Dr. Duke's Blog

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Written by Dr. Duke

Created: 10 June 2010

The markets opened up strong this morning and steadily rose throughout the day, with the major indexes closing at their intraday highs. Strong China export data may have helped shift the mood and the unemployment data showed modest improvement. Initial unemployment claims came in at 456k, down three thousand from last week, and continuing unemployment claims were 4.462 million versus the previous revised figure of 4.717 million. But this data takes on a different look if you graph the trend; initial unemployment claims peaked in March of last year, slowly declined to November and have been basically drifting sideways in the range of 440k to 460k since then. RUT closed at its high for the day at $640, a gain of $22. SPX also closed at its high for the day at $1087, a gain of $31. However, trading volume declined 14% on the NYSE and dropped 5% on NASDAQ. Trading in the S&P 500 fell back below the 50 day moving average to 4.2 billion shares.

My June iron condor on RUT at 590/600 and 710/720 stands at a net loss of $1544 with position delta = +$93 and position theta = +$326. This position still retains a profit potential of about $1300 if the RUT continues to trade in this sideways consolidation range. The July iron condor on RUT at 520/530 and 750/760 is now nearly perfectly delta neutral with a net gain of $700, position delta = +$2 and position theta = +$90. Today's strong gains on lower volume appear to support the postulate of the markets trading in a consolidation or basing pattern. For the SPX, that range is $1040 to $1107. For RUT, that range is larger, from about $607 to $670. A break-out to the downside on increased volume would signal a new bear market, while a break-out to the upside on increased volume would signal the end of the bull market correction. In the meantime, we may continue to see these large swings back and forth.

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Written by Dr. Duke

Created: 09 June 2010

Yesterday's bullish close at the day's highs seemed surprising, but today's sell off into the close was all too familiar. From about noon on, the markets steadily traded lower. The Beige Book didn't seem to affect the market one way or the other. RUT ran as high as $632 before falling to a close at $618, up less than a dollar for the day. SPX also traded up in the morning to $1078 but then gave up all of its gains to close down $6 at $1056. This is the low previously set in February this year and touched again on May 21. Will it bounce off that support level? Today's trading action was certainly bearish in tone; when the market can't hold its highs, it is a bad sign. But yesterday's trading patterns were bullish, so perhaps this is the look of a sideways consolidating trading pattern - some analysts would call it building a base. Trading volume dropped across the board, with a 3% drop on the NYSE and a 14% decrease on NASDAQ; the S&P 500 stocks dropped to five billion shares traded, right at the 50 day moving average.

I removed the July hedges on my June condor this morning, and the sell off this afternoon pushed this position back to a weak spot with a position delta of+$126 and position theta of +$307; the theta/delta ratio is strong, but that large delta translates to large price risk with further drops in RUT. The July iron condor on RUT moved into the black with the drop in IV and stands at a position delta of +$27 and position theta of +$72. So July is doing well but June is teetering on the edge.

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Written by Dr. Duke

Created: 08 June 2010

Today's markets generally traded sideways just above and below the unchanged line until the last hour of trading when a strong rally carried the SPX to a gain for the day and RUT to the unchanged mark. RUT closed at $618, a drop of less than a dollar on the day, but RUT traded as low as $607 and as high as $624. SPX closed for a $12 gain at $1062. SPX traded down to $1042, which was approximately the low point set in February of this year and again on May 25. But two data points don't make much of a support line, so saying SPX has found support may be a stretch. If you look at the intraday extremes of $1220 in April and $1040 on May 25, the SPX has corrected 15%. Many market analysts use 15% as the "line in the sand"; a drop of 10-15% is a normal correction in a bull market; When the market drops more than 15%, it often is the beginning of a bear market trend. But seeing the market rally late in the day and close near its highs was certainly a refreshing change.

Trading volume increased today with a 14% increase on the NYSE and a 21% increase on NASDAQ; over 5.1 billion shares of the S&P 500 changed hands today, an increase from yesterday and above the 50 day moving average. So we closed at session highs on higher volume. That seems positive but I am almost afraid to have hope at this point.

My June RUT iron condor is still weak but alive; the P/L stands at -$2500 with position delta = +$45, and position theta = +$107. The July condor continues to be close to the breakeven point with position delta = +$40, and position theta = +$65. Further moves down will necessitate an adjustment in the July position. The July $530 puts have a delta of 16. You can also see that this position is "on the edge" by the fact that the theta/delta ratio is about 1.5 to one. By any measure, this is a nervous market, so even today's strong close doesn't inspire much confidence. After all, it was one more triple digit move on the Dow; we could easily have a triple digit move downward tomorrow - it would be nice to have some slow, meandering days in the market.

