Dr. Duke's Blog

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Written by Dr. Duke

Created: 28 October 2011

Trading was very sluggish today with lower volume and virtually no direction. SPX closed at $1285, up less than a dollar. RUT closed down $4 at $761. There wasn't much economic news to chew on today. The University of Michigan consumer sentiment survey came in at 60.9, up a bit from the previous reading of 57.5. Trading volume was markedly down across the board with 3.4 billion shares of the S&P 500 stocks; trading was down 30% on the NYSE and down 35% on NASDAQ. The VIX actually opened up higher this morning at 26% but moved downward through the day to close at 24.5%. All signs appear to point to this rally having sustaining power, but the proof will come next week. We will have plenty of potentially market moving news events: the FOMC meeting and announcement, Bernanke's news conference, the G-20 Summit, and the non-farm payrolls report.

I rolled the 780/790 call spreads in my Nov RUT condor to 790/800; this position remains underwater with a P/L of - $3,590 with delta = -$27 and theta = +$119. My Dec condor at 560/570 and 830/840 is hedged and stands at a P/L of -$1400 with delta = -$11 and theta = +$50.

Have a great weekend. Be sure to take time to smell the roses.

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Written by Dr. Duke

Created: 27 October 2011

The late Harry Caray of Cubs baseball fame here in Chicago made "Holy Cow" one of his trademarks. And it certainly would apply to today's market. A deal was reported out of Europe this morning to address the European sovereign debt issues and the market went ballistic. SPX gained $43 to close at $1285 while RUT closed up $38 at $765. SPX sliced through its 200 dma at $1274. The only sign of weakness was giving back about $10 in the last few minutes of trading. The VIX gapped down at the open and closed at 25.5%, the lowest level since early August when the market collapsed. Trading volume surged with over 4.9 billion shares of the S&P 500 trading. Trading volume was up 27% on the NYSE and was up 32% on NASDAQ.

Third quarter GDP grew at 2.5%, a nice increase over the second quarter's anemic 1.3% growth. That helped calm some recession fears. Unemployment remains stubornly high with 402k new unemployment claims, flat from last week. Continuing unemployment claims dropped by 96k to 3.6 million.

The market's surge forced me to re-establish my hedges on the November iron condor (I wish I had left the hedges in place from Monday); I also rolled the put spreads up to 660/670. This adjusted our Greeks to an acceptable range with delta = -$19 and theta = +$96, but we remain underwater.

Market analysts have been almost unanimously surprised with the extreme strength of today's rally with several analysts predicting a pull back in coming days. But getting in front of this freight train could be dangerous.

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Written by Dr. Duke

Created: 26 October 2011

Traders were focused on the European Union Summit today, and the markets gyrated back and forth as a result. No clear plans were forthcoming, so traders took varying positions. The markets opened positively but then sold off. But buying resumed in the afternoon and the markets closed with modest gains. SPX gained $13 to close at $1242. RUT closed at $727, up $14. Trading volume was up with 3.7 billion shares of the S&P 500 trading (50 dma at 3.6B). Trading was up 9% on the NYSE and was up 20% on NASDAQ.

New home sales increased 17k to 313k for September. But durable goods orders dropped 0.8% in September, a larger loss than the previous month's 0.1% decline.

My Nov iron condor on RUT stands at P/L of -$340 with delta = -$87 and theta = +$192. As it becomes more clear that a quick fix isn't coming out of Europe, will traders turn their attention elsewhere, or will we continue to "muddle along"?

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Written by Dr. Duke

Created: 25 October 2011

The markets traded back down today as some of the news from Europe wasn't reassuring. One finance minister meeting was cancelled and traders feared the scheduled summit might also be rescheduled. Some analysts also predicted that no firm solutions to the European debt are expected anytime soon. Perhaps the markets got a little ahead of themselves over the past couple of weeks? SPX dropped $25 to close at $1229 while RUT closed at $714, down $22. Today's drop on SPX returns us to the support level at $1230; it will be interesting to see if SPX opens below $1230 in the morning. If so, we may retest some of the recent lows. The price action on RUT was even more ugly today - RUT gave back all of yesterday's gains to place this index firmly back within the trading range of the past few months. Trading volume was flat on the S&P 500 with 3.3 billion shares trading; trading volume on the NYSE increased 9% while volume on NASDAQ dropped 6%.

Today's economic news was disheartening, but probably had minimal effect on traders who are preoccupied with Europe. The Case-Shiller housing price index dropped 3.8% in August and  consumer confidence numbers dropped to 39.8 for August from September's 46.4.

