Dr. Duke's Blog

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Written by Dr. Duke

Created: 07 June 2011

The markets traded in positive territory all day, but succumbed to selling in the last hour to give up most or all of their gains. SPX lost $1 to close at $1285, but RUT held onto a gain of $2 to close at $798. Trading volume was flat with a 3% decline on the NYSE and a 1% decline on NASDAQ. Some analysts attributed the late day sell off to Bernanke's speech late in the day where he made the case for continued quantitative easing, citing weak economic data. That doesn't quite analyze for me; it seems the prospect of continued Fed support would boost stocks rather than triggering a sell off.

My July iron condor on RUT stands at a P/L of +$1,520 with a position delta of +$8 and position theta of +$76.

My read of the SPX chart tells me we are in a bearish trend, not a correction within the overall bullish trend. Friday, we broke below the lower trend line and have fallen farther since then.

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Written by Dr. Duke

Created: 06 June 2011

Markets sold off broadly today with all of the major indexes posting losses.  SPX dropped $14 to close at $1286 and RUT closed at $795, off $13. Trading volume was flat to declining with 2.9 billion shares of the S&P 500 trading while volume was down 1% on the NYSE and down 3% on NASDAQ. Today held no significant economic news to drive the markets lower. It seems the bearish sentiment is taking hold. The sovereign debt issue in Europe continues to grab headlines and worry traders; this is also driving the dollar higher, and generally, a stronger dollar hurts US equity markets. Today's close on SPX surpassed the lows set in late February and mid-April. Now we are nearing the March low at $1257. This chart is looking more and more like a new bearish down trend rather than a correction in an ongoing bull trend. However, SPX is down about 6% from the May high, so that is still within the historical range of market corrections.

My July iron condor on RUT at 700/710 and 880/890 stands at a P/L of +$840 with a position delta = +$4 and theta = +$101. I set up the July condor somewhat tighter on the call spread side and allowed more safety margin on the put spread side, and that has worked out very nicely. Our position is now perfectly delta neutral with a healthy theta/delta ratio and put spreads that remain about 1.5 standard deviations OTM, even after the severe decline of the past few days. I don't think it is unreasonable to use your judgment of the market trend when establishing the condor position, but never use your judgment to override your adjustment criteria. That can get you in real trouble.

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Written by Dr. Duke

Created: 03 June 2011

The jobs report disappointed traders before the bell this morning with an increase of 54k jobs while the market was looking for something closer to last month's +232k. The unemployment rate increased to 9.1%. The only glimmer of good news was the ISM Services Index, that came in at 54.6 for May, up modestly from April's 52.8. All of the major indexes closed lower today. SPX lost $13 to close at $1300 while RUT closed at $808, also down $13. Today's close on SPX takes us to a new low during this correction; but is it a correction or a new bearish trend? A close below $1300 will define a new lower trend line for the recent pull back that started on the first of May. RUT would have to drop below $800 to break through its lower trend line for this correction.

Trading volume declined from yesterday with 2.7 billion shares of the S&P 500 trading today. Trading volume declined 5% on the NYSE and was flat on NASDAQ.

I closed my Jun iron condor on RUT for a net gain of $2,216 on 20 contracts, or a 13% gain. That brings my condor trading account to a net gain of 23% in 2011 versus the S&P 500, up 4%. Our Jul RUT condor stands at a P/L of +$1,020 with delta = -$17 and theta = +$86. My 880/890 call spreads are now over one standard deviation OTM and the700/710 put spreads are over two standard deviations OTM.

Have a great weekend.

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Written by Dr. Duke

Created: 02 June 2011

The markets traded back and forth and largely ended the day unchanged on lower volume. I think many traders are waiting to see the jobs numbers in the morning before committing their capital to this market. SPX lost $2 to close at $1313 while the RUT closed at $821, down $1. Trading volume on the S&P 500 dropped to 2.9 billion shares, just below the 50 dma. Trading was down 10% on the NYSE and down 15% on NASDAQ.

