Dr. Duke's Blog

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Written by Dr. Duke

Created: 10 August 2011

The markets opened down this morning and tried to make it back up to yesterday's bullish close, but failed; on the other hand, the bears tried to push the indexes back down to new lows, but they also failed. But the bears made another push lower during the last couple of hours of trading, nearly making it to the lows of the day. If you study the SPX chart for the past couple of weeks since this carnage began, the days where the market closed at the lows of the day are the scary days, especially on increased volume (look at last week's Tuesday and Thursday and this past Monday). But yesterday the bears pushed the market down, but could not hold those lows - that presented a glimmer of hope; but the late trading today was a bit disconcerting. The steady decrease in trading volume is hopeful, but that may be wishful thinking.

SPX closed at $1121, down $52 while RUT lost $36 to close at $660. Trading volume remains relatively high, but declined from Monday and Tuesday's levels. 6.5 billion shares of the S&P 500 traded, but this remains well above the 50 dma at 3.2 billion shares. Trading volume was down 10% on the NYSE and was down 11% on NASDAQ.

Today's market weakness appeared to stem from rumors of France losing its AAA bond rating. And that just underscored concerns about the European Union in general. After the severe losses of the past week, traders are nervous and they hit the exits without stopping to question the veracity of any rumors they have heard. I'm not criticizing; I am just pointing out one of the reasons we are seeing extreme volatility intraday in the markets.

I am continuing to adjust my Aug and Sept iron condors on RUT to avoid being run over by this market. The Aug RUT iron condor has put spreads at 600/610 and call spreads at 750/760. Its current P/L stands at about -$3,500 with delta = +$28 and theta = +$331. Both spreads are about 1.5 standard deviations OTM; at this point, we are only minimizing our losses in this position. The Sept condor consists of the 600/610 puts and the 780/790 call spreads and has a P/L of -$480, delta = +$15 and theta = +$92.

It appears as though the markets are beginning to calm down a bit, although the late trading today worries me; let's hope we don't have some significant world event/announcement that catches the markets off guard. It is a very fragile time.

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Written by Dr. Duke

Created: 09 August 2011

The markets bounced back a bit this morning, but were very volatile all day. SPX set a new low for the past few weeks at $1102. The major market averages had pulled back to their starting points by the time the FOMC report was released. It is hard to say what the market's early reactions to the report were, given the extreme volatility all afternoon. But the last hour of trading was decidedly bullish. SPX closed up $53 to $1173 and RUT gained $45 to close at $696. One surprising aspect of the FOMC announcement was language to the effect that interest rates aren't likely to rise until the middle of 2013; it is very unusual for the Fed to issue a time line for interest rates. This was probably their attempt to calm the markets. Trading volume remains high, but it did pull back a bit from yesterday's highs; 6.8 billion shares of the S&P 500 traded today; trading volume was down 4% on the NYSE and down 5% on NASDAQ.

My Aug and Sept condors continue to struggle in the midst of this market turmoil; both positions are underwater. I removed the put hedges today; those gains are crucial in giving both of these positions a shot at profitability; in fact, the Sept condor could make a larger than normal profit. But who knows what is going to happen at this point? All we can do is trade what the market gives us.

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Written by Dr. Duke

Created: 08 August 2011

Friday's price action suggested that we might have found the bottom, but today's market convinced us of the foolishness of that thinking. SPX plunged $80 to close at $1119; Russell (RUT) gave up 8% of its value in one day: down $64 to $651. We used to think of market corrections to be of the order of 8%; we lost that much just today. The markets paused in the afternoon as President Obama spoke, but then the market averages turned over and headed lower, closing at the lows of the day. Obama still doesn't get it; he continues to talk of tax increases and blames those stubborn Republicans for everything. After traders heard that, they knew nothing is going to change in Washington any time soon and they resumed the panic selling. Trading volume was huge with 7.3 billion shares of the S&P 500 changing hands. Volume was up 10% on the NYSE and up 6% on NASDAQ. In fact, trading volume has consistently increased every day since last Monday. Volatility is also on the rise; the VIX closed at 48% today. VIX has doubled since August 1.