I removed the hedges on my Nov RUT condor position; it now stands at a P/L = +$200 with delta = -$61 and theta = +$183. So now we watch to see if we have returned to the trading range. Given the continuing uncertainty in Europe, it certainly seems logical to expect our markets to remain trapped in this trading range.

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Written by Dr. Duke

Created: 24 October 2011

Markets rallied again today, but on lower volume. SPX gained $16 to close at $1254 and RUT closed up $24 at $736. RUT has now closed for the first time outside the trading range formed since early August. SPX closed outside this trading range for the second time today, but the lower volume causes one to pause. The next resistance level is the $1260 low formed in June. The VIX dropped to 29%. This modest drop reinforces the fact that we still have several ticking time bombs in Europe. Overnight news from Europe could tank our markets very easily one of these days, so be cautious. Third quarter GDP data comes out on Thursday - that will be another test of this rally. You may scoff at my caution, but the lower trading volume suggests the large institutional players are on the sidelines of this rally, so I don't think I am alone with my concerns about this market.

Trading volume dropped off today with 3.3 billion shares of the S&P 500 stocks trading; trading volume was down 20% on the NYSE and was down 5% on NASDAQ.

I hedged my November condor on RUT and it stands at a P/L of -$950 with position delta = -$37 and position theta = +$116. Volatility on RUT remains at 40% so that keeps considerable pressure on  my call spreads as this rally continues. So, we hold our binoculars with one hand as we keep a close eye on Europe and hold our wallet with the other hand. Let's see what tomorrow brings.

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Written by Dr. Duke

Created: 21 October 2011

The markets traded up strongly for the first ten days or so in October but for the past several days, the major indexes seemed to stall at the upper end of the trading range we have been trapped within since August 1. This stall, in itself, was a new wrinkle to the pattern. Previous runs to the upper end of the trading range had just as quickly descended to the lower end of the range. SPX broke through the upper end around $1230 and forcefully closed near its highs for the day at $1238, up $23. RUT gained $16 to close at $712. RUT remains within the trading range of the past couple of months but SPX is in uncharted territory. Traders are still nervously watching Europe for any signs of the sovereign debt crisis being contained. News this weekend could easily undo today's nice bullish run outside the trading range. So we must remain cautiously optimistic. Trading volume bumped up a bit from yesterday with 3.7 billion shares of the S&P 500 trading. Trading volume on the NYSE was up 19% but trading volume declined 2% on NASDAQ.

RUT settled at $709.83, so the remaining 560/570 put spreads in our October iron condor position expired worthless, and that position logged a 9.4% return. The November iron condor on RUT stands at a P/L of +$440 with delta = -$61 and theta = +$163.

So now we pat ourselves on the back for making money in October and focus on enjoying our families and friends for the weekend. Try not to think about the markets until Monday morning.

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Written by Dr. Duke

Created: 19 October 2011

The latest news from Europe continues to be the dominant factor moving this market day to day. And, unlike most factors we analyze for their effects on stock prices, the European debt crisis defies analysis. Whenever you think it is under control, another rumor, interview or news report sends us all running for the exits. SPX traded downward $16 to close at $1210 and RUT lost $15 to close at $694. Trading volume declined to 3.5 billion shares in the S&P 500; trading was also lower on the NYSE by 12%. Trading volume increased 2% on NASDAQ.

The CPI came in for September at +0.3%, a decrease from last month's 0.4% increase. Housing starts were up at 658k, from last month's 572k, while building permits were down at 594k, from last month's 625k. SPX has been trading just below resistance at $1230 for several days now. Looking only at the price chart, one would observe that we are trading right at upper end of the recent trading range and the index may still break-out to the upside any day. However, VIX continues to rise; it closed at 34.4% today. That is a bearish sign.

I closed the 740/750 call spreads in the October RUT iron condor position for $0.16. That leaves the Oct position with only the 560/570 put spreads, safely far OTM. Assuming the put spreads expire worthless, our October condor finishes at a net gain of $1,516 on 20 contracts or 9.4%. This brings our 2011 track record for the Flying With The Condor™ service to a 32% gain - not bad for a year when the S&P 500 is down 4%. Our November iron condor on RUT with call spreads at 780/790 and put spreads at 560/570 is at break-even with delta = -$28 and theta = +$168.

