Dr. Duke's Blog

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Written by Dr. Duke

Created: 10 February 2012

European finance ministers rejected Greece's austerity plans today, making it more likely that Greece will default on their bonds. The markets took it badly. SPX lost $9 to close at $1343 and RUT closed at $813, down $12. But this wasn't the panic selling one might have expected; trading volume actually dropped from yesterday with 2.7 billion shares of the S&P 500 trading. Trading volume dropped 2% on the NYSE and dropped 18% on NASDAQ. VIX spiked upward two points to close at 20.8%.

The University of Michigan consumer sentiment survey reported 72.5 for February, down a bit from January's 75.0.

My Feb RUT condor stands at a P/L of +$460 with delta = +$15 and theta = +$354. My Mar RUT position stands at -$1,460 with delta = -$64 and theta = +$138. I removed the call hedges from the March position today. The Feb condor is nearly perfectly delta neutral and theta is building rapidly.

Enjoy your weekend. It looks like I will be shoveling snow this weekend in Chicago.

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Written by Dr. Duke

Created: 09 February 2012

The markets surprised many of us with a very strong performance in January. Then we expected it to pull back in early February, but it didn't. We thought SPX couldn't break through $1330, but it did. Now, for the past several sessions, the markets open weak and trade lower. But in every case, the bulls trade it back up and close the day roughly even or for a slight increase. The bears just cannot generate any lasting case for their position. Many technical indicators support the "overbought" case, but the market just grinds higher. In the meantime, the Greek drama continues to unfold. But it appears that the stranglehold that the European debt crisis once held on the markets is loosening and may be gone altogether. If Greece defaults, it will be an interesting test of that theory. SPX gained $2 to close at $1352 and RUT closed down $3 at $825. Trading volume is holding steady with 3.1 billion shares of the S&P 500 (the 50 dma is at 2.9B). Trading volume on the NYSE was down 1% and trading volume was up 9% on NASDAQ.

The VIX closed up a bit for the second day in succession while the market was making modest gains. This may be an aberration, but it is worth watching. VIX closed at $18.6%, up about half of a point. Initial unemployment claims decreased to 358k from last week's 373k and continuing unemployment claims stand at 3.5 million.

My Feb RUT iron condor position stands at a P/L of +$140 with position delta = -$93 and theta = +$377 (20 contracts). This position is squeezed a little tightly on the call spread side, but time is now working in our favor. The Mar position is $1,800 underwater with delta = -$21 and theta = +$85. Both positions have strong theta/delta ratios.

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Written by Dr. Duke

Created: 07 February 2012

The markets continued to follow the Greek drama this morning and markets opened up lower and traded lower. But similar to yesterday, the market averages regained most or all of their losses by the end of the session. SPX closed up $3 at $1347 and RUT closed down $1 at $827. Trading volume rose a bit from yesterday at 2.7 billion shares of the S&P 500, but remains below the 50 dma at 2.9B. Trading volume rose 6% on both the NYSE and NASDAQ. I am impressed by the resilience of the bulls in this market. I had imagined after such a strong January, that any hesitation might lead to a round of profit-taking, but that hasn't been the case. Trading volume remains low which suggests a lot of spectators on the sidelines. But none of the news thus far has resulted in any panic selling.

The only economic data forthcoming today was Consumer Credit from December, $19.3 billion. Analysts were surprised; they had estimated $8.5 billion - that doesn't seem to indicate that we have learned our lesson!

My Feb condor on RUT stands at a P/L of -$1,070 with delta = -$49 and theta = +$328. The Mar iron condor is also underwater with a P/L of -$2,090 and delta = -$24 and theta = +$78. Both positions are hedged with long calls in Mar and Apr. And I rolled my Feb 840/850 call spreads up to 850/860. Many technical indicators are flashing "overbought", but the bulls seem to be firmly in control of this market thus far, containing any selling efforts to result only in the slight pause of the past couple of days. Several analysts that I respect have been predicting a correction, but so far, the bears can't seem to hold a down market into the close.

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Written by Dr. Duke

Created: 06 February 2012

The financial news from last night into this morning seemed to be focused on the unfolding Greek drama. As a result, trading was subdued today, but the lows of the morning couldn't be held and the broad markets closed close to unchanged for the day - pretty bullish behavior. SPX closed down less than a dollar at $1344 and RUT closed down $3 at $828. Trading volume fell off significantly from Friday with 2.5 billion shares of the S&P 500 trading; trading volume on the NYSE was down 24% and volume was down 22% on NASDAQ. SPX is holding right at the high set in late July. Given all of the "impending doom" news about Greece's economic woes, and this rather tentative market reaction on much lower volume, one has to wonder if a Greek default isn't already priced into this market. I believe the consensus developing among analysts is that Europe's economic problems aren't going to result in a global recession. Of course, the minute we see any news to suggest that isn't true, it could get ugly in a hurry as people run for the fire exits. To be perfectly honest, I'm not sure where the truth is; I have seen compelling arguments that some of the complex credit default swaps and the like will bring down our large multinational banks, but others are arguing the exposure is minimal. So the prudent trader is left with the only true "secret" in this business: manage the risk. Be sure you are adequately hedged; use stop losses; and follow your rules.

