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Do you know any trading coaches who publish the results of their trades daily? Dr. Duke posts the trading track records of his Flying With The Condor™, Conservative Income, Dr. Duke's Trading Group, and The No Hype Zone Newsletter services in the free downloads section of this web site. If you have questions about any of the trades, Ask Dr. Duke.

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

 

The new market highs led the news yesterday, but the markets took a breather today. SPX closed unchanged at $2152 and RUT pulled back $5 to close at $1201. Volatility continued to contract with the VIX closing at 13.0%, down another half point. Trading volume has been at or below the 50 day moving average (dma) for the past eight trading sessions. Trading in the S&P 500 declined again today to 1.9 billion shares. trading volume decreased 15% on the NYSE and pulled back 11% on NASDAQ.

If we look at the longer term charts on SPX, RUT and NASDAQ composite, one thought is on many traders' minds: We've been trapped in this sideways market for several months; is this really a break-out or is this market just teasing us? Many of us have an almost automatic response to a rational, cause and effect explanation of the markets. We try to determine whether the price "makes sense". We look at price to earnings ratios, dividend yields and much more. But ultimately, the market price is correct. We may not understand it or it may not agree with our careful analysis, but it is what it is. An alternative approach is more statistical.

SPX has now gapped open at the first trade four days in succession. Today's open was very muted, but it was technically higher. But today ended the Russell 2000 Index's string of gap opens higher. The NASDAQ Composite's string of gap opens higher ended today and NASDAQ pulled back $17 to close at $5006. In fact, the all time high of NASDAQ at $5219 from last July remains unchallenged. If we apply the Bollinger bands to our price charts (plus and minus two standard deviations around the 20 dma), we would expect the index price to remain within the bands about 95% of the time, purely on a statistical basis. In fact, it works out just that way. Plot the Bollinger bands on your favorite stock or index and you will see what I mean. For the previous two days of trading, SPX was running right along the upper edge of the band. But SPX pulled back a bit today. RUT actually closed outside the upper edge of the band yesterday, but pulled back within the band today. NASDAQ matched SPX's price action, running right along the upper edge of the band, but pulling back today. We expect the small cap stocks in RUT to lead the market higher if, in fact, we are breaking out to a new bullish run. It is the classic "risk on" trade.

That's the positive case. But there are many negatives: BREXIT, a slowing economy in China, a couple of tepid GDP numbers for the U.S., and much uncertainty surrounding our presidential election.

What? You're waiting for the answer? Unfortunately, my crystal ball is as murky as yours. Those confident gurus on CNBC must know the secret, or at least they have mastered sounding confident. For me, I hedge positions as necessary, and slowly add bullish positions as I see the bullish strength of this market continue. But I remain cautious. We hit some relatively high numbers in December before we went over the cliff. Betting the farm on this bullish run is a good way to lose the farm.

You wouldn't know it, but it was only a few days ago that the market was in a panic about the BREXIT vote. Today SPX closed up $11 at $2100, nearing recent highs. RUT joined in with an increase of $8 to close at $1147. And volatility is coming in, with VIX dropping a half point to 15.1%. It must be a tough business being one of the perennial bears. They are all called for interviews on the financial cable networks whenever the market tumbles. But then they are quickly sent back to their caves. Trading volume remains modest. Trading in the S&P 500 reached the 50 dma at 2.3 billion shares. Trading volume increased 6% on the NYSE and gained 10% on NASDAQ.

It was only seven trading sessions ago that we were nervously looking over that steep cliff and listening to a long litany of worries from all of the financial pundits. The only question was "How far down will it go?" Fibonacci retracement levels and discussions of previous flash crashes occupied many blogs. Now it's "Happy days are here again." If the market were a human being, we would prescribe antidepressants. What is a trader to do?

The markets over the past two to three years have become very volatile. The so-called V-bottom has become a common phrase. And the width of the V-bottom hit a minimum with this BREXIT trade; it only required two sessions to tumble and the market recovered in four trading sessions - hold onto your seat.

Maybe some significantly bullish economic data is fueling this rebound. The ISM services index reported today at 56.5 for June, up from 52.9. That's good, but not stellar. Yesterday, we were told that factory orders declined one percent in May after increasing 1.8% in April. The minutes from the last FOMC meeting were released this afternoon. Those minutes were far from bullish on the economy. The committee appears concerned about raising interest rates further with such a weak economy. And BREXIT has them worried too. So it is obvious. Buy the market. Everything is rosy. Hmmm... I think we will be remaining in the sideways trading range of the past few months.

Allow me to return to the "What's a trader to do?" question. One of the most fundamental financial axioms is diversification. That not only includes which stocks or bonds. It also includes strategies. Market neutral strategies have been working well in the midst of this volatility. If you don't have a few of those working for you, you might consider adding them to the mix.