There were no economic data reports today, but even if there had been, they would have been overshadowed by the Standard and Poors downgrade of the U.S. debt. S&P officially announced its downgrade Friday after the market closed. They previewed their rating rationale with the White House, whose analysts discovered a two trillion dollar mistake in their calculations. But that didn't phase S&P; they corrected their numbers and issued the downgrade as planned. It is difficult to imagine an organization contemplating such an historic move as removing our AAA bond rating, and the analysis and calculations move through the organization with a huge error in the calculations. And when the error was discovered and acknowledged, they move forward anyway - sounds like my favorite Dilbert cartoon. And don't forget: these are the people who told you that buying those mortgage backed securities were perfectly safe.

As you might expect, I have been scrambling to protect my August and September iron condor positions. I have hedged both positions with long puts and then closed my put spreads and rolled them down. Then I opened new call spreads to effectively re-position my condors. Now the Aug position consists of the 610/620 put spreads and the 750/760 call spreads with position delta = -$47 and theta = +$136. The Sept position consists of the 610/620 put spreads and the 780/790 call spreads with position delta = -$58 and theta = +$175. Both positions are in red ink for now, but have the potential to still make a reasonable profit before expiration. In fact, the Sept position has the potential to make as much as $6k on 20 contracts simply because the put hedges have appreciated so much the last few days.

The FOMC meets tomorrow, so all eyes and ears will be tuned to whatever comes out of that meeting. In the meantime, either hedge your positions or sit safely on the sideline. It's crazy out there.

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Written by Dr. Duke

Created: 05 August 2011

The jobs report this morning prompted a positive market opening, but it didn't last long before bears were selling strongly and market observers were spooked. For the last two days, the price action has taken the indexes into "uncharted territory" - yes, analysts were pulling up various old support levels and so on. My point is that most of the support levels we traders were focused on were simply passed by without even a pause. It left many traders mentally disoriented. SPX opened and ran up to $1218 before plunging to $1168. Then SPX started recovering in the early afternoon and closed essentially at its open at $1199, down less than a dollar on the day. RUT was much more bearish, closing down $12 to $715.

The non-farm payroll report cited a gain of 117k jobs, up significantly from last month's anemic rise of 46 thousand jobs. This came as a surprise to most analysts and boosted the market, but only momentarily. The unemployment rate dropped a bit to 9.1% from 9.2% - I'm not sure if the underlying data are accurate enough to make that difference meaningful, but at least it is in the right direction. Next week, we have the FOMC meeting and traders will be even more attentive than usual, given this week's carnage in the markets. Traders will also be watching European bank and finance ministers this weekend, searching for reassurance that the European debt problems don't cascade into global financial issues.

I rolled my Aug 670/680 put spreads down to 650/660. That reduces the profit potential for the Aug position, but we still have the potential for a reasonable gain. The hedge for the Sept put spreads is holding that position's P/L in check very well. So our potential gains in the Sept position are still largely intact.

This has been a crazy week in the markets. Let's all collectively relax and enjoy the weekend. I'm going to start with a nice dinner with family and friends.

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Written by Dr. Duke

Created: 04 August 2011

And I actually asked if we had hit bottom yesterday! Yesterday seemed like a big move, but it was nothing! Today's markets set records with a huge drop on huge volume. SPX lost $60 to close at $1200 while the RUT closed at $727 for a loss of $46. Trading volume hit record highs for this year with 5.4 billion shares of the S&P 500 stocks trading; volume was up 32% on the NYSE and was up 26% on NASDAQ. The day began with a flat unemployment claims report; initial claims were essentially flat at 400k (down from 401k last week). Continuing claims were up ten thousand at 3.7 million. European economic concerns appeared to be ruling the day, although it didn't appear that we had any really new news to drive this sell-off. To me, that was the most puzzling aspect of this trading day. The concerns one would have listed several weeks ago have not changed. Even more surprising, gold even sold off a bit, so it didn't appear that traders were moving from equities into that safe haven. Similarly, the bond markets didn't see flocks of buyers either. Traders appear to be simply moving to cash. Normally, we expect the stock market to be a measure of expectations for corporate earnings; so far in this earnings season, companies have been generally beating their estimates and painting reasonably favorable futures. But that doesn't seem to be enough.