There were no economic reports of consequence today. The VIX is holding steady just below 18%. I thought it a little odd that VIX didn't rise this morning as the market opened weakly. But it didn't, so I suppose everyone is fat and happy...

My Feb iron condor position stands at a P/L of -$1,430 with position delta= -$32 and theta = +$271 with 20 contracts. The Mar condor has a P/L of -$2,090 with delta = -$22 and theta = +$74.

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Written by Dr. Duke

Created: 03 February 2012

The jobs report this morning was the perfect message for this market. The bulls went on a buying spree that has been unmatched recently. SPX gained $19 to close at $1345, near the July high of $1353 and near the 2011 high of $1364. RUT gapped open and tacked on a strong $18 to close at $831. Trading volume was also very strong with 3.3 billion shares of the S&P 500 trading today; volume gained 13% on the NYSE and was up 12% on NASDAQ.

The jobs report came in with an increase of 243k jobs and unemployment dropped to 8.3%. The ISM Services Index came in at 56.8 for January, up from 53.0. VIX dropped almost a full percentage point to 17.1% today; I was a little surprised it didn't drop more, given the strength of this rally.

So I guess we can officially declare the European debt crisis solved, at least so far as this market is concerned. Some analysts believe that today's spike is due to many money managers who have been sitting on large amounts of cash deciding they were being left behind after the January rally. If that is the case, a severe correction may be around the corner - it seems the market has a knack for confounding our best efforts to "get on the band wagon". So while you are enjoying the bullish trades, keep a tight stop engaged.

This bullish run forced me to hedge both of my condor positions yesterday, with $830 Mar calls for the Feb condor and the Apr $860 calls for the Mar condor. Today I closed the Mar 840/850 calls and rolled up to 850/860. The Feb RUT condor stands at a P/L of -$1,540 with delta = -$83 and theta = +$123. My Mar RUT iron condor stands at a P/L of -$2,000 with delta = -$46 and theta = +$44.

Have great weekend.

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Written by Dr. Duke

Created: 01 February 2012

Traders appeared to be encouraged by Portugal's bond auction and opened trading this morning in the black and held that strong bias throughout the trading session. SPX bounced up against $1330 but could not break through this resistance level. SPX closed at $1324, up $12 and RUT tacked on a huge $17 to close at $810. This bullishness was a little surprising in view of the economic data out today. The ADP employment report came out with 170 thousand new jobs, but the analysts had predicted 200k. That causes some concerns about Friday's jobs report. The ISM Index came in at 54.1 for January, up slightly from 53.1 and construction spending increased 1.5% in December. These reports aren't negative, but they certainly aren't consistent with today's bullish run either.

Trading volume in the S&P 500 was up at 3.3 billion shares, but was down 3% on the NYSE. Trading volume was up 20% on NASDAQ. The VIX dropped almost one percentage point to 18.6%.

My Feb iron condor on RUT stands at a P/L of +$780 with delta = -$141 and theta = +$200. The 840 call delta is now up to 15. Senility apparently struck yesterday when I suggested applying the Two Sigma Rule on Friday to close the call spreads - I gave away a week somewhere! My Mar RUT iron condor spread stands at a P/L of -$540 with delta = -$72 and theta = +$88. Can the market stay motivated to continue this drive higher?

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Written by Dr. Duke

Created: 31 January 2012

Many market observers are giddy about the market's positive gains since the first of the year, which I suppose is understandable after the year we had in 2011. But the last several trading sessions are setting up as another range bound trading situation. For the last nine trading days, we have stayed roughly in the range of $1310 to $1330. Note that on several of those days we have spiked down below $1300 and up above $1330 one day, but in every case, the S&P 500 has been pulled back into the range. SPX ranged from $1307 to $1321 today before closing down less than one dollar at $1312. RUT was flat on the day at $793. Trading volume was up today, probably due to end of the month "window dressing". 3.1 billion shares of the S&P 500 traded and trading on the NYSE was up 21%. Trading on NASDAQ was up 6%.

Today's dose of economic data weighed on the market. The Case Schiller Housing Price Index dropped again in November, this time down 3.7%. The Chicago PMI came in at 60.2 for January, down from December's 62.2 and Consumer Confidence also dropped to 61.1 in January from the earlier 64.8. The market is in an interesting place. It appears to be trapped: on the one side we have good corporate earnings and some economic data that isn't worsening and appears to be slowly healing (today's data withstanding). On the other hand, the economic data in the states isn't anything to write home about; our political wrangling and political malfeasance are at all time highs (how is it possible that Congress is actually considering legislation to make it illegal for Congressmen to trade on inside information? How did we get here?); and Europe hovers over everything like a black cloud.