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Written by Dr. Duke

Created: 18 October 2011

Our markets continue to be held hostage to any kind of news or rumor coming out of Europe. Markets traded lower this morning based on a report that Moody's has put France on negative credit watch. Later in the morning, there were positive reports about Germany and France cooperating to make the debt bailout a certainty - but, again, no specifics. But this news encouraged traders and the market rallied throughout the day, but then the earlier news reports were called into question, so the trading became very choppy in the last hour. It is hard to predict where the markets may go tomorrow. SPX tacked on $29 to close at $1230 and RUT closed at $709, up $21. Today's move returns SPX right to the resistance level set earlier in September - tipping point. Trading volume spiked up today with 3.9 billion shares of the S&P 500 trading today; this is slightly above the 50 dma at 3.8B. Trading volume was up 22% on the NYSE and increased 15% on NASDAQ.

My Oct iron condor on RUT stands at a P/L of +$96 with delta = -$90 and theta = +$1,000. The 740/750 call spreads are right at one standard deviation OTM. I tried to close them this morning, but was unable to get a good price before the market rally took over. The Nov condor stands at a P/L of +$60 with delta = -$51 and theta = +$155. So we sit back and watch to see what news report or rumor sends this market soaring or diving tomorrow.

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Written by Dr. Duke

Created: 17 October 2011

The markets pulled back significantly on news from Europe that the optimal solution to their debt crisis may not be materializing overnight - and this was a surprise? Technical analysts will view this as simply a case of the markets hitting resistance and bouncing back downward into the trading range of the past two months. The economic data that came out today wasn't extremely negative, but it certainly wasn't very positive either, so that didn't help traders' moods. The Empire Manufacturing survey came in at -8.48, slightly better than last month's -8.82, but worse than the -5.0 that was widely expected. Industrial production increased an anemic 0.2% and capacity utilization stands at 77.4%. So in the absence of any strong economic date suggesting a strong recovery, everyone is focused on Europe. And that situation isn't going to be resolved anytime soon. SPX opened at yesterday's close and traded steadily downward from there, closing at the lows of the day at $1201, down $24. RUT also lost $24 to close at $689. Lower than average trading volume continues with 2.8 billion shares of the S&P 500 trading today; this is a decline from yesterday and well below the 50 dma at 3.9B. Trading on the NYSE was up 10% and trading volume was up 1% on NASDAQ. The VIX jumped up 5 points to 33.4%, reaffirming the concerns of further bearish trade in the coming days.

My Oct iron condor on RUT stands at a P/L of +$856 with position delta = -$19 and position theta = +$296 on 20 contracts. Both spreads are about two standard deviations OTM. The Nov condor stands at a P/L of +$480 with delta = -$24 and theta = +$142 (also 20 contracts).

Today's trading so steadily downward all day and closing with the major market averages near or at their lows for the day is pretty bearish behavior. This may be the beginning of a run downward to test the support levels of this trading range once again - a great market for non-directional traders, but a very difficult market for directional traders. The fact that these runs both upward and back down are occurring on low volume just reaffirms the market's lack of direction - we are basically trading sideways in a wide range until traders gain confidence to trade strongly one way or the other.

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Written by Dr. Duke

Created: 14 October 2011

Following the lead from Europe's major indexes trading up today, our major market indexes traded higher as well, but trading volume dropped again. SPX closed up $21 at $1225 and RUT gained $14 to close at $712.  Trading in the S&P 500 dropped off to 2.8 billion shares; trading volume on the NYSE dropped 9% and trading on NASDAQ was essentially flat with a 1% drop. Retail sales gained 1.1% in September, but the University of Michigan consumer sentiment survey dropped to 57.5 for Oct, down from 59.4. SPX broke through the $1200 and $1220 resistance levels today. Some may set the upper resistance level of this trading channel at $1230 since SPX reached $1230 on an intraday basis in early September but then closed lower. In either case, we are close to breaking out of this trading range we have been trapped in for the past two months. The contrary indicator is the low levels of trading volume. Break-outs have a much higher probability of follow through when they occur on increased trading volume.

I left my Oct iron condor on RUT open. The 740/750 call spreads are about one standard deviation OTM; I will allow additional time to bleed out of this spread before closing it next week. This position stands at a P/L of -$1304 with delta = -$140 and theta = +$505. I rolled the 490/500 puts (closed for $0.28) in my November position up to 560/570 today (opened for $0.68). The Nov condor now stands at break-even with delta = -$57 and theta = +$127. This move has pushed our maximum gain up to $4,100 for this 20 contract position.

Enjoy the weekend.