Initial unemployment claims were nearly flat week to week with 422k versus last week's 428k. Continuing unemployment claims were flat at 3.7 million. Factory orders were down 1.2% in April, as compared to March's increase of 3.8%. So the economic data today was not really bad enough to send the market down, but not good enough to trigger a rally either. Tomorrow's jobs report will be closely watched.

My June iron condor on RUT stands at a P/L of +$2,216 with delta = +$11 and theta = +$87. My July iron condor on RUT stands at a P/L of -$280 with delta = -$52 and theta = +$110. Implied volatility on RUT remains pretty high at 24%; otherwise, the July position would have broken into the black by now. OK, start the office pool on the jobs report. Actually, predicting the jobs number may be easier than predicting the market's reaction to the number.

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Written by Dr. Duke

Created: 01 June 2011

Traders headed for the exits today, based on some negative economic reports and ADP's employment report. SPX lost $31 to close at $1315 and RUT lost even more proportionately with a $27 decline to $821. I didn't perform a precise analysis, but a quick glance at the price charts suggests these were the largest downward moves on either of these indexes this year and maybe farther back yet. Yesterday's strong upward move surprised me. After all, think of the negative factors swirling around the global economy: Euro debt problems, US debt problems, the end of QE II, continuing high unemployment, and weakening economic data. But the strength of today's downward move also surprised me. If you draw the trend lines on the SPX chart for the downward trend starting in early May, today's move took SPX right back into the middle of that downward trending band.

Trading volume on the broad markets jumped up today with 3.2 billion shares of the S&P 500 stocks trading today. This is the first time in several weeks that the S&P 500 volume has exceeded the 50 day moving average. But trading volume on the NYSE was only up 3% and trading on NASDAQ was actually down 8%.

ADP's employment report started the ball rolling this morning by reporting 38k jobs were added in May, down from last month's increase of 177k. Then the ISM index came in at 53.5 for May, down from April's 60.4. Late in the day, Moody's piled on by downgrading Greece's debt, but to whom was that surprise? Tomorrow morning brings unemployment claims and Friday brings the nonfarm payrolls report (aka the jobs report). ADP's weak showing has analysts worried about the jobs report Friday.

My June iron condor on RUT stands at a P/L of +$2,076 with delta = +$9 and theta = +$104. I removed the hedges on my July iron condor on RUT; it now stands at a P/L of -$120 with delta = -$60 and theta = +$96.

So now the question is: will we have a bounce back up tomorrow? Or will we plunge even further?

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Written by Dr. Duke

Created: 31 May 2011

The markets opened sharply up this morning on news of another bail-out pending for Greece. But then the negative economic data started coming in and this moderated the bulls' rally. However, the bulls regained control toward the end of the day and the broad indexes finished at or near their highs for the day. SPX closed up $14 at $1345 and RUT closed at $848, up $12. Trading volume was up sharply from Friday's pre-holiday lows. 2.8 billion shares of the S&P 500 stocks traded, up from Friday but still under the 50 dma. Trading volume on the NYSE was up 60% and was up 46% on NASDAQ.

The Chicago PMI report for May came in at 56.6, down significantly from April's 67.6. Analysts expected a drop, but not this much. Consumer confidence dropped to 60.8 for May from April's 66.0. And the final bit of depressing data came form the Case-Schiller housing price index, with a 3.6% decline for March.

So the market is being pulled back and forth between the bulls and the bears. Traders will be especially sensitive to the ADP employment data tomorrow, the unemployment claims on Thursday, and the jobs report on Friday.

My June RUT iron condor stands at a P/L of +$1,836 with position delta = -$39 and position theta = +$107. The July iron condor on RUT at 700/710 and 880/890 is hedged with Aug $880 calls and stands at a P/L of -$2,130 and delta = -$41 and theta = +$69. With the significant economic data coming out over the rest of this week, the markets may prove to be rather volatile.

