Dr. Duke's Blog

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Written by Dr. Duke

Created: 09 July 2010

The markets tacked on another bullish day today, although much of it was added in the last hour of trading. However, the trading volume made record lows for the year. Trading on the NYSE dropped 25% and trading on the NASDAQ dropped 23%. Trading in the S&P 500 stocks was under three billion shares today. You have to go back to the first trading day of the year (traditionally a low volume day) to find a lower S&P trading volume day. This extremely low volume makes me leery of declaring that the worst is over, etc. The big players have not fully endorsed this move up as yet. Any disappointing earnings reports over the next week or two could trip this market very easily (Alcoa is Monday after the close). Be cautious.

My Aug iron condor on RUT is starting to get squeezed on the top side. The delta of the short 680 calls hit 19 today. The position delta stands at -$61 and theta = +$106. The theta/delta ratio is dropping, but still in a good range. If the run higher continues, this position will have to be adjusted.

Have a great weekend.

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Written by Dr. Duke

Created: 08 July 2010

As noted in my blog yesterday, I was concerned whether the major indexes could hold as support the resistance levels they broke yesterday, e.g., $1042 on SPX. Well, they did better than that, they closed above yesterday's closing prices. SPX closed at $1070, up $10 after trading as low as $1058, well above the strong resistance level of $1042 that was broken yesterday. RUT closed at $620, up $9. RUT traded down to $612, which was yesterday's close, but then rallied to close at $620. So the DJIA, SPX, and the RUT all traded down and tested yesterday's closing prices before trading higher today. All of this price action was very bullish and supports the idea of a bottom on the correction having been reached. However, it was on even lower volume than yesterday; trading on the NYSE was down 8% and trading was down 5% on the NASDAQ. Less than 4 billion shares of the S&P 500 stocks traded today, down from yesterday and well below the 50 day moving average, which is just below 5 billion shares.

A reduction in the number of initial unemployment claims cheered the market; the numbers came in at 454k this week, down from 475k last week. Similarly, the number of continuing claims dropped by 230k to 4.41 million. However, it is difficult to know how many of those 230k are now employed or whether they simply ran out of benefits.

My Aug condor is pretty much unchanged from yesterday with a P/L of -$1720, delta = -$37, and theta = +$97. The theta/delta ratio is high and the current value of the index is close to equidistant from the OTM call and put spreads. The price action of the past few days may have you looking for bullish trades, but beware of the low trading volume. This market is still dangerous.

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Written by Dr. Duke

Created: 07 July 2010

I am running out of superlatives to describe recent market action. It seems like traders are being jerked back and forth nearly every day. It reminds me of Greek mythology where the Gods toy with the humans - the market Gods are having fun with us. No significant economic news came out today to justify this huge run. In fact, the talking heads on CNBC were having a hard time explaining the move today. Perhaps the absence of bad news was sufficient motivation for traders. Trading volume was light today with a 1% decline on the NYSE and a 3% rise on the NASDAQ. The S&P 500 stocks traded 4 billion shares, flat with yesterday and well below the 50 day moving average.

SPX closed at $1060, up $32, while RUT ran $22 to close at $612. Big moves on light volume shouldn't be trusted so beware of tomorrow's market; don't just blindly start going long. It would not be surprising to see some of today's gains given back. I will be watching to see if SPX can close above the critical $1042 resistance level that was broken today. Closing above $1042 for a couple of sessions will offer some reassurance that a bottom has been reached.

I rolled the 730/740 call spreads of my RUT Aug iron condor down to 680/690 this morning. The put spreads are split between 510/520 and 550/560. At the close today, this position is well positioned with a position delta = -$14 and position theta = +$93.

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Written by Dr. Duke

Created: 06 July 2010

The markets opened up pretty strongly this morning, but soon lost their momentum and started selling off. However, the Russell 2000 Index (RUT) stood out from the pack today and just continued to sell off all afternoon. It was the only major index to post a loss for the day. RUT closed down $9 to close at $590, matching the intraday low set last Thursday. SPX traded up and tested resistance at $1042 before retreating to close at $1028, a gain of $5. The price action of RUT and SPX over the past three sessions appears to be establishing a bottom for the correction. The volatility index (VIX) ran up earlier in the day but ended the day essentially unchanged at 30%. The ISM Services Index reported out at 53.8, down from last month's 55.4; economists expected a drop, but not quite that much. That report, at 10 am ET, appeared to start the slow sell off in the markets. Trading volume was mixed; it was 18% higher on the NYSE and 29% higher on NASDAQ, but the S&P 500 stocks only traded 4 billion shares, well below the 50 day moving average.