 

The BREXIT vote surprised the markets last Friday and SPX plunged $76 or 3.6% from Thursday's close to Friday's close. But the markets didn't calm over the weekend. SPX gapped open lower on Monday to close down at $2001. But the last four days have been truly straight up! Today SPX closed at $2103, almost back where it closed on June 23rd before the BREXIT vote was in. We have seen a lot of price volatility in the markets over the past 2-3 years and the so-called V-bottom has become a familiar phenomenon. But I think this V-bottom set records - down nearly 4% in 2 days and essentially fully recovered in 4 days. We went from speculating about global recession to an aggressive bull market in record time.

The Chicago PMI jumped to 56.8 for June, up from 49.3 in May. The ISM manufacturing index increased again in June, up to 53.2 from May's 51.3. But construction spending remains weak, declining 0.8% in May; but that was an improvement over the 2.0% decline in April. Today's economic news was reasonably strong, but I don't think this huge turnaround is fully based on economic data. I think it has been a classic example of traders simply freaking themselves out. They panicked and sold, and just as quickly, decided it was overdone and bought back in with both hands. Volatility came in another point with VIX closing at 14.7%. This isn't the kind of price action that investors find comforting.

Many market participants left early for the long holiday weekend; trading volume was down 25% on the NYSE and down 19% on NASDAQ.

Another record turnaround came from Investors Business Daily this week. Their market assessment went from Confirmed Uptrend to Market in Correction and back to Confirmed Uptrend in just 3 days. That's a V-bottom.

Have a great Fourth of July Weekend. Fly the flag and eat a hot dog! We are fortunate to be Americans.

The British vote took the bookies and the market pundits by surprise. The bookies lost a bundle and now it's our turn. SPX lost $76 Friday and then gapped open lower this morning and dove to $2001, down $37 on the day. On Friday SPX broke down through the 50 dma and then broke a strong support level at $2040. Today SPX broke the 200 dma.

What about the small caps? The Russell 2000 (RUT) has fared even more poorly than SPX. That fact alone is a bearish signal. Small caps always lead, whether in a bullish trend or a bearish trend. RUT broke its 50 dma Friday and broke down through the 200 dma today, closing at $1090, down $38. But today's price action on RUT broke the August flash crash low. By contrast, SPX remains about $130 above its flash crash lows.

The question on many traders' minds is simple. Is there hard economic justification for this sudden plummet? My answer is no. The bulk of the analysis I am reading addresses the huge uncertainties and uncertain time frames for the effects to be known, much less work through the global markets. Certainly, financial stocks are taking it on the chin because of their currency exchange positions and the huge moves in the Euro and the dollar. But are all of the S&P 500 stocks suddenly worth 5% less? I don't think so. When traders are unsure of the risk and are hearing talk of the sky falling, their first reaction is to sell, watch and wait.

So how should we handle this situation? Even though I don't see the justification, I can't ignore price action. Many trailing stops are being hit. I closed the put spreads in my July and August iron condors today. When I see signs of stabilization, I will replace those spreads. Some have suggested selling call spreads above this market, but I think that is risky. Go back and study the corrections of October 2014, August 2015 and during the first quarter this year. In all three cases, the snap back rally was quick and steep. You don't want to find yourself in front of that train.

One of the things I watch is the long lower shadow on the candlesticks. That suggests many traders are buying the lows of the day and driving the price higher. But don't jump too quickly. Look back at January 20th. That was tempting, but it was a fake out. February 11th was the low. Then March was a strong month. You want to be a little late to this party. Today's lower shadow on SPX was pretty anemic. We may be in for an extended period of pain before the market calms.

In my last blog, I outlined the trade that I had developed over the past week, the iron condor on SPX with the weekly options that expired today, the 2030/2040 put spreads and the 2130/2140 call spreads. I sold the 2030/2040 put spreads on Thursday of last week, based on the strong bounce off of $2050 that day. Earlier this week, that position looked very solid and I added the 2130/2140 call spreads. I was patting myself on the back. I was confident my put spreads were "money in the bank" and the 2130/2140 calls were far enough OTM to be quite safe.

But then the Brits surprised us and the markets went crazy. When I checked the S&P futures early this morning, they were around $2025. This was after a close at $2113 yesterday - wow! SPX opened this morning and traded down to $2056 in the first ten minutes of trading and the VIX spiked as high as 26% intraday and closed at 25.8%. But intraday trading in SPX was pretty steady and calm throughout the day. This was even more surprising when considering the huge volume spike, up over 100% on the NYSE and NASDAQ. If today had been a normal trading day, I could have easily closed those 2030/2040 put spreads this afternoon for a modest debit. But not today, the market makers didn't want to let me out for a reasonable debit. I would have closed at a loss.

