Dr. Duke's Blog

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Written by Dr. Duke

Created: 08 January 2013

The markets continue to basically trade sideways to slightly down. SPX lost $5 to close at $1457 while RUT held up better, losing $1 to close at $875. Trading volume popped up a bit with 2.6 billion shares of the S&P 500 stocks trading; trading volume rose 4% on the NYSE and rose 2% on NASDAQ. VIX remains relatively low at 13.6%.

Perhaps the prospect of the debt ceiling debate and the ratings agencies waiting on the sidelines to down grade our bonds has traders a bit concerned. The earnings announcements in the next few weeks will also have an influence on this market, especially the guidance offered for the next quarter. For all those reasons, it isn't too surprising to see the market trudging sideways.

I have to cut this blog short this evening due to other commitments.

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Written by Dr. Duke

Created: 07 January 2013

After such an enthusiastic beginning to the new year last week, it seems traders' enthusiasm is waning. SPX closed at $1462, down $5 and RUT lost $3 to close at $876. Trading volume was flat to declining with 2.3 billion shares of the S&P 500 stocks trading today. Trading volume was flat on the NYSE and dropped 3% on NASDAQ. VIX jumped up a bit this morning to 14.5%, but settled back down to 13.8%, near the open this morning.

Alcoa kicks off the earnings season tomorrow and estimates of earnings for this quarter have been steadily dropping. Fourth quarter earnings projections back in October were for growth of 9.2%, but that has dropped to an anemic 2.7%. That is starting to temper traders' appetite for risk. This series of earnings announcements could be taken as opportunities to sell and lock in gains, but that action may largely rest on the guidance given during the reports. The back drop of the debt ceiling fight that is starting to heat up may temper guidance.

If the early sound bites are meaningful (maybe it is empty posturing), the parties on both sides of the aisle are digging in for a serious fight over the debt ceiling. I thought the recent tax battle was bad enough, but this is shaping up as an even nastier battle. Unfortunately, significant numbers of both parties are dissatisfied with the last deal, so this negotiation is starting out in the hole as leaders on both sides try to appease the various factions of their parties. I am starting to think the network hosts of the Sunday political talk shows are part of the problem. Have you noticed how they like to goad whomever they are interviewing into taking an extreme position and drawing a line in the sand? It makes for great headlines, but I don't think it serves us very well.

Turning to the SPX chart, a technical analyst has to take note of the resistance level at $1465 set back in mid-September and tested in early October. For the past several trading sessions, it appears as though SPX has been struggling to break through that resistance. It is interesting that the trading volume on SPX has declined every day in this new year. It popped nicely on January 2, but SPX volume has been steadily retreating since then.

My January condor position continues its underwater journey; the higher theta as we near expiration is helping work off some of the losses, but the position will be a loss when it is all said and done.

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Written by Dr. Duke

Created: 02 January 2013

Wall Street obviously was thrilled with the Senate's tax package being voted in by the House at the eleventh hour. The market's extremely positive reaction was a little surprising to me since the fundamental spending/debt problems remain unaddressed by this legislation. The additional revenues will add up to about $300 billion this year. When you are generating new debt as fast as we are, that isn't even a drop in the bucket.

SPX ran up $36 to close at $1462 - wow! RUT closed at $873, up $24. These are huge gains by any measure. Trading volume also spiked upward with 3.1 billion shares of the S&P 500 stocks trading today. Trading volume on the NYSE was up 29% and volume on NASDAQ was up 37%. If you take a look at the one minute chart on SPX today, it was very unusual. Normally, there is a lot of choppiness throughout the day, but today SPX spiked up at the open and largely traded sideways until the last half hour or so, with very little volatility.  Most of the one minute candlesticks were just a few cents in height. It was one of those rare one sided markets.

Economic data was mixed today, but I don't think anyone in the markets even noticed one way or the other. ISM's manufacturing index rose to 50.7 for December from the previous month's 49.5, but construction spending slowed by 0.3% in November; analysts had predicted a 0.6% increase.

The market truck ran over my Jan iron condor this morning, forcing me to close and reopen spreads on both sides. The position remains largely underwater, but hopes for a positive month are gone. Now I am fighting to minimize my losses - not a nice way to start the new year. Losses are the cost of doing business for traders. But I still haven't learned to take losses very well.

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Written by Dr. Duke

Created: 28 December 2012

A couple of weeks ago, I compared this fiscal cliff drama to one of the classic Greek tragedies where all the main characters die in one way or another and the play ends with everyone left standing mourning their losses, cursing the gods and so on. I was joking, but now I'm not so sure. Today, it finally became apparent that the president really has no intentions of averting the fiscal cliff; he has calculated that the ensuing mess will be blamed on the Republicans, so how could a politician pass up that opportunity? You think I'm wrong? How else can we explain that only today did the president finally call together in a single meeting the majority and minority leaders of both houses in the White House. This is the first time since the election that this group has met. I don't call that leadership.

