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 November 2014 position in the Flying With The Condor™ account survived the downturn in October very nicely and was closed with a 13% gain. We also dodged the flash crash on August 24th by going to cash the previous week. The Flying With The Condor™ service ended 2015 up 40%, handily beating the S&P 500 Index. Check the Track Record in the Downloads section for details.
A Tale Of Two Markets
- Written by Dr. Duke
The S&P 500 Index (SPX) closed today at $2397, down $2 for the day. The Russell 2000 Index (RUT) closed at $1392, essentially unchanged (up twenty two cents). But the NASDAQ Composite Index closed up $18 for a new all-time high of $6121. Normally, we see these three major market indices to be somewhat in sync. Most commonly, we draw conclusions for the divergence of the large blue chips represented in the S&P 500 from the small to mid-cap stocks of the Russell 2000.
SPX is bouncing off resistance at the upper edge of a trading channel that dates back to March 1st. RUT has been even more neutral, currently in the middle of a trading channel that dates back to the first week of December. However, the NASDAQ is a different story. That price chart has been steadily climbing higher since the election and today was no exception. NASDAQ is being driven by the high technology stocks that are on fire. Stocks like AAPL, AMZN, FB, ISRG, PCLN, GOOGL and many others are driving the NASDAQ Composite. It wasn't long ago that Google was approaching $500, and I thought that to be rarified air, but no more. Many NASDAQ stocks are approaching $1,000 per share. PCLN closed at $1911 today. We are in the midst of a high tech boom in the stock market. Most smaller companies and the large traditional blue chips were not invited to the party.
I find it interesting that the very success of these NASDAQ stocks is scaring many analysts. Predictions of a correction or worse are common. Price measures, such as P/E ratios and dividend yields do indeed suggest an overbought market, but far from historical extremes. Recent earnings announcements have been very positive with large numbers of companies beating analyst estimates and the outlooks for next quarter have been generally positive. Anyone who has much market experience will be quick to tell you that corrections are exceedingly hard to predict. Bull markets will ignore a lot of negative news and then one day... they won't.
What is a trader to do? I have been buying diagonal call spreads on some of these hot NASDAQ stocks. I am hedging my bets a bit by selling the front dated call slightly in the money. That gives me a lower break-even price, allowing the trade to tolerate some minor pull-backs. But don't take a long nap. This market requires close monitoring.
A Time For Condors?
- Written by Dr. Duke
The major market indices continue to trade sideways, and volatility is quite low. SPX closed today at $2391, up less than three dollars. The volatility index for the S&P 500 index, VIX, closed at 10.5% today, near the lows for this year. SPX has been trading in the range of $2320 and $2400 since mid-February. Powerful market forces are arrayed on either side of this market. The bulls are citing a more business-friendly administration, a reduction in regulations and prospects of tax reform. The bears cite several months of stellar market advances, high price/earnings ratios, and an aging bull market. It doesn't seem as though any negative news affects the market. Every dip is quickly bought, but the market can't seem to quite make the break-out to new highs either.
For the last couple of months, I have been loading my portfolio with iron condor positions on the S&P 500 index (SPX), The Russell 2000 index (RUT) and the NASDAQ 100 index (NDX). Today, I sold the NDX May 5375/5400 and 5800/5825 iron condor for a credit of $195 per contract. Yesterday, I sold the NDX June 5200/5225 and 5825/5850 iron condor for $506 per contract. The disadvantage of selling iron condors in this environment is the low implied volatility, which lowers the option premiums. On the other hand, that low volatility is one more sign of the sideways, treading water nature of this market, and that favors these trades.
Don't neglect trade management. Entering this positions and then going on vacation is a prescription for disaster. Be sure you have a clear plan for risk management, e.g., if SPX breaks down through $2300, I will buy one $2300 put for every ten condors. Establish a series of these rules and trade what the market gives you each day. Don't try to predict its movement tomorrow.
- Written by Dr. Duke
We are well into earnings season. IBM was weighing heavily on the Dow Jones Industrial Average today after disappointing analysts during their earnings announcement yesterday. But the heavier weight on the markets is the diminishing euphoria that pushed the markets higher after the election last year. The realities of politics and the difficulty of delivering on campaign promises is throwing cold water on this market.
The Standard and Poors 500 Index (SPX) closed down four dollars today at $2338, but the Russell 2000 Index (RUT) closed five dollars higher at $1367. Volatility rose a bit with the VIX rising a half point to 14.9%.