My credit was $325 per contract, so breakeven for the entire position was $2036.75. At that price, my 2040 calls would lose $325 per contract and the position would break-even. About 2-3 minutes before the close of trading today, SPX was above $2040 and I was poised to achieve my maximum gain. I felt like Charlie Brown as Lucy pulled the ball away, and SPX traded down to $2037.41. My 2040 puts expired ITM by $2.59, thus leaving me with a gain of $66 per contract or +10%. That was frustrating, but on a day like today, a 10% gain is blissful.

The iron condor positions in my Flying With The Condor™ service were actually helped by today's pullback; both the July and August positions are up several percent. There is a lot to be said for trading far OTM iron condor positions with 60+ days to expiration.

Where do we go from here? I don't claim to be a global economist, but I don't see what substantially changed today. By Euro Zone rules, this British exit will take many months if not a couple of years. Maybe I am missing something, but I think it was the surprise that spooked the markets. If I'm right, we will see some buying opportunities over the next few weeks. But then, maybe the sky is indeed falling...

The markets have appeared to be preoccupied with the BREXIT vote all week. The conventional wisdom has the BREXIT vote failing and markets trading higher as a result. I doubt that assessment, but I saw a trading opportunity that didn't really depend on my "knowing" the answer to BREXIT's ultimate effect on the British and world economies. 
 
Last Thursday, I was prompted to sell the SPX JanWk4 spread at 2030/2040 when I observed the large lower shadow on the SPX candlestick. SPX had traded as low as $2050 intraday, but then bounced strongly to close at $2078. I interpreted this as evidence that support had been reached. So I sold the SPX JanWk4 2030/2040 put spread for $1.30.
 
Today I looked at the position, thinking I would close today or tomorrow before the BREXIT event. We were profitable, but only by 5-7%. VIX had moved much higher since I entered the trade, closing at 21.2% today. That left me with a choice: 1) take my modest gain and close, or 2) play the BREXIT event.
 
When I was looking at this trade this afternoon, SPX had traded up by $13 to $2091 since I sold the 2030/2040 put spread. At that price, the JanWk4 2040 put had a 96% probability of expiring worthless Friday. SPX closed at $2119 on June 8th; SPX's all-time high close was 5/21/15 at $2131. Breaking that all-time high at $2131 on Friday seems highly unlikely.
 
From all of the market commentary and trade action this week, I would expect a bullish market reaction if BREXIT fails. Therefore, assuming we get a negative BREXIT vote Thursday and the market trades higher, how high may it go? The probabilities of the 2130, 2140, and 2150 calls expiring worthless Friday were 90%, 95%, and 97%, respectively at about 1:30 pm CT this afternoon when I was evaluating this trade. A prediction of SPX below $2130 at Friday's close seems pretty safe to me. So I sold the SPX JanWk4 2130/2140 call spread for $1.30 this afternoon with SPX at $2091. SPX pulled back a bit into the close at $2085. VIX also moved higher this afternoon, closing at 21.2%. Updating both SPX and VIX, the probability of the $2130 call expiring worthless is now a touch higher at 91%.
 
This should be a solid position. The JanWk4 options expire Friday at the close. SPX is now $45 below the short strike at $2130. A move of that magnitude in two days would be extraordinary. In addition, IV will most likely drop Friday morning after the BREXIT news, pulling much of the value out of both of my JanWk4 SPX spreads.
 
Now, for the rest of the story...

 

After SPX bounced so strongly last Thursday, the markets appear to have stabilized. SPX has been gaining while RUT and the NASDAQ Composite have been more flat lined. SPX closed today up $6 at $2089 and RUT lost $4 to $1154. Volatility was essentially unchanged today with the VIX rising a tenth of a point to 18.5%. This is a relatively light economic data week, but any economic data is being eclipsed by the vote in Britain about continued Euro Zone membership. We should hear the results here before the market opens Friday morning. I regularly read many financial blogs and web sites, and listen to as much of the financial cable news as I can stomach (too much politics in all of them). My general impression is that everyone is freaked about the possibility of Britain leaving the EU. Of course, both sides have their horror stories if they lose - it isn't obvious to me who is correct. But I'm just a trader, not a macro-economist. What does concern me is whether this is just another "tempest in a teapot" or if the U.S. markets are likely to make a big move either way on Friday.

When the market bounced so strongly last Thursday, I sold the weekly SPX 2030/2040 put spreads, now up 6%. I will close that position tomorrow or Thursday at the latest. SPX at $2040 is strong line of support, but Brexit may test support. At a minimum, it all makes great theater.

A short time ago, it seemed that the bullish mood of the market was being held in check by the prospect of another interest rate hike at this week's FOMC meeting. But the bears are taking control even in advance of the Fed announcement. SPX lost $17 or 0.8% today to close at $2079. Today's close was in the neighborhood of SPX's December high and just above the 50 dma at $2077. RUT closed down even more than SPX, down 1.1% at $1151. This breaks RUT's late December high and is just above the 50 dma at $1132.