The strong market action this morning prompted me to remove the Sept put hedges on my Aug RUT condor and I re-established half of my put spread position down at 510/520. As it turned out, it would have been nice to have had those Sept puts in place, but I didn't see the sell-off coming. My condor's position delta and theta are now similar at +$58 and +$41, respectively. When the delta and theta of your position are similar, you are in a weak position and either a market move or an adjustment is imminent. So I will be watching to see if RUT breaks through support at $590 and SPX breaks through support at $1010. If those support levels are broken, we may be seeing the beginning of a bear market trend rather than a bull correction.

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Written by Dr. Duke

Created: 02 July 2010

Trading volume dropped dramatically from yesterday; it almost seemed as though traders had positioned themselves for the unemployment report and the actual announcement was a non-event. Trading volumes were down significantly across the board. Trading on the NYSE dropped 32% while trading on NASDAQ dropped 39%. The S&P 500 stocks traded 3.2 billion shares, down significantly from yesterday's 5.5 billion shares.

Nonfarm payrolls dropped 125k but much of that was expected due to census workers being released. The unemployment rate dropped from 9.7% to 9.5% and factory orders dropped 1.4% in May. So the news wasn't terrible, but it wasn't very reassuring either. The market traded up at first but then began a slow decline through most of the day. The major indexes tried to recover the day's losses in the last hour of trading, but still ended in a loss. RUT lost $6 to close at $599 while the SPX closed at $1023 for a loss of $5.

My Aug iron condor on RUT at 550/560 and 730/740 stands at a P/L of +$280, delta = -$27 and theta = -$48. The delta of my $560 puts is at 29, so I can't release the Sept put hedge. A combination of the two Sept puts and the fact that I closed half of my put spreads has resulted in my theta going negative. This situation can't be allowed to continue long. If the market doesn't bounce back upward next week, I will be closing the rest of the put spreads and rolling them downward. That will restore our positive theta. Yesterday's and today's market action appear consistent with creating a bottom, but the low volume forces us to defer our conclusion. So remain vigilant.

Enjoy the holiday.

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Written by Dr. Duke

Created: 01 July 2010

The futures were pretty negative about an hour before the open today, but they worked their way up to flat by the open, but the market plunged within a few minutes and worked toward significant lows before starting to rebound. By the end of the day, much of the losses had been recovered. RUT lost $5 to close at $605, but traded as low as $590 before rebounding. SPX had a similar pattern, trading down to $1010 before rebounding to close at $1027 for a loss of $3. Both the SPX and the RUT displayed the classic hammer candlesticks today, a common reversal pattern. However, the lower shadow sets the support level that may be tested several times before a reversal actually unfolds. Tomorrow's unemployment numbers may be the stimulus. Trading volume was up today: up 19% on the NYSE and up 32% on the NASDAQ. The S&P 500 stocks traded 5.5 billion shares, above the 50 dma.

The question on my mind at this point is whether we are still in a correction of a bullish trend, or whether we have started a new bearish market trend. RUT's close today is just below the lower edge of what appeared to be a consolidating range over the past six weeks. With SPX closing below $1040 for two trading sessions, that index has clearly broken out of the consolidating range of $1040 to $1120. However, today's hammer may be establishing a new lower support level for this basing pattern.

The economic news that precipitated this morning's drop was a 30% drop in pending home sales, an increase of 13k in initial unemployment claims, an increase of 43k in continuing unemployment claims, and a weak ISM manufacturing index report. The stage appears to have been set for a disappointing unemployment report tomorrow morning. We may retest those lows set this morning.

I closed half of my Aug 550/560 put spreads for $2.60 this morning and held my Sept 560 puts. This has kept my Aug condor at breakeven since the Sept puts are profiting nicely. In fact my position was actually profitable this morning before the market started rebounding. Now we wait to see how the market reacts to the unemployment report in the morning. Today's rebound on stronger volume was a hint that support has been reached, but the unemployment numbers could cause a selling spree that retests those lows.

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Written by Dr. Duke

Created: 30 June 2010

The markets didn't display the classic "dead cat bounce" today after yesterday's bloodbath, but the major indexes traded modestly higher most of the day. But news that Moody's will be reviewing Spain's debt for a possible downgrade sent the markets lower in the last hour of trading. The Chicago PMI came in at 59.1, down form last month's 59.7 reading. The ADP employment report sees 13k more jobs, down from an increase of 57k last month. Most analysts have gloomy expectations for tomorrow's unemployment claims data and Friday's unemployment rate announcement. Softening of any of this data will confirm the fears of a double dip in the economy. Some of the market's influential analysts (Dennis Gartman, et al.) see the news from the G20 summit of cutting spending together with increased taxes as a lethal prescription likely to drive the world into a deeper recession. President Hoover is credited with the same policies creating the Great Depression in the thirties. Perhaps this recent rash of market weakness reflects that viewpoint.