But this ugly picture works well for delta neutral trades. My Feb RUT iron condor stands at a P/L of +$2,520 with delta = -$60 and theta = +$92. The Mar condor stands at a P/L of +$240 with delta = -$39 and theta = +$83. Most likely, we will close the Feb call spreads this Friday (Two Sigma Rule) and allow the put spreads to expire worthless.

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Written by Dr. Duke

Created: 30 January 2012

The S&P futures were in the red this morning based on the same old European debt problems - and throw Greece's bond negotiations in for good measure. SPX opened and dropped to $1300 by mid-morning. But then it stabilized and traders started buying, steadily pulling the markets up to minimal losses for the day. SPX closed down $3 at $1313 and RUT closed down $6 at $792. The VIX spiked up in the morning, but dropped back to close at 19.4%, up less than a percentage point. Trading volume in the S&P 500 fell off to 2.6 billion shares, well below the 50 dma at 2.9B.

Personal Income was reported as rising 0.5% in December, a big improvement over the previous month's 0.1% increase. But personal spending was flat in December. We will get the Chicago PMI and the Case Schiller housing price index tomorrow; those numbers could be market-moving, but at this point it is hard to imagine much movement either way. The balancing act between the bulls and the bears is pretty close to even, but slightly tilted in favor of the bulls. It seems that when either group gets the upper hand, the buying or selling sets in to pull the market back. SPX has managed to stay above $1310 for eight sessions now, but has only closed above $1320 once. And note how the trading volume has steadily fallen off since SPX broke $1330 as the intraday high on Thursday. Stocks are cheap by many measures, but fear stemming out of Europe seems to be holding the market in check.

My Feb RUT condor stands at a P/L of +2,320 with delta = -$63 and theta = +$100. The Mar RUT iron condor stands at a P/L of +$200 with delta = +$200 with delta = -$34 and theta = +$79. This meandering market is good for these trades.

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Written by Dr. Duke

Created: 27 January 2012

Fourth quarter GDP came in at an annualized growth rate of 2.8%, but analysts were expecting 3.2%, so that set the markets off into negative territory from the beginning today. SPX spent most of the day in the red and then made a run upward during the last hour, but could not hold a positive gain for the day. SPX closed down $2 at $1316 and RUT closed up $6 at $799. Trading volume was down with 3.0 billion shares of the S&P 500 stocks changing hands. Trading volume was down 6% on the NYSE and was down 14% on NASDAQ.

The University of Michigan Consumer Sentiment Survey reported a value of 75.0 for January, up modestly from December's 74.0.

My Feb iron condor on RUT stands at a P/L of +$1600 with delta = -$98 and theta = +$110. RUT's relative strength versus SPX is a bullish sign for this market, but not so good for our Feb 840/850 call spreads. As of the close today, we could have closed our call spreads for a small gain or break-even and the delta of the 840 calls is only 12, so this position is still pretty solid. Many analysts expect the last couple of days of January trading to be bullish due to institutional buying - we'll see what Monday brings.

Have a great weekend.

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Written by Dr. Duke

Created: 26 January 2012

The markets opened this morning and continued yesterday's rally after Bernanke promised another couple of years of cheap money, but the enthusiasm quickly faded. Markets turned down late morning and spent the balance of the day in the red. SPX lost $8 to close at $1318 and RUT lost $3 to close at $793. Since the first of the year, the averages have made strong gains, so much so that many technical indicators have been flashing overbought. This has left many analysts predicting a correction while the markets pushed higher. There are many factors at play here, pushing the markets in conflicting directions. Late January after a strong bullish run is often a positive time for the markets due to institutions wanting to show clients they are long the bull market and haven't been left behind. And, Bernanke's promise of easy money certainly helps. And the overall market averages are cheap by most any historical measure. But then we have the prospect of a Greek default and the rest of the European sovereign debt crisis weighing us down. And we may have a large number of traders who are anxious to lock in some of the gains they have enjoyed so far this year, especially after the beating most institutions and hedge funds took last year. And we have the historical pattern of a decline in late January after the so-called Santa Claus rally. The bottom line is that it is awfully hard to predict the end result of this confluence of forces.

Trading volume actually increased a bit today with 3.5 billion shares of the S&P 500 trading; volume increased 4% on both the NYSE and NASDAQ. The VIX increased about a third of a percentage point today, closing at 18.6%. But intraday, the VIX actually dipped below 17%. It doesn't appear that the large institutional traders are too concerned about a correction. Should I be reassured or worried by that measure?

Today's dose of economic data wasn't terrible, but it wasn't inspiring either. Initial unemployment claims reported out at 377k, up from last week's 356k. Durable goods orders rose 3.0% in December, but they rose 4.3% in November. And new home sales declined from November's 314k to 307k in December. So our economy seems to be just plugging along with minimal progress, but not sinking further either.

My February RUT iron condor at 590/600 and 840/850 stands at a P/L of +$2,080 with position delta = -$72 and position theta = +$97 on 20 contracts. It will be interesting to see how the balance of January plays out.