Trading volume in the S&P 500 stocks ran at 1.9 billion shares today. Trading volume has run below the 50 day moving average (dma) since March 20th. Below average trading volume tells us that the large institutional players aren't panicking and selling, but it also tells you that those same players aren't going "all in" either.
Pull up the price chart for SPX. Draw trend lines at $2320 and $2400. SPX has traded sideways within this channel since mid-February. This sideways trading channel is even more obvious in RUT, and has been in place since early December.
So what should we be trading today?
In spite of the overall market averages trending sideways, there are a few high fliers that deserve a bullish trade. Consider BABA, CMG and ISRG for straight forward bullish trades: long stock, covered calls, diagonal call spreads, etc.
Non-directional options trading strategies are perfect for this type of sideways market. Consider "at the money" calendar spreads, butterfly spreads, and iron condor spreads on the major market indices (SPX, RUT, and NDX).
Is The Rally Over or Just On Pause?
- Written by Dr. Duke
SPX closed today at $2359, down four dollars, after bouncing off the 50 dma at $2341. This mirrors last Monday, when the 50 dma provided support for SPX. I am paying close attention to the 50 dma as my trigger for adjusting and closing positions. The Russell 2000 Index behaved even more bearishly today, breaking down through the 50 dma, and closing down $16 at $1370. But the NASDAQ Composite is still holding up rather well, closing today at $5895, down $17, but near the top of its recent trading range.
SPX and RUT are solidly in sideways trading patterns, but seem to have enough bullish support to hold the line when the bears mount a charge to the downside. My concern is what event might finally rattle the bulls. This rally was built on expectations of a better economy under the new administration, but Washington gridlock appears to remain the norm. When the bulls lose faith, it could get ugly.
Will the jobs report this Friday be the seminal event?
In the meantime, classic delta-neutral trades are a good fit for this market.
Big Reversal Day
- Written by Dr. Duke
Market analysts have been nervous since last Tuesday's meltdown. The "sky is falling" gurus have been preaching correction to anyone who would listen. But the balance of last week's trading was somewhat reassuring - sideways beats going farther down. But the doomsday gurus appeared to be getting their wish this weekend as the futures plunged. The SPX futures this morning were downright ugly and SPX opened at $2329 and traded down as far as $2322 before finding support. Then a steady grind higher began that lasted virtually all day, hitting its high for the day at $2345 just a few minutes before the close at $2342, down two dollars on the day. The 50 day moving average (dma) stands at $2332, so technical analysts will observe that support at the 50 dma held, even though it briefly dipped below support intraday. The other positive piece of data was found in today's trading volume in the S&P 500 companies: 1.9 billion shares with the 50 dma at 2.1 billion shares. The final positive indicator came in VIX, the volatility of the S&P 500. VIX spiked to over 15% this morning, but immediately began its retreat, closing at 12.5% for the day. The trends in volatility and trading volume show that traders didn't panic.
Tomorrow's opening will be crucial to see if the market follows through on today's reversal, but the preponderance of the evidence seems to point to the bulls retaining control of this market.
The Russell 200 Index (RUT) displayed a similar trading pattern to SPX, opening weak, hitting a low at $1335, but then recovering at close at $1357, up three dollars on the day. This close for RUT places it squarely within the sideways trading channel of the past four months.
Looking forward this week, the only significant economic data scheduled to report is the final estimate of fourth quarter GDP on Thursday. Unless there is a big revision downward, that report isn't likely to move the market; we already know last year's growth was anemic. Maybe the risk to the bulls is in the political realm, but predicting Washington political moves makes predicting market tops and bottoms look easy.
Is the Sky Falling?
- Written by Dr. Duke
The markets are up over 14% since the election, and that's a huge run in anyone's book. So it isn't surprising that concern has been growing that this rally has run too far, too quickly. We begin to think that there must be a correction lurking around the corner. Yesterday's strong decline across all of the major market indices brought out the "sky is falling" folks. SPX did decline $29 or 1.2%, so it wasn't a trivial down day. More troubling to me was the fact that the sell-off strengthened into the market close. There was no market rally to end an otherwise dismal day and give traders hope.
But today was a different day for traders. SPX opened at $2348, and closed at $2348, up $4 on the day. The small cap stocks, as represented by the Russell 2000 Index, didn't fare quite as well, but today's trading didn't extend yesterday's losses. RUT was essentially unchanged at $1346, down less than a dollar.
