Dr. Duke's Blog

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Written by Dr. Duke

Created: 24 June 2011

The S&P futures were initially buoyed this morning by the 1.9% growth in first quarter GDP, which was in line or beat most estimates. Durable goods orders grew 1.9% in May, providing more good news. But the selling began almost immediately after the open, and the markets traded downward all day. SPX closed down $15 at $1268 and RUT closed at $798, losing $5. Trading volume in the S&P 500 was essentially flat from yesterday and remained above the 50 dma. Trading volume was up 9% on the NYSE and was up 38% on NASDAQ.

The question on everyone's mind remains whether this is a correction in a bullish trend or a new bearish trend. A couple of facts stand out on the SPX chart. A clearly defined downward trend can be drawn since early May, now down about 7%. One could draw a sideways consolidating range of trading for the past two weeks, but the market could break out of that range to either direction. Bottom line: for my directional trades, I am largely in cash and waiting for a direction to emerge. For my delta neutral trades, I don't worry about where it is going - I trade what the market gives me.

My July iron condor on RUT at 700/710 and 880/890 stands at +$2,500 with delta = +$23 and theta = +$79. My Aug iron condor on RUT at 670/680 and 890/900 stands at +$500 with delta = -$12 and theta = +$70. The July condor now has three weeks left until expiration, so those far OTM spreads are looking pretty solid. The Aug condor looks good for now, but a lot of time remains for the market to look me up. Maybe he has forgotten about me... or is it a she?

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Written by Dr. Duke

Created: 23 June 2011

The markets opened weak this morning and traded lower.The SPX hit its 200 day moving average around 11 am ET and bounced upward from there. Then news of a economic bailout for Greece boosted the market as the trading session came to an end. The dollar strengthened overnight and that may have started the market's downward plunge. Oil prices dropped dramatically today. It was interesting to listen to the talking heads on CNBC explain why dropping oil prices were dragging the market lower this morning - not too long ago, the same experts were explaining why high oil prices were killing stock prices. Everyone has a prediction for tomorrow's market and when tomorrow comes, everyone is anxious to explain why it is up, down or unchanged. If you don't think about it too much, they sound very knowledgeable.

SPX lost $4 to close at $1284 while RUT actually gained $3 to close at $803. Trading volume was up with 3.2 billion shares of the S&P 500 trading; this is above the 50 dma at 2.9 billion shares. Trading volume was up 29% on the NYSE, and coincidentally, also up 29% on NASDAQ.

The bounce of SPX off of the 200 dma was encouraging. It is worth noting it also bounced off the 200 dma last Thursday. Perhaps we are finding the bottom of this correction. Today's candlestick, known as a hammer, with the long lower shadow is also an encouraging sign of a trend reversal at the bottom.

My July iron condor on RUT stands at a P/L of +$2,460 with delta = +$17 and theta = +$85. The Aug condor is up $560 with delta = -$23 and theta = +$69.

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Written by Dr. Duke

Created: 22 June 2011

The markets were barely in positive territory today until after Bernanke's press conference and the release of the FOMC policy statement. But traders sold off after Bernanke's remarks with all of the major indexes closing the day for losses. SPX closed down $8 at $1287 and RUT lost $7 to close at $800. Trading volume was down from yesterday's low levels with 2.4 billion shares of the S&P 500 traded. Volume was up 2% on the NYSE and down 13% on NASDAQ. Perhaps significantly, in spite of the late sell-off, the VIX actually closed down a bit to 18.5%. That VIX reading, together with the trading volume, tells me that the institutional players weren't very concerned about anything Bernanke had to say. There wasn't much new in Bernanke's news conference or the policy statement. Interest rates will remain low; the unemployment rate will remain high for an extended period of time; GDP growth will remain modest, but positive.

The SPX price chart remains in a down trend; the top edge of the trend line is around $1310, so we will have to see the index break out above $1310 decisively before we can declare this correction to be "over". Caution remains the prudent course of action. My iron condor positions are in excellent shape at this point, but they aren't exciting; I am just watching them make money slowly. The July iron condor on RUT stands at a P/L of +$2,580 with delta = +$8 and theta = +$78. The put spreads are over two standard deviations OTM and the call spreads are over 1.5 standard deviations OTM. The Aug condor stands at a P/L of +$760 with delta = -$24 and theta = +$64.

Greece has faded from the headlines for now, but a general feeling of negativity and pessimism persists. Perhaps we will have a low volume, sideways market for the summer. From a historical basis, that scenario has a lot of precedent.

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Written by Dr. Duke

Created: 21 June 2011

Traders were focused on Greece today, but the prevailing assumption is that Greece will be bailed out, so trading was generally positive, although the volume appears timid. SPX closed at $1296, up $17 and RUT gained $18 to close at $806. Trading volume was up from yesterday's low numbers but remains below long term averages. Trading in the S&P 500 came in at 2.7 billion, well below the 50 dma, while trading volume on the NYSE was up 8% from yesterday and, likewise, volume was up 14% on NASDAQ.

