Dr. Duke's Blog

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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.

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Written by Dr. Duke

Created: 25 January 2012

As the markets have continued this slow steady climb into 2012, many analysts keep looking for a correction, but the markets just keep rising. Bernanke then throws the markets a huge surprise today by announcing that the Fed will maintain these record low interest rates through 2014 - wow! This is unprecedented. Fed watchers were shocked the last time the FOMC announced a specific time period for interest rates remaining low - why extend that by two more years? Now the question you have to ask is: what does the Fed see down the road that required such a surprising announcement? Do they see more danger from Europe's sovereign debt crisis than the markets have priced into stocks? Do they see a new recession here in the states or just continued slow to minimal economic growth?

SPX began the day in red ink, but broke out to the upside in the early afternoon, closing at $1326, up $11. RUT gained $7 to close at $796. VIX dropped almost another percentage point to 18.3% and spiked down as low as 17.2% intraday. Trading volume jumped up today with 3.4 billion shares of the S&P 500 stocks trading; trading volume rose 16% on the NYSE and rose 20% on NASDAQ. When the Fed gives you free money, you have no choice but to buy.

My Feb RUT condor stands at a P/L of +$1,780 with delta = -$86 and theta = +$102. The 840/850 call spreads remain at about one standard deviation OTM, so no adjustment is necessary - yet.

It appears that we are in one of those classic situations where everyone believes a correction is in order and that the problems in Europe have to contain our market's advance. The market usually finds a way to confound the majority viewpoint...

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Written by Dr. Duke

Created: 24 January 2012

The continuing Greek negotiations to restructure their debt don't appear to be nearing a resolution and this weighed on traders at the open this morning. But markets traded stronger through the day and much of the losses were recovered by the close. SPX didn't quite recover all of its losses, closing at $1315, down $1. But RUT bounced around 11 am ET and drove to a positive finish at $788, up $5. This divergence in SPX and RUT would be considered bullish by most analysts. The mid-cap stocks typically lead bullish recoveries. Trading volume remains weak with 2.8 billion shares of the S&P 500 trading; this is just below the 50 dma. Trading volume declined 2% on the NYSE and dropped 3% on NASDAQ.

No economic reports were released today. The VIX rose a bit but remains relatively low at 18.9%.

My Feb iron condor on RUT stands at a P/L of +$2,220 with delta = -$60 and theta = +$89.

I took a flyer today and bought the AAPL Feb 460/470 call spread in anticipation of AAPL's earnings announcement this evening. And AAPL didn't disappoint; all of their results exceeded expectations. It was a risky trade, but home runs are fun when you get them.

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Written by Dr. Duke

Created: 23 January 2012

The markets continued their strong bullish run this morning, but continued chatter about the negotiations surrounding Greek bonds, and more importantly, the lack of progress, appeared to wear down traders. So the markets plunged into red ink around noon and spent the rest of the day trying to climb out of that hole. SPX tacked on less than a dollar to close at $1316 while RUT closed down $2 at $783. The price action on both SPX and RUT were of the classic doji candlestick variety - the mark of indecision. This candlestick often foretells a market reversal, but not necessarily always. At a minimum, it suggests that bullish sentiment and bearish sentiment are roughly balanced at this point. The markets have had a strong run so far this year, so a little pause might be in order. The doji may not indicate a reversal as much as a pause.

The VIX increased less than half a percentage point on this minor pullback, closing at 18.7%. Other than the news out of Europe, there was no significant economic news today. In fact, we won't have any significant economic reports until Wednesday with FOMC and pending home sales.

Trading volume was down today with the S&P 500 trading right at the 50 dma of 2.9 billion shares. Volume declined 20% on the NYSE and declined 14% on NASDAQ.