Both SPX and RUT have been trading in a sideways channel for about three weeks. Today's little mini-rally almost pulled SPX back to its support level at $2355. RUT was more successful, essentially closing at the support level held for the last few weeks.
Was today just a temporary pause before we go over the cliff? That is hard to answer with much certainty, but let's consider the evidence:
The trailing 12 month price to earning ratio for the S&P 500 is at record levels. We have to go back to 2009 to find higher numbers.
The CBOE SKEW ratio measures the demand for far out of the money put options. The thinking is that the large institutional traders will see the storm coming and buy protection. SKEW did reach very high levels this past Friday, at 153, higher than the first quarter correction of 2016 or the correction in the fall of 2014. But SKEW declined to 136 today, still moderately high, but not quite as scary.
I follow the volatility index for the S&P 500 (the ticker symbol is VIX). Normally we see VIX tracking steadily higher in the days just before a correction, but VIX has been pretty quiet. Even during the scary decline yesterday, the high of VIX was 12.9%, and VIX closed at 12.8% today. These remain historically low levels of volatility. During the market decline preceding the election last year, VIX hit a high of 23%. The big players aren't panicking just yet.
Where does that leave us? I think today's price action shows that the bulls remain firmly in control of this market. Traders remain optimistic about the future of our economy. Don't get me wrong. We should be cautious, but it would be premature to move largely to cash. It does raise an interesting question. Do you have trailing stops entered to protect those gains you have enjoyed since the election?
Waiting On The Fed
- Written by Dr. Duke
Here we are once again, with the market treading water as we await the results of the meeting of the Federal Open Markets Committee (FOMC), or as we usually say, "the Fed". Fed watchers are rather confident we will see another rate increase on Wednesday. As always, the question is whether this interest rate increase is already baked into current market prices, or whether the market pulls back in response. The huge bullish run we have enjoyed since the election last year seems to have flattened out after the Standard and Poors 500 Index (SPX) hit a high of $2396 on March 1st, slowly declining and closing at $2373 yesterday. Trading volume has also dropped off since March 1st, closing at 1.9 billion shares yesterday, well below the 50 day moving average (dma).
The market futures are suggesting a lower open this morning, so it appears this waiting game will continue today, and probably through tomorrow afternoon.
Economic data have been strengthening recently, but the bulk of the market gains are based on expectations of gains yet to be realized: tax reform and trimming of bureaucratic regulations, to name a couple. Will an interest rate hike dampen that enthusiasm?
I was invited to write a chapter on the diagonal spread for a new e-book that was just published. That will make for good reading while we wait on the Fed.
Can The Bulls Continue?
- Written by Dr. Duke
The S&P 500 roared higher this week, closing yesterday at a new all-time high of $2351. I must say this has caught me by surprise. Conventional wisdom believes this strong bullish run has arisen from the prospects of individual tax reform, lower corporate taxes, and a reduction in the regulatory burden on business. Each day brings news reports of political resistance to many of these campaign proposals. I think the market has gotten ahead of itself, but the price is the price. My rationale one way or the other isn’t relevant.
The forward-looking P/E for the S&P 500 is now 17.6, the highest level since June 2004. The five-year average P/E is 15.2 and the ten-year average is 14.4. Higher stock prices have been driving this ratio higher because forward estimates for earnings are not growing as rapidly as prices. This suggests that the market’s exuberance since the election may be a bit overdone. In my opinion, there is substantial evidence for a bullish market outlook; I don’t disagree with that assessment. But the prospects of a pull back or correction appear to be increasingly probable.
The S&P 500 volatility index (VIX) rose on Wednesday this past week, but then declined to close on Friday at 11.5%. Wednesday presented a classic VIX divergence, i.e., when the market index and index volatility are running in the same direction. In this case, VIX ran from 10.8% to 12% on Wednesday, while The S&P 500 traded higher by $13, closing at $2349, a new all-time high (until Friday). VIX divergences are high probability indicators. In this case, with a rising VIX in a rising market, a pull back is highly probable, and in fact, did occur on Thursday. The S&P 500 followed through with a lower open on Friday, but then the bulls reasserted themselves and pushed the index higher.
More and more overbought signals are appearing, but markets can and have continued to rise in overbought conditions before. This is where the market adage originated, “Markets climb a wall of worry.” Trades positioned with a bullish posture make the most sense in this environment, but keep your stops tight. The probability of a pull back or correction is increasing, but that may be well into the future.
