Dr. Duke's Blog

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Written by Dr. Duke

Created: 20 December 2011

The stock markets opened up strongly this morning and steadily rose to close near their highs of the day. SPX rose $36 to close at $1241 and RUT tacked on $30 to close at $738. The talking heads cited the favorable Spanish bond auction and the favorable housing starts data for this rally. Housing starts for November came in at 685k, up from last month's 627k. Building permits also rose to 681k from the previous month's 644k. These are good signs, but hardly extraordinary. If this is the long awaited Santa Claus rally, it would be expected to continue into the new year, but that would be surprising behavior for this market. Maintaining an upward or a downward trend for more than two or three trading sessions has been unusual this year. The European debt crisis is far from resolved and while our own economy is showing signs of recovery, it is a very slow recovery at best. So I have to conclude that this rally will last only until the next negative news item comes out of Europe.

Trading volume spiked up today with 3.1 billion shares of the S&P 500 stocks trading, although this is slightly below the 50 day moving average at 3.2B. Trading on the NYSE rose 7% and volume increased 14% on NASDAQ.

Well, let's see what Santa brings us for the balance of the week...

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Written by Dr. Duke

Created: 19 December 2011

The markets opened up weakly in the black today but began giving the gains back within a few minutes and slowly declined all day, closing near the lows of the day. SPX closed down $14 at $1205 and RUT lost $13 to close at $709. Trading volume dropped dramatically with only 2.7 billion shares of the S&P 500 stocks trading today. Volume dropped 39% and 38%, respectively, on the NYSE and on NASDAQ.

There wasn't much economic news today, but financials seemed to lead the market weakness, but it wasn't clear what news precipitated that move. Band of America shares dropped below $5 today. I used to think of $5 stocks belonging to some little company few had heard of, but no more.

I closed the 970/980 put spreads in my January iron condor on SPX; with the earlier close of the 1350/1360 call spreads, that locks in an 11% gain.

The Santa Claus rally is remaining elusive so far. Maybe this will be one of the "exception" years.

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Written by Dr. Duke

Created: 16 December 2011

The bulls just can't seem to make their case. They had a couple of opportunities this week, but the runs to the upside fizzled out each time. This morning, the markets opened up in the black and traded upward, but it didn't last. SPX traded as high as $1231 before falling back and closing at $1220, up $4. RUT followed suit, running to $731 and then closing at $722, up $6. This was quadruple witching week, with expiration of the index options, index futures, stock options, and single stock options. Consequently, trading volume spiked with 4.1 billion shares of the S&P 500 changing hands. This is the first time in December that trading volume on SPX has broken the 50 day moving average; it only broke the 50 dma three times in November. Trading on the NYSE was up 48% and volume jumped 44% on NASDAQ.

Economic data was in short supply today. the CPI rose 0.2% in November and Fitch downgraded several large European and international banks, including BAC and GS. They also warned of possible downgrades for several European countries.

RUT settled at $721.85 and SPX settled at $1225.05. Thus, the remaining 560/570 put spreads in my December iron condor expired worthless, confirming a gain of $2,000 on 20 contracts or 12% on the capital at risk. That brings the 2011 track record for the Flying With The Condor™ to +39%. The Jan SPX iron condor stands at a net gain of $2,100 with the 970/980 put spreads remaining open. I will probably close them next week and make room for a new condor for the January expiration month.

I have kept a spreadsheet of the Thursday closing prices and the settlement prices for SPX and RUT for the past five years. That data is the basis of my Two Sigma Rule for closing positions before expiration week. The average difference between Thursday's close and the settlement price on Friday for SPX is $8.40 and $6.02 for RUT for the eleven months of 2011. That works out to approximately one half of a standard deviation for the overnight move, on average. But averages can have some outliers hiding in the data; thus, the Two Sigma Rule on the Friday before expiration week is a safe guideline.

Enjoy your weekend.

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Written by Dr. Duke

Created: 15 December 2011

The markets were caught today between fears of the next shoe dropping in Europe and some improved economic data here at home. SPX gained $4 to close at $1216 and RUT closed at $716, up $8. Trading volume dropped from yesterday with 2.8 billion shares of the S&P 500 stocks trading. Trading volume dropped 10% on the NYSE and dropped 2% on NASDAQ.