Everyone is now focused on tomorrow's jobs report. Even before this huge sell-off, no one was expecting a large number. At this point, it isn't clear that even a positive surprise in the jobs report would turn this market around. On the other hand, when you see such a huge move downward, there is often a reflexive bounce the following day as traders buy the bargains. But there was no sign of that happening as the trading closed today; in fact, the selling accelerated into the close. My RUT 670/680 put spreads are being squeezed; if this sell-off continues, I will be closing and rolling spreads. Everyone will be glued to the futures as the jobs report hits the wires tomorrow morning.

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Written by Dr. Duke

Created: 03 August 2011

 The futures were positive this morning and the market opened upward, but within just a few minutes, the carnage began. SPX dropped to $1235 before rebounding and then slowly gained in late afternoon trade to close up $6 at $1260. RUT followed a similar pattern, closing up $6 at $773. Trading volume was huge at 4.2 billion shares of the S&P 500 stocks. The last time we saw volumes this high was at the lows hit in mid-March this year. Trading volume was up 11% on the NYSE today; trading was up 9% on NASDAQ. Every major market index closed with a gain today.

The economic data reported today was mixed. ADP's private employment report cited 114k new jobs, but the report of new layoffs from Challenger, Gray and Christmas rose for the third month in succession, with an increase of 59% for July compared to July, 2010. The July ISM Services Index declined a bit to 52.7 for July (53.3 in June), while factory orders declined 0.8% in June. The bottom line for all of this data is either evidence of a double dip or, at best, continued weakness in the economy.

The VIX spurted up to over 25% this morning, but declined to close at 23.4%. There isn't much to report on my condor positions. Both the Aug and Sept condors consist of only the 670/680 put spreads, which appear safe enough now, but that wasn't obvious as RUT appeared to be in free fall this morning, hitting $750 before rebounding. Now we wait to see if we have simply matched the mid-March lows, or are lower lows in store?

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Written by Dr. Duke

Created: 02 August 2011

 SPX opened this morning just above the 200 dma, but that was short-lived. As the day wore on, the selling intensified. Traders appear to be spooked by the prospects of a debt rating downgrade and the old news of a weak economy and continued high unemployment. All of the major market indexes logged large losses. SPX closed at $1254 for a loss of $33. And RUT lost $26 to close at $767. SPX is now in the area of $1250 to $1260 where the downturns in March and June both landed before turning upward. Trading volume was again up significantly with four billion shares of the S&P 500 trading. Trading was up 13% on the NYSE and was also up 7% on NASDAQ.

The one anomaly on the day was VIX. VIX opened at 24.2% and closed at 24.8% - unusual for a day where the major indexes lost so much value. This suggests that large institutions aren't aggressively buying protection in this market and that seems surprising.

My Aug and Sept iron condors on RUT have only their put spreads in play now; both call spreads have been closed. The put spreads are at 670/680. Earlier today I would have considered those to be in a safe position, but today's market drop has me wondering. It is interesting that the debt limit deal that everyone seemed convinced a week ago was so crucial now appears to be irrelevant. Tomorrow should be interesting. If the broad market indexes continue downward tomorrow, we will have broken the lows set in the last two corrections. Then we will have to seriously consider the prospect that the bull market has ended and a new bear market trend has begun. 

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Written by Dr. Duke

Created: 01 August 2011

 Traders were encouraged by news of a debt ceiling deal this morning and stocks traded up strongly. But then it seemed that reality came crashing down on everyone - the ISM manufacturing index came in at 50.9 for July, down significantly from last month's 55.3, reminding us that the economy continues to struggle. In addition, many analysts finally tumbled to the prospect that America's debt rating was likely to be downgraded since the debt ceiling deal didn't really address the long term debt problem. SPX ran as high as $1307 before collapsing to a low of $1275, and then gradually rebuilding as the day went on. SPX closed at $1287, down $12 on the day. RUT lost $4 to close at $793. SPX closed above the 200 dma at $1285, but just barely. Trading volume was down from Friday's elevated levels, but remained high with 3.3 billion shares of the S&P 500 trading today; trading volume was down 4% on the NYSE and was down 3% on NASDAQ.