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Written by Dr. Duke

Created: 27 May 2011

The markets traded upward today, albeit on very low volume before the holiday weekend. SPX closed up $5 at $1331 and RUT closed at $836, up $5. Only 2.1 billion shares of the S&P 500 stocks traded today. Trading was down 19% on the NYSE and down 13% on NASDAQ. The last several sessions of trading are about to penetrate the upper band of the downward trend formed since early May. Next week will tell the tale.

The Consumer Sentiment Survey from the University of Michigan came in at 74.3, better than analysts expected (up from 72.4 last month). Pending home sales dropped 11.6% in April, a big change from March's 4% increase, but the markets didn't seem too concerned.

My June iron condor on RUT stands at a P/L of +$2,216 and delta = -$27 and theta = +$53.

Enjoy the holiday weekend. The markets will be closed on Monday and the blog will return Tuesday.

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Written by Dr. Duke

Created: 26 May 2011

The equity markets still appear to be following the inverse relationship with the dollar; they opened down this morning as the dollar strengthened but then rallied as the dollar weakened later in the day. The SPX closed at $1326, up $5 while the RUT blew ahead for the second day with a $10 increase to close at $831. Trading volume continues to be weak with 2.6 billion shares of the S&P 500 trading today. Trading volume on the NYSE was down 9% and was unchanged on NASDAQ.

Economic news was mediocre and certainly unable to generate much enthusiasm with traders. GDP growth for the first quarter was estimated at +1.8% but an increase of 2.0% was expected by analysts. Initial unemployment claims increased by 10k from last week at 424k while the continuing unemployment claims dropped to 3.69 million from last week's 3.74M.

My June iron condor on RUT stands at a P/L of +$2,416 with delta = -$27 and theta =+$26. The big question with this market is whether it can sustain a rally given the normal slow down in the markets during the summer and the ending of quantitative easing by the Fed. That seems like a prescription for a sideways trading environment at best and maybe a bearish trend at worst. But whenever we all think the answer is obvious, the market will surprise us.

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Written by Dr. Duke

Created: 25 May 2011

The major indexes opened today's trading in the red but quickly bounced and traded upward. Interestingly, the dollar traded sideways, so the normal inverse relationship of the equity markets and the dollar didn't hold today as it has for the past couple of weeks. SPX gained $4 to close at $1320 and RUT gained $11 to close at $821 - not sure why RUT was so strong... Trading volume was up a little today with 2.8 billion shares of the S&P 500 stocks trading, but this remains below the 50 dma. Trading on the NYSE was up 10% and trading volume on the NASDAQ was up 2%. The only significant economic data was the durable orders report with a 3.6% decline for April, quite a shift from March's increase of 4.4%. The SPX and RUT charts are both still lodged in the downward trend since the beginning of May. My June condor on RUT stands at a P/L of +$2,216 with delta = -$5 and theta = +$50.

This is certainly a market for the delta neutral trade; I have been searching for some directional trade opportunities but those are difficult to find in this environment. But it is better to wait than force the trade.

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Written by Dr. Duke

Created: 24 May 2011

Traders started today on a positive track, bouncing back from yesterday's losses. But it didn't last long before the bears took over. But, after putting on my rose-colored glasses, I note that the bears couldn't really drive the market down much. SPX closed the day at $1316, only down a dollar. RUT lost $4 to close at $810. Trading volume remained lackluster as it has for weeks now. 2.6 billion shares of the S&P 500 traded today, still well below the 50 dma at 3.1B. Volume was down 1% on the NYSE and was up 4% on NASDAQ. So the SPX chart is looking more and more like a downward trend (closed at a new low for the month today).

My June iron condor on RUT stands at a P/L of +$2,216 with a delta = +$5 and theta = +$39. Both spreads are about two standard deviations OTM, even with the expanded volatility of the past couple of days. It may be tempting to close this position early at this rate, but both spreads are far OTM and time is on our side at this point in the trade.