But the reality is starting to dawn on the markets and they are trading downward. SPX closed at $1402, down $16 and RUT closed at $832, down $5. The only good news is that trading volume remains low; only 1.7 billion shares of the S&P 500 stocks traded today. Trading volume was down 8% on the NYSE and was down 15% on NASDAQ. So panic has not yet set in; the large institutional traders haven't started running for the doors. But they are hedging their portfolios. VIX jumped up to 22.7% today.

Economic data of late hasn't been terrible, but I think it has been largely ignored; all eyes are on Washington. New unemployment claims are stubbornly running around 350k month after month. The new home sales reports yesterday were upbeat; the pending home sales today were a little disappointing with an increase of 1.7% for Nov (October's increase was 5%). The Case Schiller Index reported a nice 4.3% rise in housing prices earlier this week. So the economy continues to muddle along and slowly recover. But next week??

My January iron condor on RUT at 700/710 and 870/880 stands at a P/L of -18% with delta = -$104 and theta = +$154.

Enjoy your holiday weekend and don't let these political and economic problems worry you too much. Focus on what's important. Best wishes for a happy and prosperous new year.

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Written by Dr. Duke

Created: 21 December 2012

 The fiscal cliff play continues. This may turn out to be a classic Greek tragedy for those of you who remember those plays from high school. In any case, many traders started to worry seriously today that maybe a deal wasn't forthcoming anytime soon. The markets opened roughly at yesterday's close but traded down from there. SPX closed at $1430, down $14, but traded as low as $1423 before recovering somewhat. RUT lost $5 to close at $848. VIX inched up a bit to 17.8%. Trading volume was up on this expiration Friday with 3.7 billion shares of the S&P 500 stocks trading. Volume was up a whopping 115% on the NYSE and increased 48% on NASDAQ.

The fact that SPX bounced back from its intraday lows was positive, but one has to wonder how much of the recent price increase in the market will be sold off once a fiscal cliff deal is struck. Or will a huge bull market erupt on the news? That is hard to predict. It appears to me that 2013 will be a tough economic year regardless of the deal ultimately reached in D.C.

Durable orders increased 0.7% in November, not quite as robust as October's 1.1% rise, but not too bad either. The University of Michigan Consumer Sentiment indicator dropped to 72.9 from 74.5 - not too surprising given all of the drama unfolding around the fiscal cliff. Some of the surveys I have seen suggest most people don't even know what is involved in "going over the cliff", they just infer from all of the media attention that it must be Armageddon.

SPX settled at $1433.59 and RUT settled at 846.02 so the puts of my December condor expired worthless, leaving the Flying With The Condor™service up 19% on the year. We beat the S&P 500 at +14%, but I gave away a lot of my gains over the past few months.

Trading hours will be cut short on Monday and the exchanges will be closed Tuesday.

Enjoy the holiday with your families. Merry Christmas.

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Written by Dr. Duke

Created: 19 December 2012

Some of you may have read or heard analysts beginning to discuss what many call the Goldilocks view of the current markets: we should be bullish because 1) rising taxes and reduced spending will stimulate growth in the economy, 2) the Fed will continue their quantitative easing programs but no inflation will result, and 3) the government can easily afford the higher interest rates that are coming after our debt is downgraded. In other words, the bullish trend is a fantasy, a Goldilocks story. The markets have been trading higher since mid-November (running over my December condor in the process), but some analysts are questioning whether the euphoria has been over done or is misplaced entirely. I am inclined to agree with this point of view, but it is dangerous to get in front of this train.

SPX gave back most of yesterday's gains, closing down $11 at $1436 while RUT traded flat at $848. Perhaps a little more ominously, VIX moved up almost two points to 17.4%. Trading volume dropped off from yesterday with 2.7 billion shares of the S&P 500 stocks trading; volume fell 9.8% on the NYSE and decreased 4% on NASDAQ.

Housing starts for November came in at 861k, down from 888k in October, but building permits jumped to 899k from the previous month's 868k. So the thesis of a slow real estate recovery appears to be supported by this data. Probably the emphasis should be on the word, slow. And, if the tax reform discussions include dropping the mortgage interest deduction, that may push real estate back off the cliff again. Many of my friends hold mortgages simply for the tax deduction and my younger friends would not be as attracted to buying a house without that tax advantage. A lot of construction and finance industry jobs are dependent on a healthy real estate market.

I closed the call spreads in my December condor today, taking the largest loss of my trading career - ouch! But, at the expense of my pride, and so you can learn from my mistakes, here goes. My Dec condor on RUT started at 880/890 and 710/720. When the market plunged after the elections, I was at the point of hedging my put spreads. But the move downward and all of the fiscal cliff drama spooked me, so I repositioned my condor: I rolled the calls down to 830/840 and the puts down to 690/700. That looked good for a few days, but then the market turned and roared upward. I rolled the 830/840 calls to 850/860 and eventually closed them for a big loss. But note the moral of the story: if I had simply left the original condor alone and hedged the put spreads just as I always do (my normal rules), that condor would be standing at a gain of about 17-19%. So the lessons are: 1) develop your trading system of rules, 2) follow the rules with discipline, and 3) put your emotions aside.