All eyes were focused on whether the Prime Minister of Greece would succeed in receiving his vote of confidence in the parliament. The fact that he did should boost the markets tomorrow, barring some contrary overnight news.

My July iron condor on RUT is now up $2,720 with delta = +$6 and theta = +$59. The Aug condor stands at a P/L of +$360 with delta = -$34 and theta = +$71. Now we watch for the FOMC policy statement tomorrow for any clues on the economy.  The future direction of the markets is anyone's guess at this point. If the Greek debt problem receives sufficient resolution to get it off of the front page, then the upcoming earnings announcements will take over as the weather vane for the market. Of course, that assumes our own government can resolve our debt problems. Maybe that takes over on the front page.

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Written by Dr. Duke

Created: 20 June 2011

I'm back in the office after attending the Traders Expo in Dallas. I highly recommend these trading conferences to you. The speakers and exhibits are excellent. Plus you get to meet other traders and learn from them as well.

But here we are back with this weak market. The SPX opened positively this morning, but then chopped sideways the rest of the day, closing up $7 at $1278. RUT also tacked on $7, closing at $788. Trading volume was down markedly from Friday's option expiration with 2.3 billion shares of the S&P 500 stocks trading. This was the first day in the past four sessions that trading in the S&P 500 was below the 50 dma. Trading volume declined 44% on NASDAQ and declined 32% on NASDAQ.

The markets were focused largely on the European debt problems today. Of course, it helped that we had no economic reports to distract traders from Greece and the European Union. Tomorrow we will have the existing home sales report and the FOMC policy statement is due Wednesday afternoon. No change in interest rates is expected, but traders will carefully examine every word for clues about the economic recovery or lack thereof.

My iron condor positions are faring very well. When I initiated these positions a few weeks ago, I was concerned about the downside risk, so I skewed them a bit to the bearish side instead of positioning them as perfectly delta neutral. My July RUT iron condor now stands at a P/L of +$1,800 with delta = +$23 and theta = +$104 (with 20 contracts). The 710 puts have a delta of 9 and the 880 calls have a delta of 2. Thus, the position is quite safe with about 24 days to go to expiration. The Aug position stands at a P/L of +$820 with delta = +$2 and theta = +$53 (with 20 contracts). The 680 puts have a delta of 11 and the 890 calls have a delta of 5.

This market is either in a new bearish trend or is in a contracted bearish correction that may last a while. The economic situation is confusing for the trader. The fundamental data for the typical blue chip stock is very strong - profitable with a lot of cash on the balance sheet, etc. However, when one looks at the macro-economic picture, there is much to worry about - sovereign debt problems that are threatening to tear apart the European Union, and a political impasse in the U.S. concerning a plan to get our debt under control. This presents a difficult trading environment - should I be bullish or bearish? Even stocks like AAPL are being hurt in this environment and yet AAPL appears to be crushing their competition and has a very strong balance sheet. I wish our country were that well managed.

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Written by Dr. Duke

Created: 16 June 2011

I missed my blog last evening. After the market closed, I decided to fix one of the sprinkler heads in my underground sprinkler system. Then I discovered I had a leak in the underground piping. Before long, I found myself in a muddy hole in the yard. By the time I finished this "simple little project", it was late and I was tired. I will be traveling this evening (on my way to the Traders Expo in Dallas), so I will miss writing my blog this evening as well.

SPX erased all of Tuesday's gains yesterday, reminding us that we are in a bear market trend, at least for the intermediate term. Today SPX is up modestly, trading at $1269 as I write this. RUT has not been trading quite as bearishly, but is still in a downward trend, currently trading at $783. It is worth noting that the charts of the major market indexes have been in a clear downward trend since early May. This may be a correction in a longer term bullish market, but until proven otherwise, we are in a bearish trend. For example, of the four positions I recommended for our trading group subscribers, one was a bearish trade (gained 32%), two were sideways (gained 29% and 2%), and only one was bullish (gained 20%). The single bullish trade was on a stock that was trading upward while the overall market was bearish. The point is to examine the overall market trend first; then determine your individual stock trades. Currently, that suggests a bias toward bearish or sideways types of trades.

My July iron condor on RUT stands at a P/L of +$1,320 with a position delta = +$39 and theta = +$80. The Aug condor stands at a P/L of +$200 with a position delta = +$4 and theta = +$56. The spike upward in volatility has reduced the current P/L of both positions, but they are still very well positioned with the short put option deltas in both trades at 13. Upward spikes in volatility hurt the iron condor, but this is only relevant if you are forced to close the trade early. If the underlying index price remains in our channel, our ultimate profitability is still available to us.