Initial unemployment claims came in at 366k, down from last week's 385k, while continuing unemployment claims held steady at 3.6 million. We seem to be steadily holding the initial claims number below 400k - a welcome trend. The PPI for November increased 0.3%  and capicity utilization remained flat at 77.8%. The Empire Manufacturing Index increased to 9.53 for December from last month's 0.61. All in all, this wasn't resoundingly good news, but it wasn't bad either.

I chose to close the 1350/1360 call spreads in my Jan SPX iron condor today. I was able to take them off for a small gain and basically lock in a reasonably high probability gain for this position. The SPX Jan 970/980 put spreads are far OTM and should expire worthless unless we have a global meltdown of some kind. Assuming the put spreads expire worthless, that will result in a 13.5% gain for this condor - not a bad start for 2012.

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Written by Dr. Duke

Created: 14 December 2011

Italy's latest bond auction further reinforced the traders' concerns over European debt with bond yields reaching 6.5%. The dollar strengthened against the Euro and US stocks dropped again today, although on only slightly higher volume. SPX closed down $14 at $1212 and RUT lost $10 to close at $708. Trading volume in the S&P 500 was slightly up at 3.2 billion shares, still below the 50 dma. Trading volume was flat on the NYSE and up 2% on NASDAQ.

No significant economic data were released today, so the fears about the European debt crisis leading to a global recession appear to be driving the pessimism.

My Jan iron condor on SPX stands at a P/L of +$1,980 with delta = -$2 and theta = +$49, on 20 contracts. The theta/delta ratio is strong; in fact, I am tempted to close this position early and lock in a nice gain. Hmmm.. My directional trades are being run over by this market as my delta neutral trades are making money. It makes a good case for diversifying your strategies.

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Written by Dr. Duke

Created: 13 December 2011

The markets opened up pretty strongly this morning and stayed in the black until after the Fed announcement. SPX closed down $11 at $1226 and RUT lost $15 to close at $718. SPX was as high as $1250 early in the day, but gave it all back in the last couple of hours of trading. Trading volume picked up with 3.1 billion shares of the S&P 500 stocks trading, but that is still below the 50 day moving average. Trading increased 24% on the NYSE and increased 14% on NASDAQ.

The big news of the day was the FOMC announcement. The Fed made the most positive statements about the economic recovery it has made in quite some time (albeit still modest). But many were expecting a QE III program of some sort and were disappointed. Thus, the markets traded off pretty strongly late in the day. The VIX dropped to 23.3% this morning but then moved up in the afternoon to close at 25.4%. The morning reading was the lowest VIX has been since early August.

My Jan SPX iron condor at 970/980 and 1350/1360 stands at a net gain of $1,400 with position delta = -$8 and position theta = +$77. Today's downward move relieved the pressure on the call spreads, so this position is in pretty good shape. But in this volatile market, that could change quickly. The Euro Watch is still in full swing and any manner of news could swing this market one way or the other very easily.

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Written by Dr. Duke

Created: 12 December 2011

Every major market index was down today. It started early with Intel's lowering of its outlook and it appears that as traders reflected on the Euro Summit over the weekend, they lost confidence that anything of substance had been really decided. So the fear that the European debt issues will spread to cause global economic issues is alive and well. SPX shed $19 to close at $1236 and RUT closed at $733, down $12. Institutional money managers appear to be sitting on the sidelines; trading volume was flat to decreased today with 2.8 billion shares of the S&P 500 trading, unchanged from Friday. Trading volume was down 7% on the NYSE and was down 6% on NASDAQ.

Interestingly, the VIX actually declined today as the markets also declined - is this a bullish divergence? The last three trading sessions have been maddening, steadily retracing the same territory each day. We will hear something from the FOMC tomorrow, but it isn't likely to move markets.

My Jan iron condor on SPX stands at a P/L of +$600 with delta = -$40 and theta = +$99. The call spreads are just outside one standard deviation OTM, so this position is in reasonable shape. The risk is principally on the call spread side since the 970/980 put spreads are very far OTM and thus unlikely to present a problem. The 560/570 put spreads are all that remain of the Dec RUT iron condor position, so they will expire worthless this weekend.

