Dr. Duke's Blog

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Written by Dr. Duke

Created: 26 May 2010

High volatility continued today with the major indexes gapping up at the open and climbing from there before selling off in the late afternoon. An unexpected boost of 15% in April's new home sales and a 2.9% increase in durable goods orders helped fuel the early optimism. Many attribute the sell-off to a Financial Times article suggesting China is considering lightening their substantial Euro holdings, driving the Euro lower late in the day. RUT held up better than the other indexes, closing up $3 at $643 while the SPX dropped $6 to close at $1068. Trading volume was down at the major exchanges with a 9% decline on the NYSE and a 7% decline on NASDAQ; but the S&P 500 traded almost 6 billion shares, near yesterday's high levels. Today's trading action just reinforced the nervousness we have seen on the trading floors so often of late.

Today's candlestick on the SPX chart was the classic shooting star, a common reversal signal when it occurs at the top of a bullish trend; SPX is certainly not in a bullish trend, but it is disconcerting that the buyers who took the markets up early in the day could not hold those highs. So today's trading action may not be an indication of a further leg downward, but it does suggest we may have difficulty resuming a bullish trend anytime soon.

I sold the RUT June 590/600 put spreads this morning to begin to recreate my June iron condor. But the late day trading reversal certainly worries me after establishing that position. We'll see what the market brings tomorrow.

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Written by Dr. Duke

Created: 25 May 2010

The level of volatility in recent markets is unprecedented. Today was one more example: we opened sharply down and traded further downward; the markets were in near panic. Then it stabilized and slowly but surely traded upward all afternoon to close nearly flat on the day - Holy Cow! RUT traded as low as $618 but closed the session at $641, down $1.19 on the day. SPX traded down to $1041 before retracing the losses and closing at $1074, a gain of $0.38 on the day. The $1041 low on SPX was close to the lows set last November, while RUT broke through the support level formed by its double top last fall. The trading pattern on both indexes displayed the classic hammer candlestick pattern with a long lower shadow and little or no upper shadow. This would be considered a reversal pattern to those who study candlesticks and I might also interpret it that way normally. But these are not normal times. I'm not sure what technical indicators can be trusted. This may be the bottom of this correction, but beware. As you might expect, trading volume jumped up significantly today with a 44% increase on the NYSE, and a 39% increase on NASDAQ. The S&P 500 stocks traded six billion shares, way above the 50 day moving average around 4.3 billion.

My stop loss orders triggered on my June RUT condors this morning; then after the market appeared to be stabilizing, I sold my July $650 puts. That helped mitigate my losses, but I am still underwater. Now the crucial question: should I attempt to re-position my June condor spreads or just wait on the sidelines? The futures are up a bit right now...

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Written by Dr. Duke

Created: 24 May 2010

The markets opened up a bit this morning but then just chopped up and down, largely sideways through most of the day. But the traders sold off in the last few minutes, perhaps taking some of their positions off the table to reduce exposure to the markets in the morning. Most European markets were closed today, so there is some concern about how they will trade tomorrow. If the European markets trade downward, they will probably carry the US markets with them. RUT closed down $8 at $641 and the SPX lost $14 to close at $1074. Trading volumes dropped off from Friday; the NYSE was down 44%, and NASDAQ was flat. The S&P 500 stocks traded down to about 4.2 billion shares, below the 50 day moving average.

Existing home sales jumped up more than expected with a 7.6% increase in April, presumably due to the Federal buyer's credit offered through April 30. But the number of existing homes for sale rose to the highest level since July, 2009. That will pressure sales prices downward. A few weeks ago, the focus on this news would have been the positive spin of the surprising increase in sales; but in today's market, the focus is on how this large inventory will depress sales prices and create more foreclosures. The mood in the markets has dramatically shifted.

I tried to add new call spreads to my June condor position today, but missed the opportunity as the market just traded down in the late afternoon. So I bought some July $650 puts at the close to hedge against a gap downward tomorrow morning. Now we wait and see what happens in Europe.