I took the opportunity to close the 900/910 call spreads of my Sept RUT condor, confirming a nice gain on the upper side of that position. The 670/680 put spreads remain almost two standard deviations OTM. Ironically, I also have the 670/680 put spreads remaining in the August condor position, but those spreads are about three standard deviations OTM. Unless the U.S. declares bankruptcy, the Aug and Sept condors should close with gains of 14% and 13%, respectively.

With the focus turning to the debt rating agencies, Standard and Poors and Moody's, this market malaise isn't likely to end soon.

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Written by Dr. Duke

Created: 29 July 2011

 The markets continued their sideways to downward dance today. And the debt ceiling was all anyone at CNBC could talk about - more Chicken Little drama. Ironically, the concern appears to boil down to whether our debt will be downgraded by S&P and/or Moody's (lest we forget, the same people who said all of that sub-prime mortgage debt was just fine). Most sane observers who haven't drank the kool-aid agree that a default on the debt is very unlikely. The irony derives from the fact that it is highly unlikely that the eventual compromise in Congress will do anything substantive to actually decrease our debt or even decrease the rising rate of debt creation. So the downgrade is probably coming, and it appears that the experts aren't too sure about what that means. Many speculate about rising interest rates, but considerable uncertainty persists. And, of course, the equity markets don't like uncertainty. We "fix" uncertainty by discounting the prices.

The first quarter GDP growth was revised downward to 1.3% from 1.7% and second quarter GDP grew 1.3%. This revived talk of a double dip in the economy; that spooked traders as much or more than the debt ceiling debate. The Chicago PMI report dropped a bit to 58.8 for July (61.1 in June). So traders didn't have much good news today, and it showed in the markets. SPX closed at $1292, down $8 and RUT dropped $2 to close at $797. SPX was seriously down at the open, but bounced off the 200 dma and recovered to be in positive territory briefly before selling off in the afternoon. Trading volume was up again with 3.5 billion shares of the S&P 500 trading. Trading volume was up 15% on the NYSE and up 10% on NASDAQ. The VIX closed at 25.3%, up again today. It is interesting to note that the 200 dma held when the market corrected in mid June. Will it serve as support again? The 200 day moving average of the SPX stands at $1285. It is worthwhile to keep an eye on that line in the sand.

My puts remain from the Aug iron condor on RUT, and so far, are OK with a delta of 5 on the short $680 puts. The Sept condor now sits perfectly delta neutral at delta = +$7 and theta = +$75. But the rising IV has taken its toll, forcing the P/L back to break-even. But remember: the ultimate profitability has not changed; if we are forced to close the put spreads prematurely, the increased IV will hurt us, but if we stay in the position to expiration, our full profit is still feasible.

So your assignment for the weekend is clear: postpone any more market worries until Monday morning and enjoy your family and friends. Remember what is truly important.

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Written by Dr. Duke

Created: 28 July 2011

 Markets tried to add some small gains today, but were pulled back this afternoon to modest losses. SPX closed at $1301, down $4 while RUT closed down $1 at $799. RUT ran as high as $810 before being pulled back down. Trading volume on the S&P 500 dropped a bit from yesterday but remains above average at 3.3 billion shares.

Initial unemployment claims dropped to 398k, down from last week's 422k. Continuing claims dropped by 17 thousand but remain around 3.7 million. Pending home sales rose 2.4% in June, but this was down from last month.

My Aug condor consists only of 20 contracts of the 670/680 puts with delta = +$24 and theta = +$82; the delta of the 680 puts = 5. The Sept iron condor on RUT stands at a P/L of +$100 with delta = -$6 and theta = +$73. Since I don't expect much progress on the debt ceiling issue, I suspect we have more of this dismal sideways to downward action in front of us for a while.