down 2% on the NYSE and trading on NASDAQ dropped 9%.

The number of initial unemployment claims reported today at 287k, flat from last week's 288k. Continuing unemployment claims were down slightly at 2.38 million, up from 2.40 million.

I took the opportunity to close my remaining SPX Oct 2080/2090 call spreads for five cents. This closes the October position for a gain of 8.2%. I am freeing up cash for a new November position. Our current November trade is doing well, but I expect we will close it early some time after this market bounces. When we see the market bounce (that will be a risky call, given the price volatility), I will sell more November put spreads. Our current November put spreads are over one hundred dollars OTM.

Time to relax and call it a day...

Big Sell-Off
Written by Dr. Duke   
Tuesday, 07 October 2014 14:58

The markets opened weakly this morning but appeared to be just chopping sideways most of the day. Something changed around 2 pm ET. SPX closed down $30 at $1935 and half of that loss occurred in the last two hours of trading. But I can't find any news items that appear responsible. Several analysts blamed concerns over weaker European economies, but those reports came out yesterday and this morning. Why did everyone run for the exits this afternoon? RUT has been trading weakly all year and today was no different with RUT closing at $1076, down $18. RUT's 50 dma crossed below its 200 dma about two weeks ago and RUT is now $65 below its 50 dma and down 7.3% for the year. By contrast, SPX remains up almost 5%. RUT's close today was lower than any of this year's corrections, but SPX is still above the August low at $1910. Another day like today might change that.

Trading volume on the S&P 500 peaked on October 1st on the big drop that day and has steadily declined until today, when it spiked back up to 2.1 billion shares.  Trading volume rose 9% on the NYSE and rose 21% on NASDAQ. I may not understand the impetus, but a lot of traders were heading for the exits.

Volatility, as measured by the VIX, popped back up today, closing at 17.2%, up almost two points. That takes VIX back to the highs of the August correction. In fact, VIX only closed slightly above 17% in August.

Some observers probably thought I was being too conservative when I closed our October put spreads about ten days ago, but conservative looks good on a day like today. The October calls spreads on SPX at 2080/2090 are really far OTM now. I had thought my two sigma rule would close them on Friday, but it looks like we may let them expire worthless unless we get a strong bounce this week. My November condor on SPX at 1810/1820 and 2090/2100 is weathering the storm very well so far and remains modestly profitable (+4%). It is hard to imagine the 1810/1820 spreads being seriously threatened, but today's big drop has me thinking...

The Bears Reassert Themselves
Written by Dr. Duke   
Monday, 06 October 2014 15:21

It appeared on Friday as though the bottom of this correction was in. SPX displayed a classic hammer candlestick on Thursday and then traded strongly higher on Friday. The S&P futures were positive this morning and the markets opened higher. Everything seemed to be lining up. But then those pesky bears came back, pulling SPX down to close at $1965 for a loss of three dollars. RUT traded even more weakly with a loss of $10 to close at $1095. SPX tried to break out above its 50 dma at $1975 and traded as high as $1978 before being pulled back down. Volatility popped back up about one point to 15.5% on the VIX. Trading volume fell off from last week with 1.8 billion shares of the S&P 500 stocks trading; this is below the 50 dma at 1.9 billion shares. Trading volume dropped 8% on the NYSE, but rose 5% on NASDAQ.

There was no significant economic news to drive the market one way or the other. Maybe the markets needed some additional positive news after the jobs report to continue the buying.

This sideways to slightly lower sideways churn is good for my iron condor trades. My October position only consists of the SPX 2080/2090 call spreads, which are essentially worthless now with less than two weeks to go. Assuming they expire worthless, the October position closes for a gain of 8.8%. The November SPX position was entered earlier than I do normally, and consists of the 1810/1820 put spreads and the 2090/2100 call spreads. Both spreads are far OTM and the position currently stands at a P/L of +$1,140 on 20 contracts or +7%. Position delta on 20 contracts is delta = +$5 and theta = +$57. The position is delta neutral and theta will continue to build.

We will see the minutes from the last FOMC meeting on Wednesday; that could move the market. Trading sideways into the earnings announcement cycle may be the best alternative for this overbought market. It allows the various indicators, such as the average P/E of the S&P 500, to move closer to long term averages without a dramatic market correction or crash. In any case, this market is dangerous; keep a close eye on it.

This Is Getting Serious
Written by Dr. Duke   
Wednesday, 01 October 2014 14:41

SPX lost another $26 today, closing at $1946. SPX has now broken a couple of key support levels. Is the low of the August correction at $1910 the next support level? SPX set a closing high at $2011 on September 18th. Today's close is a correction of 3.2% from that high. That doesn't seem like much of a pull back, but consider RUT - a completely different story. RUT closed down $16 at $1085 today. RUT passed the low set back in August yesterday and matched the low set in May today. The closing low on May 15th was $1096 and the intraday low was $1083. RUT's intraday low today was $1083 - precisely the same as on May 15th. Is that just a weird coincidence or is $1083 a strong support level for some reason? RUT's recent high was $1179 on September 2nd. Today's close represents an 8% drop from that high and a 10.2% drop from RUT's July 3rd high at $1208. It is safe to say that we are in correction mode; the current question is how far will it pull back? Will SPX continue to hold up relatively well?

Volatility has risen the past couple of days with the VIX hitting an intraday high today at 17.6% and closing at 16.7%. For the record, the intraday highs on VIX in the April/May and August corrections were 17.9% and 17.6%, respectively. The February correction was more severe with VIX hitting 21.5%.

Trading volume picked up a little bit today, but today's increases are off relatively large numbers from yesterday. Traders may not be flooding through the exits just yet, but the selling pressure is significant. Trading in the S&P 500 stocks came in at 2.5 billion shares (the 50 dma = 1.9B); trading on the NYSE was up 2% and trading volume rose 14% on NASDAQ.

ADP's private employment report came out with an increase of 213 thousand jobs. The ISM manufacturing survey reported 56.6 for September, down from last month, but still a good number. Construction spending dropped off by 0.8% in August, down from July's +1.2% increase.

How low can it go?

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