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Written by Dr. Duke

Created: 07 June 2010

As the market sold off into the close, I was reminded of poor Charlie Brown as Lucy pulled the football back just as he tried to kick it - once again. This morning, it appeared as though we had settled near a bottom to this correction, but we were fooled once again. The extreme volatility of this market was again demonstrated today; this was the twentieth triple digit move on the Dow in twenty eight sessions. The markets opened soft this morning and traded choppily around the unchanged line most of the morning; but in the early afternoon, a sell-off began that went all the way into the close. All of the major indexes closed near or at the lows for the day. SPX broke through the closing lows set earlier this year in February. RUT is still well above its February lows at about $587.

RUT closed down $15 at $618 while the SPX closed at $1057, a drop of $14 on the day.  Trading volume declined from yesterday, suggesting that the large institutions and funds aren't actively closing their positions. Trading volume dropped 11% on the NYSE  and 6% on NASDAQ. The S&P 500 stocks traded about 4.5 billion shares, below Friday's volume and below the 50 day moving average. The now common question of whether this is a correction in a bull market trend or the beginning of a bear market continues to be debated, but it appears as though more analysts are piling onto the bear trend side of the debate and predicting lower lows.

Today's late breakout to the downside forced my hand on the June condor position, so I purchased July $600 puts to hedge the downside; this move adjusted my greeks to a more acceptable delta = +$28 and theta = +$100. The July condor stands at breakeven with a position delta = +$23 and position theta = +$74. So, once again, we wait to see what this market will give us tomorrow.

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Written by Dr. Duke

Created: 04 June 2010

The jobs report this morning set a negative tone for the markets that snowballed as the day worn on. About 431k new jobs were reported, but 411k of those were temporary census workers. The unemployment rate dropped a bit to 9.7%, a reduction of 0.1% but the data probably isn't sufficiently precise to claim this represented a reduction. RUT dropped $33 to close at $634, near the low closes last week and just above the 200 day moving average (dma) at $632. SPX closed at $1065, down $38. Trading volume jumped up with a 28% raise on the NYSE, and a 7% raise on NASDAQ. The S&P 500 stocks traded over 5.3 billion shares - an increase of over a billion shares.

Today's downward move was a little too much for my June condor but positioned the July condor nearly perfectly. The June position now stands at a P/L of -$2500, delta = +$63 and theta = +$203. Today's jump in volatility is principally responsible for the increased red ink in the June position (condors are negative vega positions). July stands at a P/L of -$100, delta = +$11, and theta = +$76.

Today's market action took us back to the bottom of the trading range of the past eleven trading sessions. Will we break through to new lows or bounce off support? We'll see on Monday.

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Written by Dr. Duke

Created: 03 June 2010

The markets appeared to be seeking direction today, trading in choppy fashion up, down and up again. RUT preserved most of its intraday gains and closed at $667, an increase of $7. SPX gained $4 to close at $1103. Trading volume was basically flat with a 6% decrease on the NYSE and a 2% increase on NASDAQ. Trading volume on the S&P 500 stocks was flat. Traders are focused on tomorrow's unemployment report; a preview was today's ADP payroll report with an increase of 55k jobs, which encouraged traders. Initial unemployment claims dropped about 10k while continuing unemployment claims increased slightly to $4.666 million. The commercial office vacancy rate fell for the first time since the third quarter of 2007. The VIX dropped to just below 30%, encouraging some traders to believe the worst is behind us. All of this economic data can be interpreted as support for the economic recovery, but all attention is now focused on unemployment, the last major economic indicator to show improvement. The market's reaction to the unemployment report is likely to be volatile.

Time decay is having more impact on the June RUT iron condor position. The P/L has improved to -$1700 with a position delta of -$63 and position theta = +$289. The July iron condor stands at a P/L of +$700 with delta = -$24 and theta = +$71. Now we focus on the unemployment report.

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Written by Dr. Duke

Created: 02 June 2010

The markets opened in positive territory this morning and traded gradually upward until about 2:30 ET, when the exact opposite of yesterday's market action occurred - a strong rally to close at the highs of the day. RUT closed at $661, up nearly $20 and the SPX ran $28 to close at $1098. The S&P 500 traded at a slightly decreased volume from yesterday at about 4 billion shares (below the 50 dma). Trading was down 7% on the NYSE and was flat on NASDAQ. This strong performance on the U.S. markets came after weak performances in Asian and European markets. Pending home sales data may have helped set a positive mood. Pending home sales for April are up 6% from March, and up 25% from April of last year.

So the extreme back and forth swings of this market continue. It is probably more profitable right now to be selling antacids than trading. My condors are in pretty good shape at this point with the June RUT 590/600 and 710/720 iron condor underwater by $2200 with position delta = -$17 and position theta = +$285, so this position is nearly delta neutral but is building some large positive theta decay. The July RUT 520/530 and 750/760 iron condor stands at a P/L of -$240, position delta = -$21 and position theta = +$95, so this position is also very delta neutral and the theta/delta ratio is strong at over four to one.