Market volatility tells the story. The implied volatility on SPX, the VIX, closed today at 21%, up four points today alone. VIX opened last Thursday at 14%. From 14% to 21% in only three days is a big move. VIX rose last week as the SPX was still trading higher - a classic VIX divergence. This was the sign that weakness was imminent. Several of my iron condor positions were pressured on the top side last week, but I felt confident in not hedging those positions based on the VIX divergence.

Today's continued market weakness triggered IBD's Big Picture (Investors Business Daily) to move from Confirmed Uptrend to Uptrend Under Pressure.

No significant economic data were reported today. The big kahuna of economic data is the FOMC announcement Wednesday afternoon. Analysts are betting on the Fed delaying the next rate hike until later this year.

Let the Fed watch begin.

The prospect of the markets making new highs seems to be elusive. SPX closed at $2099, up $2, after a trading day that was mostly underwater. RUT gained $8 to close at $1163. Volatility was flat with the VIX unchanged at 14.2%. The high for SPX from last November was just above $2110, and SPX touched that level intraday in mid-April, but fell back. This latest run higher now seems to have stalled. Trading volume remains below average at 2.0 billion shares of the S&P 500 stocks; the 50 dma is 2.2 billion shares. The markets hit their lows for the day right after the open this morning and then slowly improved throughout the day. Some analysts attributed the improvement to prospects of an oil production deal from tomorrow's OPEC meeting, but it is anyone's guess what will come out of that meeting.

Economic data remain mediocre at best, even though the President began a pep rally tour on the economy in Indiana today. Yesterday, the Chicago PMI dropped from 50.4 to 49.3 for May. Today's ISM manufacturing index continues to flirt with that 50 level - the dividing line between economic expansion and contraction, coming in at 51.3 for May, up from 50.8. Over the past ten months, we have had five reports over 50 and five under fifty. Construction spending declined 1.8% in May after a 1.5% gain in April. This is the largest decline in construction spending in five years. The minutes from the last FOMC meeting, the Beige book, gave the economy faint praise as "showing moderate economic growth". The decline in construction spending has prompted several analysts to reduce their second quarter GDP estimates.

If we turn to a review of historical price data from the Stock Traders Almanac, we see that we are entering the weakest three months of the year for the markets, July through September. From 1971 through 2016, the NASDAQ Composite declines in June and hits negative numbers in September, before beginning to recover in October. Based on historical data alone, we might be well served to limit our involvement in the markets for the next couple of months. I think the uncertainties of the presidential election will add even more price volatility for the next few months. It will be hard for the bulls or the bears to take control of this market.

The S&P 500 index (SPX) closed at $2099 today, up 2.3% this week alone. The Russell 2000 Index (RUT) closed at $1150, up $11. This strong bullish week has a lot of people seeing only blue skies - is that appropriate? Today's close on SPX at $2099 is approaching the high set last month, so some traders are talking about a break-out. When we expand the SPX chart, the picture is much less bullish. The end of the dot com era ended with SPX around $1525 in March 2000. SPX beat that by a few points in October 2007 before the financial meltdown. In May of last year, SPX hit another all-time high around $2135. The bulls unsuccessfully attempted to break that high in June and July last year, but then the flash crash hit in August. But those persistent bulls, led by the Fed, pushed the SPX back to roughly $2115 last November. Should we be excited SPX is on the doorstep of that $2115 mark? My answer is no. Looking at the big picture, we see that the S&P 500 has been flat or declining since those highs in May 2015. I will want to see a couple of closes above $2135 before breaking out the champagne.

Consider the small caps in the Russell 2000 Index (RUT) and we see an even weaker picture. RUT hit its all-time high in June of last year around $1295, and it only made it back to $1205 last November, shy by 7%. RUT closed today at $1150; it would have to rally 13% to reach the 2015 high. Again, we see a similar picture to SPX in that RUT remains far off of its 2015 highs. But that deficit is much larger in the case of RUT.

Now add in today's weak GDP number for the first quarter (+0.8% growth) and the less than stellar earnings announcements of the past few weeks. And the FOMC appears to be doing its best to telegraph another interest rate hike at the June meeting. This doesn't look like the setup for the equity markets breaking out to new all-time highs.

In this environment, I think it prudent to take profits when they are available and be cautious. Consequently, I closed the June RUT iron condor from the Flying With The Condor™ advisory service this week for a 13% gain. That freed up capital to roll out and establish a new position in the August expiration. I feel safer when I have more time to hedge and adjust positions, especially in this market.

Enjoy your holiday with family and friends. But remember the true meaning of this Memorial Day. We have a lot to be thankful for due to some incredible sacrifices.