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Written by Dr. Duke

Created: 21 May 2010

Just before the open this morning, the futures were deep in the red and trading started fast and furious downward. It appeared to be a continuation of yesterday's flight to cash. SPX broke through the lows set on May 6 ($1065) and even the low set in February at $1057 before rebounding as high as $1090. The markets staged a strong rally into the close in the last twenty minutes - a bullish sign going into a weekend when you might expect caution to rule. RUT closed at $649, up $9 and SPX rose $16 to close at $1088. Financial stocks led the market's gains, based on both the German Parliament approving the Greece bailout plan as well as the US Senate's passing of a financial reform bill, removing some of the associated uncertainty. Trading volume was high, but not too much higher than yesterday with a 10% increase on the NYSE and flat on NASDAQ; over 7 billion shares of the S&P 500 stocks traded today, slightly up from yesterday.

A piercing candlestick pattern was displayed on both the SPX and RUT charts today. Today's candle did not extend (or pierce) more than halfway into yesterday's black candle, which would be the strongest reversal signal, but it was significant. But this market has been prone to sudden and wide swings back and forth, so one has to be very cautious about assuming a reversal is signaled. However, one sign that yesterday was the end of the correction was simply the extremely dire tone that was universal on all of the financial news programs yesterday. Everyone I heard on CNBC was insisting it was going lower and going to get worse before it improved.

I closed the 790/800 call spreads of my June RUT iron condor this morning for $0.15, but I didn't roll the calls down. I decided it was wise to take a little bit of a "wait and see" attitude before rolling those spreads downward (my recent scars are tender). So now I am just holding the 580/590 put spreads and am about $2k underwater; but if I do nothing more and these put spreads expire worthless, I will be up about $2k. I will look for an opportunity to open new call spreads next week.

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Written by Dr. Duke

Created: 20 May 2010

Today's market was significantly different than recent volatile days of trading in that the market just traded down and down and down. It appeared that the SPX had bounced off of its 200 day moving average (dma) yesterday but it just sliced through that level and is threatening to break through the low of $1065 set in the so-called flash crash on May 6. SPX closed at $1072, down $43 on the day. RUT behaved similarly with a drop of $34 to close at $640. RUT's low on May 6 was $638. The markets had staged a rally and started to recover some of the losses this afternoon, but then dropped to new lows for the day after hearing that the Senate had taken one step closer to financial reform. The markets are running scared due to the European debt crisis and the uncertainty surrounding financial reform in the US markets. Not surprisingly, today's huge drop occurred with increased volume; trading on the NYSE increased 28% and increased 30% on NASDAQ. Trading in the Standard and Poors 500 nearly reached 7 billion shares. The surprise of an increase in unemployment claims to 471k from 446k probably didn't help the mood on the street today. However, continuing unemployment claims decreased by 40k to 4.625 million.

I took my largest loss ever in my May RUT iron condor (-$8,080) today. That is what happens when you violate your own rules. I should have closed this position last Friday or Monday morning at the latest. The June position is now also under pressure with a P/L of -$2,080, delta = +$56 and theta = +$40. So now everyone speculates on whether we have hit bottom or not. The futures can change a lot over the next sixteen hours, but they are down right now, suggesting more losses tomorrow. All of the talking heads are negative at this point; if you are a contrarian, that may be a good sign.

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Written by Dr. Duke

Created: 19 May 2010

Selling pressures continued today, driving the S&P 500 to break its 200 day moving average at $1102, and then bouncing from $1101 to trade back up to close at $1115, a net loss of only $6 for the day. RUT traded in a similar pattern, but didn't recover as well as the SPX; RUT dropped $8 to close at $675. Trading volumes were higher across the board with an increase of 17% on NYSE and 15% on NASDAQ. At one point today, the DJIA was off $186 - we continue to see violent swings both down and then back up. It appears that the European debt crisis and uncertainty surrounding financial reform legislation continue to weigh on this market.

The Consumer Price Index (CPI) dropped 0.1% in April, easing any inflation fears from last month's small increase. The FOMC minutes from the last meeting were released this afternoon; the minutes included news that there were no immediate plans to sell the mortgage-backed securities acquired during the financial crisis. This appeared to drive the markets higher this afternoon.

My iron condor spreads remain close to where they were yesterday. I will close some or all of the May position tomorrow. Increased volatility pushed the June position into the red with a P/L of -$580, delta = +$27 and theta =+$76.

The question of the hour is whether this market correction has touched bottom or not. The pattern of trading on Monday and today of trading down to intraday lows and then recovering are signs of a reversal in the trend, but predicting the market is anything but a science. It seems to me that the debt problems of Greece boiling over into a global crisis have been overblown and resulted in the markets overlooking good earnings reports and modestly improving economic data here in the states. But it is unclear what news could reassure the markets and reverse this correction.