It will be interesting to see if today's divergence in the VIX is foretelling a move back up tomorrow. Of course, given the see saw action of the last several sessions, it is the bulls' turn tomorrow.

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Written by Dr. Duke

Created: 09 December 2011

The markets apparently liked what they were hearing out of Europe today (although there was a paucity of specifics), and so the buying commenced. SPX gained $21 to close at $1255; ironically, SPX gave up almost the same amount yesterday as it gained today. At one time, that would be considered an unusual coincidence, but not for 2011; this kind of volatility has become the norm. RUT behaved similarly to SPX, gaining $23 to close at $745. The VIX trimmed back to 26.4%, about where it was a week ago, after nearly reaching 31% yesterday. In spite of today's big gains, trading volume declined with 2.8 billion shares of the S&P 500 trading today; trading at the NYSE was down 13% and volume was down 10% on NASDAQ.

Economic data was minimal today with the University of Michigan Consumer Sentiment survey coming in at 67.7 for December, up slightly from November's 64.1.

My Jan iron condor on SPX stands at break-even with delta = -$45 and theta = +$87 on 20 contracts. The RUT 560/570 put spreads are all that remain of the December position, so they will most likely expire worthless next weekend.

So the European Watch continues; the next market moving news may well be some credit rating downgrade this weekend or next week. I believe this market remains a risky place for directional trades; use tight stops.

We had our first snow today here in Chicago - I offer that for those of you in warmer climates so you can gloat. Enjoy the weekend.

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Written by Dr. Duke

Created: 07 December 2011

I grew up in an America where we were infamous for not having a clue about what was going on anywhere else in the world. How surprising it is now to find us knowing the names of Europeans involved in the ECB, finance ministers and other European leaders. Moreover, our markets have been hanging on every bit of news coming out of Europe. Today was no different. Our markets were basically treading water looking forward to the Euro Summit when news came out late in the afternoon that the G20 was considering some kind of lending program to assist Europe. That spiked the major market averages for a few minutes, but then most of those gains were erased into the close. SPX ended up with a $3 gain to close at $1261 and RUT gained less than a dollar to close at $746. Market trading volume was flat to modestly higher with 3.0 billion shares of the S&P 500 trading (3.3B is the 50 dma). Trading volume was up 14% on the NYSE and up 11% on NASDAQ.

More ominously, today marks the fourth session that the VIX has moved upward, closing today just under 29%. This marks a classic divergence with the VIX moving upward as the market averages track sideways. At best, it represents a great deal of uncertainty among traders as they hedge themselves against a possible down draft. At worst, it is predicting the down draft. I am inclined to think we will continue to trade largely sideways, but within a volatile trading range - in short, more of the same. My reasoning is simplistic. I don't see any clear and definitive solutions to the European debt crisis coming out in the short term; much like our own situation here, the political realities dictate a lengthy, contentious struggle.

My Jan SPX iron condor continues largely "as is" with a P/L of -$1140 with delta = -$50 and theta = +$95. So our position's theta/delta ratio remains strong, but the 1350/1360 call spreads are inside of one standard deviation OTM, so that is keeping our condor in red ink. Tomorrow and Friday we will likely see volatile moves in both directions for the markets as various news tidbits flow out of the Euro Summit.

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Written by Dr. Duke

Created: 06 December 2011

The markets opened and traded sideways most of the day. SPX made a run higher in the last hour of trading, but gave up most of that gain before closing roughly unchanged at $1258 (up only $1) and RUT was flat at $747. Trading volume also fell off with only 2.7 billion shares of the S&P 500 trading. Trading volume was down 11% on the NYSE and was down 12% on NASDAQ. The VIX rose slightly today to close at 28.1%.

No significant economic data was reported today. The market appears to be treading water while waiting on the Euro Zone summit later this week. But I will be surprised if we receive definitive news out of the summit.

My Jan iron condor on SPX stands at a P/L of -$900 with delta = -$49 and theta = +$89. Now we return to the Euro Zone watch...