A New Administration
- Written by Dr. Duke
President Trump was inaugurated yesterday. Normally, the market would not be too concerned about that event, but this year was different. Trump’s strong talk about trade has the market worried about a trade war. On Friday morning, the markets traded higher until Trump’s inaugural address, then the major indices gave up most or all of their gains after Trump reiterated some of his trade rhetoric. I am presuming his comments are only a negotiating tactic. Business people always ask for the moon, but never expect to receive that extreme. The Standard and Poor’s 500 Index (SPX) opened Friday at $2270, and traded as high as $2277 before pulling back to close at $2271, essentially flat on the day.
SPX has been trading in this sideways channel of $2240 to $2277 since early December. The market has paused to reflect on the probabilities of the new administration’s economic proposals becoming a reality. It is hard to predict how long we may trade within this sideways channel. This market has proven very resistant to bad news, having withstood recent terrorist attacks both domestic and abroad. So I am not in the doomsday camp. This market needs some solid economic news to push it higher, e.g., passage of a tax reform bill. This sideways trading action is also reflected in SPX’s trading volume, which has been running below average all year. This underscores the “treading water” we have observed in market prices.
The S&P 500 volatility index (VIX) declined all of last week, even dipping below 11% on last Friday, 1/13. But the VIX started rising earlier this week, hitting an intraday high of 13.3% on Thursday, presumably reflecting some uncertainty leading up to the inauguration. But the VIX fell Friday, closing at 11.5%, down 1.2 points on the day.
It fascinates me to see the bipolar response of this market to a Trump presidency. On the one hand, his comments about lowering taxes and reducing bureaucratic regulations are received enthusiastically. But some of his other comments, notably about trade tariffs, make the market nervous. Layered on top of these issues may be some concern about the “establishment” politicians resisting the changes Trump has proposed and creating a legislative stalemate.
The overall market has been trading sideways since early December, but we aren’t seeing much negativity in the market’s technical indicators. The dividend yield of the Dow Jones stocks is roughly in the middle of its five-year range. The CBOE put/call ratio is a little high, but this is a contrarian indicator so a high put/call ratio is actually bullish. Consumer sentiment levels are near record highs, and the willingness of consumers to spend money is a basic requirement for a strong economy. Despite the harsh rhetoric and the anarchy in the streets, the Trump administration is creating positive expectations on the part of ordinary working people. Unless we see support levels begin to be broken, we should assume continuation of the bullish market trend.
This market remains nearly ideal for classic delta neutral options strategies, such as iron condors and calendar spreads. A diagonal bull call spread is also a good strategy for stocks with strong price patterns that may be on the verge of breaking out higher if and when this sideways market breaks, e.g., AMAT, CGNX, and BA.
The Elusive Dow $20,000
- Written by Dr. Duke
The talking heads on the financial networks have been talking about about breaking $20,000 on the Dow Jones Industrial Average for several weeks now. The Dow touched $20,000 this past Friday, but could not hold it, closing at $19,964. SPX broke out to a new all-time high on Friday, closing at $2277. But trading yesterday and today confirmed that the markets remain in the sideways trading channel in effect since early December.
The market’s meteoric rise since the election couldn’t continue, so taking a breather is to be expected. The economic proposals being promoted by the new administration are very encouraging to both small and large businesses. And this carries over to broad consumer confidence as well. All of the consumer confidence surveys are either near or above several year highs.
The S&P 500 volatility index (VIX) has been steadily declining since the first of the year, closing today at 11.5%, levels we haven’t seen since July and August. The common interpretation would be bullish, based on a consensus among large institutional traders for higher markets and minimal need for hedging their portfolios. The contrarian viewpoint would be that this is simply the calm before the storm. I am inclined to the former viewpoint.
In summary, all three market indices, SPX, RUT, and NASDAQ, have been trading sideways for some time and the possible breakouts from last Friday have now been nullified. The inauguration is still about ten days away and we are just starting to see the legislative battle lines begin to be drawn. It isn’t too surprising to see the market take a breather as this action unfolds.
Even as the overall market indices have slowed, the financial stocks remain strong. Some, like GS and MS, have flattened and are trading sideways; SCHW and others continue to climb, but at a slower rate. Buying diagonal call spreads is working well on these stocks, but be sure you know when the earnings announcements are scheduled. Carrying those positions through an announcement is risky.