If you are a delta neutral trader, this market is probably causing you a serious case of self-doubt. But hang in there. The probabilities are on your side. If you decide to sit out July because June went badly, and then July looks like it would have been profitable if you had been in the trade, what will you do? A delta neutral trader must trade every month and must control his losses in the bad months. Predicting the direction and volatility of the markets is very difficult at best. Trading delta neutral is the alternative approach to the crystal ball.

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Written by Dr. Duke

Created: 01 June 2010

The markets traded downward this morning but then recovered and traded choppily up and down the rest of the day until the last hour of trading, when the market sold off strongly and closed at new lows for the day. RUT closed at $641, down $20 after trading as high as $663 this morning. The SPX behaved in a similar pattern, closing down $19 at $1071, after trading as high as $1095 this morning. We are surprisingly close to the intraday "flash crash" low set at $1066 May 6. The most common explanation for the sell-off was the Attorney General's announcement of a criminal investigation into the Gulf oil spill. That certainly should affect energy stocks but it isn't clear to me why that should cause a broad based sell-off in the markets. This is one more example of the extreme nervousness and volatility characteristic of this market. Favorable economic news boosted stocks this morning; construction spending was up 2.7% and the Institute for Supply Management index came in at 59.7 for May, greater than expected by the analysts. Trading volume was essentially flat with a 4% increase on the NYSE and a 3% increase on NASDAQ. The S&P 500 stocks traded 4.2 billion shares, flat from yesterday and below the 50 day moving average.

Our markets strike me as behaving in classic day trader fashion with the frequent late-day sell-offs. Day traders close all of their positions at the end of the day to avoid any overnight risk exposure. In similar fashion, traders may be taking money off the table to avoid any overnight announcements or events from Europe, Israel, North Korea, etc.

My June RUT condor now stands at a P/L of -$2100, delta = -$7 and theta = +$233. So the greeks for this position look good, but the volatility of this market is a constant threat. My July condor actually sits in the black with a P/L of +$380, delta = -$22, theta = +$72. Now we wait to see if this market rebounds or follows through to the downside in the morning.

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Written by Dr. Duke

Created: 28 May 2010

The holiday weekend began early for many traders; volume was light in the markets today. Trading was generally sideways and downward with many traders taking off some positions rather than be exposed to surprising news over the long weekend. SPX closed down $14 at $1089 after bouncing off $1085 late in the day. That makes $1085 a "early warning" trip wire on Tuesday. RUT ran down $9 to close at $662.

Today's pullback eased my condors into a better position with June's greeks at a position delta of -$75 and theta = +$201. With about three weeks to go, theta is starting to build in the June position. The July condor is roughly at breakeven with delta = -$35 and theta = +$78.

Those of you who watch Fast Money on CNBC listened to Dennis Gartman of The Gartman Letter discuss this market last evening and say he has never seen anything like these wild swings back and forth in over 35 years of trading. Check out his newsletter; he is well known among hedge fund and institutional traders. Hopefully, the craziness is over, but only time will tell.

Have a restful and thankful holiday weekend.

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Written by Dr. Duke

Created: 27 May 2010

Normally, traders would be euphoric after a bullish day like today, but the nervousness still overhangs the market. In my own accounts, I closed some bullish trades for nice gains that should, in more rational times, be expected to continue on for more profits, but I decided to take my money off the table and wait and see what tomorrow brings. On the other hand, in my delta neutral trading, I sold the June 710/720 call spreads today to complete the June 590/600 and 710/720 iron condor on RUT and also established my July 520/530 and 750/760 iron condor on RUT before the holiday weekend. June's greeks stand at a position delta of -$68 and theta = +$135 while the freshly minted July position stands at a delta of -$38 and theta = +$80.

Today's strong open and steady gains throughout the day began with China denying the rumors from yesterday about reconsidering their Euro debt holdings. This fueled increases in the European markets,  strengthened the Euro and set the stage for the US markets. Initial unemployment claims declined by 14k to 460k and continuing claims dropped almost 30k to 4.607 million. GDP grew 3% in the first quarter and while this was less than the 5.6% growth in the fourth quarter, analysts regarded this as more good news supporting an economic recovery, albeit a slow one. RUT ran up $28 to close at $671 and the SPX closed at $1103, up $35. Both indexes closed at their highs for the day - a rather bullish indicator. After the recent volatility, one might have expected some profit taking after such a strong move upward, but it didn't happen. Trading volume declined with a drop of 23% on NYSE and a 3% increase on NASDAQ. Trading in the S&P 500 stocks dropped below the 50 day moving average to about 4.5 billion shares.

So, now what? Will traders take money off the table before the holiday weekend? We'll see. As yesterday demonstrated, it only takes a rumor to bring this market down in a hurry.