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Written by Dr. Duke

Created: 14 June 2011

The bulls took charge this morning and didn't surrender control of the market for the entire session. SPX tacked on $16 to close at $1288. RUT wasn't to be outdone as it gained $17 to close at $794. However, this was all on lower trading volume - not a bullish sign. 2.6 billion shares of the S&P 500 traded and volume was flat on the NYSE. Trading volume declined 10% on NASDAQ. Before one gets too carried away with today's strong upward move, a glance at the charts confirms that the major market indexes are still firmly within the bearish downward trend of the last six weeks or so. Another sign of caution was the VIX; it dropped today, but remained above 18%. That suggests many traders remain cautious in spite of this positive move today.

Retail sales dropped 0.2% in May while the PPI gained 0.2%. But the small retail sales numbers didn't seem to bother the markets.

I closed out the June trades from Dr. Duke's Trading Group today. Those recommendations are now up 16% for 2011, easily beating the S&P 500, up 2.5% for the year.

My July iron condor on RUT stands at a P/L of +$1,920 with delta = +$16 and theta = +$80. The Aug iron condor on RUT is also well positioned with a +$560 P/L and delta = -$11 and theta = +$57. So now we watch to see the market can climb out of this hole it has dug for itself.

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Written by Dr. Duke

Created: 13 June 2011

The markets opened up positively this morning, probably reflecting some bargain hunting and maybe reacting to a weaker dollar. But the dollar remained weak as the market traded off this afternoon. SPX ran as high as $1277 and then as low as $1266 before closing at $1227 for a gain of less than one dollar. RUT traded down $2 to close at $777. Trading volume dropped from Friday with 2.7 billion shares of the S&P 500 trading, well below the 50 dma. Trading volume dropped 11% on the NYSE and dropped 7% on NASDAQ.

No economic data was reported today; the PPI and retail sales reports are due tomorrow.

My July iron condor on RUT at 700/710 and 880/890 stands at a P/L of +$1,180 with delta = +$40 and theta = +$77. My Aug iron condor on RUT at 670/680 and 890/900 stands at a P/L of +$820 with delta = +$19 and theta = +$38. It is fun to be trading delta neutral in a choppy sideways market such as this, but I am remaining on high alert for a sudden move lower. Nearly all of the technical indicators are signaling "oversold" but that is precisely when the market surprises you and goes the other way.

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Written by Dr. Duke

Created: 09 June 2011

Traders found a reason to be bullish today, although there wasn't any obvious news to account for that change in posture. The SPX gained $9 to close at $1289 and RUT closed at $793 for a gain of $5. However, trading volume fell markedly with 2.5 billion shares of the S&P 500 stocks trading, down from yesterday and well below the 50 dma. Trading volume dropped 12% on the NYSE and dropped 18% on NASDAQ. Initial unemployment claims were virtually flat week to week with 427k (from last week's 426k). Ongoing unemployment claims were flat at 3.7 million.

This market is far from turning the corner. Today's rise was certainly encouraging, but the drop in trading volume does not add confidence to today's move.

My July iron condor stands at a P/L of +$2,120 with delta = +$35 and theta = +$41. No significant economic news is slated for tomorrow, so it is anyone's guess where this market goes from here. As long as trading volume remains low, it is hard to build any confidence in a developing trend.

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Written by Dr. Duke

Created: 08 June 2011

It is fascinating to me how the markets can ignore bad news for so long and then suddenly focus on the bad news as though it is new and overwhelming. Bernanke spoke the obvious yesterday, viz., the economy is weak and the recovery is slow at best. And the markets behave as though this is an incredible, shocking surprise?? All of the market indexes sank to new lows today with the SPX losing $5 to close at $1280. RUT closed at $788 for a loss of $10. Trading volume was up a bit today with 3 billion shares of the S&P 500 trading; this is right at the 50 day moving average. Trading on the NYSE was up 10% and volume was up 13% on NASDAQ.

The price chart for the SPX is a bit scary; there are no obvious levels of support nearby. The intraday lows at $1295 on April 18 were easily sliced through a couple of days ago. The next strong level of support is the low in mid-March around $1257. That is also the neighborhood of the 200 dma at $1251. Today was the sixth day in succession that the SPX has set a new low each day - quite a string. SPX is now down almost 7% from the high set in early May. Technically, that is still within historical market correction territory but this chart is looking pretty ugly.

My July iron condor on RUT at 700/710 and 880/890 is doing well with a net P/L of +$1,660, delta = +$21 and theta = +$60. The theta/delta ratio of approximately 3 to 1 is very good and the position is still very close to delta neutral in spite of the recent moves downward by RUT. Both spreads remain about 1.5 standard deviations OTM with 36 days to expiration. I must say it feels good to not be adjusting or closing positions as this market collapses. I suppose that is the advantage of far OTM condor positions... or maybe the market gods are smiling on me this week!