My February iron condor on RUT stands at a P/L of $2,460 with position delta = -$47 and position theta = +$73. Most of the gains in this position are coming from the put spreads, although the 840/850 call spreads could be closed for a small profit now. But the delta of the short 840 calls is less than 7, so those spreads are quite safe for now. My perception is that a strong earnings season has motivated much of the bullish run this month. Will the market's attention return to Europe after the announcements begin to wane?

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Written by Dr. Duke

Created: 20 January 2012

The markets took a breather today. SPX gained $1 to close at $1315 while RUT closed at $785, up $2. To my surprise, VIX fell almost two percentage points to close at 18.3%. Wow! The markets have really forgotten about the European debt issues. I can't get over how quickly this market posture has changed, and with little or nothing substantially different in Europe. Trading volume was mixed with a slight decrease in the S&P 500 trading down to 3.3 billion shares; trading on the NYSE rose 13% and trading on NASDAQ declined 1%.

The only economic news of the day was existing home sales for December, which were up to 4.61 million from the previous 4.39M.

RUT settled at $780.62 and SPX settled at $1313.93 for January. That officially completed my second January iron condor with a 7% gain as the 670/680 put spreads expired worthless. The Feb RUT condor stands at a P/L of +$2,460 with delta = -$51 and theta = +$57. Thus far, the Flying With The Condor™stands at a gain of 5% for 2012, as compared to a gain of 4.5% on SPX, so we are managing to stay ahead of the broad market so far this year (these results only include closed positions).

Well, I have to go clear out some snow; we are in the middle of winter storm here. Have a pleasant weekend.

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Written by Dr. Duke

Created: 18 January 2012

The bulls took charge today and drove markets significantly higher. SPX opened up and steadily tacked on gains as the day wore on; this is unusual; it has been a winning strategy for the past several weeks to simply watch the open and then place your bets for the opposite direction intraday. SPX gained $14 to close at $1308 and RUT also gained $14 to close at $779. This is the first time RUT has closed above the highs set in late October. Trading volume increased a bit but still remains rather anemic for a strong bull market. 3.2 billion shares of the S&P 500 traded today, just above the 50 dma at 2.9B; trading volume on the NYSE was only up 1%, but trading on NASDAQ was up 12%.

If you ascribe to the seasonal patterns in the markets, a strong showing in the first two weeks of January often forecasts a positive year for the markets. But that pattern also includes a weak patch of trading in late January into February before the bullish trend takes over for the year. I am still skeptical that the European debt crisis can be ignored, but we seem to be doing just that for the past couple of weeks.

The PPI dropped 0.1% in December, so no signs of inflation yet; industrial production increased 0.4% - not huge but positive. Capacity utilization increased a bit to 78.1% in December; those levels haven't been seen since 2008. This dose of economic data was certainly positive, but not as strong as the market's rise today (at least in my opinion). The VIX opened up higher this morning at 23.2% but moved down throughout the day to close at 20.9%.

My Feb RUT iron condor was pushed back a bit by this strong run upward; the P/L stands at +$1,740 with delta = -$58 and theta = +$95. The Feb 840 calls are still under nine delta. The Jan RUT 670/680 put spreads are almost $100 OTM at this point. Unless something dramatic happens tomorrow, I will allow them to enter expiration and expire worthless.

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Written by Dr. Duke

Created: 17 January 2012

The markets jumped up at the open today and held most of those gains into the close. SPX once again closed above support at $1294, up $5, and RUT closed at $766, up $1. Interestingly, RUT has yet to break the resistance set in late October last year. One other anomaly was the VIX, closing at 22.2%, up over one point on a positive, upbeat market day. That divergence worries me a bit. Today's upbeat day was a bit surprising after all of the downgrades in Europe and the negative news surrounding Greek debt refinancing. Are we becoming immune to news concerning European sovereign debt? Or is the stock market just too inexpensive to ignore at these prices? Many measures suggest multi-year low prices, such as the price/earnings ratio of the Dow Jones Industrials at a five year low of 11.9. While stock prices have been trending sideways, corporate earnings have been growing. This may be fueling the bullish sentiment that appears to hold this market up even in the face of negative news from Europe.