The Russell 2000 Index (RUT) closed down $6 at $609, just above the support level at $607 set June 8th. If RUT breaks through this support level, the next stop is much lower at about $580. SPX closed at $1031, right in the support range of $1020-$1030 set back in Oct and Nov of 2009. Similar to RUT, a break-out below this level may not find support until around $980 from August of 2009. Trading volumes dropped from yesterday's high levels; trading on the NYSE dropped 13% and it was down 21% on NASDAQ. Trading the shares of the S&P 500 dropped back to 4.3 billion shares, below the 50 dma at 4.9 billion shares.

The Sept puts are nicely holding up the P/L of my Aug iron condor on RUT: P/L = +$180, delta = -$6 and theta = -$20. The delta of my short Aug 560 puts stands at 26. If that exceeds 30, I will close the put spreads and hold the long Sept puts. Play all of your positions very defensively; the mood of this market is decidedly bearish - I doubt that Friday's unemployment report will be greeted positively.

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Written by Dr. Duke

Created: 29 June 2010

The markets opened downward today and never looked back. The consumer confidence index took a plunge to 52.9 from 62.7. That news coupled with concerns over European sovereign debt financing tipped the markets over the edge. The Schiller Housing Index registered the first rise in housing prices in several months, but the index committee chairman said it was likely a temporary rise due to the federal housing purchase credit that expired at the end of April. So that lone piece of positive news was discounted. RUT closed down over $26 at $616 while the SPX closed at $1041, down $33. RUT closed just above its intraday low around $607 on June 7. SPX closed near the intraday lows set on February 5, May 25 and June 8. The last time SPX closed below $1041 was in November of 2009. Trading volume spiked with a 63% rise on the NYSE and a 53% rise on NASDAQ. Trading in the S&P 500 stocks topped 5.4 billion shares, well above the 50 day moving average (dma) at about 5 billion shares.

I adjusted my Aug condor with some Sept puts, and held its P/L to -$170 with a delta of -$20 and theta of +$4. The adjustment has killed most of my theta but this will hold the losses to a minimum while we wait to see if the index will bounce. If it breaks support and drops, I will close the put spreads and hold the long puts. If it bounces back up, I will sell the long put position.

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Written by Dr. Duke

Created: 28 June 2010

Trading volume was very light today, dropping over 38% on the NYSE and volume was down 48% on NASDAQ. Trading in the S&P 500 stocks dropped from about 5.5 billion shares on Friday to 3.5 billion shares today, well below the 50 dma. Initially, it appeared that news from the G-20 summit would be reassuring to investors and the European markets did trade up today. U.S. investors had some good news with personal income rising 0.4% in May while personal spending rose only 0.2%. But the U.S. markets traded largely sideways and downward on very low volume. RUT dropped $4 to close at $642 while the SPX gave up $2 to close at $1076.

I established my Aug iron condor on RUT last week at 550/560 and 730/740 for a total credit of $4,600 on 20 contracts. At the close today that position remains near breakeven with position delta = -$7 and theta = +$79. This market appears to be locked into a sideways trading range for the time being - perfect for delta neutral trading strategies. But it is a nervous market. Watch your positions closely.

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Written by Dr. Duke

Created: 25 June 2010

The major indexes traded upward a bit today, although the Russell 2000 Index traded up rather strongly by $12 to close at $645. This may be related to the fact that the components of the RUT will be reconstituted this weekend. SPX gained $3 to close at $1078. Trading volume increased significantly, increasing 20% on the NYSE and 71% on NASDAQ. Trading in the S&P 500 stocks jumped up to 5.5 billion shares, exceeding the 50 dma at 5 billion shares. The VIX dropped back 4% to 28.5%. It appears as though some of the anxiety in the market was diminished after seeing the final draft of the financial reform bill. Banks and financial services stocks did well today. GS ran up $5 to close at $140. The University of Michigan consumer sentiment survey also boosted the market with a reading of 76, its highest reading since January of 2008. But the major indexes continue to trade in a broad range established over the past month. If the decrease in VIX continues into next week, that will be helpful to anyone who established their iron condors this past week. So market analysts continue to watch for a trend, but so far, the market appears to be searching for its direction. Have a good weekend.