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Written by Dr. Duke

Created: 18 December 2012

Traders apparently believe all is well in D.C. and are beginning to take strong bullish positions. It surprised me today when we didn't see some profit taking this afternoon. SPX closed at $1447, up $16 and near its high of $1448. RUT gained $13 to close at $848. Trading volume spiked upward with 3.2 billion shares of the S&P 500 trading. Trading volume on the NYSE was up 20% and volume was up 5% on NASDAQ. VIX dropped almost a point to 15.6%. There was minimal economic news today, so this rally is presumably based on a deal to solve the fiscal cliff. Optimism that is well seems surprising to me, but you can't argue with the tape. I was waiting for the sell-off this afternoon to unload my December call spreads, but it never materialized, so I am facing the prospects of a serious loss here. We'll see what tomorrow brings.

As I self-analyze my position, I think I have violated my own rules about not predicting the markets, i.e., trading non-directionally. The debt and spending situation for our government is out of control, and I have yet to see any proposals being discussed in Washington that begin to address these problems in a meaningful way, e.g., raising taxes on everyone at $250k and up only funds the government for a couple of weeks or less. So I think I have been predicting lower markets without explicitly making the prediction. I will pay the price for that oversight.

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Written by Dr. Duke

Created: 17 December 2012

Traders became more bullish today on news that Boehner was meeting with Obama and had offered to raise taxes on those making more than one million dollars per year. In my opinion, the notable news was the absence of any concessions from Obama. If we trust his press secretary, it appears the President is not yet in negotiation mode. So traders may take this market back down tomorrow; who knows? It is a rough market to be trading.

SPX ran up $17 to close at $1430 and RUT tacked on $11 to close at $835. Trading volume moved up modestly with 2.5 billion shares of the S&P 500 stocks trading; this is an increase from Friday, but remains below the 50 dma. Trading volume increased 8% on the NYSE and volume increased 6% on NASDAQ.

The only economic news (hard data as opposed to fiscal cliff watching) was the Empire Manufacturing Survey; it came in at -8.1 for December, a little worse than the previous -5.2. That isn't the right direction!

My Dec iron condor stands at a P/L of -$2,600 with delta = -$174 and theta = +$643. Today's move up pushed it further in the hole, but the theta decay is getting huge so each day makes a big difference. So we wait until tomorrow to tune back into the Fiscal Cliff soap opera. I have a prediction: a deal will be struck; it will include real tax increases but nebulous promises about cutting spending in the future.

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Written by Dr. Duke

Created: 14 December 2012

Markets continued sideways or downward as all eyes are focused on Washington, looking for a deal to avoid the so-called fiscal cliff at the first of the year. There wasn't much news today, except the obligatory "sky is falling" articles. SPX lost $6 to close at $1414 while RUT closed unchanged at $824. Volatility inched up a half point with the VIX at 17%.

There was some economic news today, although it was over-shadowed by the fiscal cliff vigil. The Consumer Price Index (CPI) dropped 0.3% in November and industrial production increased 1.1%. Capacity utilization increased from 77.7% to 78.4%. So all of this data was modestly positive. It seems to support the same old conclusion: the economy is recovering, but at a historically record low rate.

My Dec iron condor stands at a P/L of -$1,760 or -8% with delta = -$55 and theta = +$212. The call spreads remain a little over one standard deviation OTM and the put spreads are almost three standard deviations OTM. I decided to leave the call spreads open over the weekend to benefit from additional time decay. The risk is that a fiscal cliff deal is reached and the market spurts upward, but we have a pretty good safety buffer at this point, so I think it is a high probability move.

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Written by Dr. Duke

Created: 13 December 2012

The mood on Wall Street darkened further as traders considered the Fed's announcement in more detail. Several months ago I was surprised by the Fed's willingness to promise low interest rates for a specific period of time. At that time, I wondered: what if inflation rears its head during that time period? Now Bernanke has tied that promise of lower rates to unemployment below 6.5%. The more I think about the Fed's posture, the more I worry. I preferred the days when the FOMC was basically a "black box" that just issued interest rate announcements periodically.

Of course, the news reports from D.C. are not helping the mood on the street. Now I'm beginning to see articles about why going over the cliff is either 1) no big deal, or 2) will be painful, but good for us. I actually think there is some truth in the latter position; perhaps the fiscal cliff does what no politician has the courage to tackle. The fact that we are seeing those articles shows how we are collectively beginning to think that no agreement will be reached. There is probably a betting line in Vegas; I wonder what the odds are of an agreement?

SPX lost $9 to close at $1419, right at the support level set by the April highs. RUT dropped $5 to close at $824. Trading volume backed off with 2.4 billion shares of the S&P 500 stocks trading. Trading volume on the NYSE declined 3%, but increased 6% on NASDAQ. Volatility rose almost a point with VIX ending the day at 16.6%.

My Dec condor now stands at a net loss of 9% with delta = -$75 and theta = +$234. RUT's pull back and this position's large theta are whittling down this position's loss to something more reasonable.