The Empire Manufacturing Index reported 13.5 for January, up significantly from the previous reading of 8.2. The PPI, industrial production and capacity utilization data will be reported tomorrow.

My Feb iron condor on RUT at 590/600 and 840/850 stands at a P/L of +$2,260 with position delta = -$33 and theta = +$73. I still have the Jan RUT 670/680 put spreads open.

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Written by Dr. Duke

Created: 13 January 2012

The long awaited downgrades of the sovereign debt of nine European countries were announced today and talks broke down for negotiating Greek debt to avoid an outright default. With those headlines alone, you might have expected a bloodbath in our markets, but that wasn't the result. SPX dropped as low as $1278 but recovered much of the early losses to close at $1289, down $6. RUT also lost $6 to close at $764. The other surprise was trading volume. Trading in the S&P 500 was flat from yesterday at 2.8 billion shares; this is just below the 50 dma at 2.9B. Trading on the NYSE was up 4% and volume was down 1% on NASDAQ.

A similar story was told in the VIX. It jumped early today to 22.4% but closed at 20.9%, for an increase of 0.4 points. The University of Michigan Consumer Sentiment report came in for January with a 74.0 reading, up from last month's 69.9.

I must admit to being surprised at this market's reaction to the negative European debt rating news. One must conclude that the fears of a spreading "European contagion" are not as strong as I once thought. GS only traded down by $2.25 today. And remember we had a potential "double hit" to financial stocks with the European debt news and the disappointing earnings announcement from JPM.

Today's slight pull back actually helped my Feb iron condor spread on RUT with 20 contracts. It now stands at a net gain of $2,020 with position delta = -$38 and position theta = +$74. I don't always mention it, but remember that position Greeks are dependent on the number of contracts, so if your position Greeks don't match mine, that is likely the reason. Earlier today, I was a bit concerned about negative developments in Europe over the weekend impacting world markets Monday while our exchanges are closed. A couple of years ago, something similar happened, leaving us with hugely negative futures for Tuesday morning. But today's recovery from intraday lows shows significant underlying strength in this market. I still worry, but not quite so much...

Enjoy your weekend. If you get a chance, download Martin Luther King's "Dreams" address. I think you will be surprised how far afield we have drifted from his dream. Now, more than ever, we focus on a man's color, not his character.

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Written by Dr. Duke

Created: 12 January 2012

Most traders were expecting good economic news this morning with lower unemployment claims and robust retail sales for December. But that wasn't the case. Unemployment claims rose to 399k, up from last week's 375k and retail sales for December rose a tepid 0.1%. Thus, markets traded down and hit lows mid-morning. However, the bulls then started buying and drove the markets slowly higher the balance of the day. SPX closed at $1296, up $3 and RUT also rose $3 to close at $770. Trading volume was flat from yesterday with 2.8 billion shares of the S&P 500 trading. Trading volume was up 2% on the NYSE and down 3% on NASDAQ.

The bullish news is that SPX has now closed above support at $1285 for three trading sessions. Support was tested yesterday and today, but it held in both cases; note the long tails on yesterday and today's candlesticks. By contrast, RUT only today has finally reached the late October highs around $770. So the same story continues to play out in the markets: there is sufficient moderate to good economic news here in the states to support the markets, but the specter of European sovereign debt holds the markets back. If you follow the seasonal trends of the stock market, you know that we are entering a traditionally weak part of the year following the Santa Claus rally. But this year may be different. The market seems to do its best to surprise us just when we think we have it figured out.

My Feb RUT iron condor at 590/600 and 840/850 stands at a P/L of +$1,700 with position delta = -$50 and position theta = +$79. The 840/850 call spreads are just outside of one standard deviation OTM. The 670/680 put spreads are all that remain of my Jan RUT iron condor position.