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Written by Dr. Duke

Created: 18 May 2010

Triple digit days on the DJIA were unusual once - but no more. After a positive open this morning, the markets traded slowly but surely downward all day. The Euro strengthened this morning, but then began sliding back; this strengthened the dollar and appeared to start the selling on Wall Street. RUT closed down $13 at $683 and the SPX closed at $1121, down $16. Trading volume was flat to slightly increased with a 7% increase on the NYSE, but only a 1% rise on the NASDAQ. The stocks of the S&P 500 traded about 5 billion shares, about flat from the last couple of days and slightly above the 50 day moving average. Today's economic news was generally positive with April's housing starts at 672k, up from March's 635k; but April's building permits dropped from 685k to 606k. April's Producer Price Index (PPI) declined 0.1%, alleviating some of the inflation fears generated last month with the 0.7% increase. But concerns of a growing sovereign debt crisis in Europe and the possible effects on global financial institutions appeared to drive the markets lower.

My condor positions are continuing pretty much as they were. The May position is trimming its losses but the put spreads will have to be closed soon; position delta has increased to +$192 with theta = +$833. The June position is in excellent shape with delta = +$14 and theta = +$85.

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Written by Dr. Duke

Created: 17 May 2010

It seems like I am almost continually commenting on this market's extreme volatility. Perhaps we need to re-define a volatile market, e.g.,  perhaps we should not comment on a wild day in the markets unless the Dow loses or gains at least 200 points! In any case, today was another one of those days. The markets opened and made a brief run upward before collapsing and then staged a huge rally to actually finish the day with gains! RUT opened the day and made a brief run up as high as $704 before dropping to $678 by mid-afternoon. RUT closed up $2 at $696. SPX traded similarly and closed at $1137, up $1. SPX traded as low as $1115 today, near Friday's close of $1111 - does this establish the area of $1111 - $1115 as a good support level? Maybe - two data points are slim support.

The only economic data of any significance was the Empire State Manufacturing Index. It reported a value of 19.1, down from last month's 31.9, but still showing positive gains; the employment index portion of this report rose for the fifth consecutive month. But the falling Euro and European fiscal concerns overwhelmed other news. But the Euro rebounded in the afternoon relative to the dollar, and the weakening dollar may have been behind the afternoon's rally.

My May iron condor continues to limp along with a position delta of +$48 and theta = +$924. That huge theta is helping erase some of the losses, but I should hasten to point out that I do not recommend having an iron condor position open during expiration week unless the remaining spreads are greater than two standard deviations OTM. But these are unusual times and I am trying to minimize losses in this position - remember when your parents used to say, "do as I say, not as I do"? By contrast, the June RUT iron condor is sitting fat and happy with delta = +$8 and theta = +$71. So, I will continue to nurse the May position along to gain as much time decay benefit as possible before closing this position.

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Written by Dr. Duke

Created: 14 May 2010

It was such a bad day in the markets that even my web hosting service lost their servers this afternoon!

Worries over the European debit crisis bloomed fresh today and markets in Europe and the US plummeted. RUT lost $16 to close at $694 while the SPX traded down $22 to close at $1136. Fortunately, buyers arrived for the last half hour of trading, recovering some of the losses and giving us some hope for Monday; but is it false hope? April retail sales increased 0.4% in April and the University of Michigan consumer sentiment survey reported out at 73.3, up from last month's 72.2. But this modestly positive economic news was ignored by today's market.

I heard an interesting factoid on CNBC today: there have been 11 triple digit days on the DJIA in the last 14 trading sessions - no wonder I feel tossed about by this market.

My May iron condor is still underwater but the greeks are actually pretty good with delta = +$29 and theta = +$537. But this trade is a loser; we are just attempting to minimize the loss at this point. My June iron condor on RUT is at breakeven and nearly perfectly delta neutral with delta = +$4 and theta = +$77. Now we wonder about Monday. Will some news from Europe calm the markets or will we see more losses Monday?

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Written by Dr. Duke

Created: 13 May 2010

Trading opened up to the downside this morning and then traded upward, hit resistance and traded down all afternoon on lower volume. The only economic news was the initial unemployment claims report of 444k, down slightly from the 448k of last week. The number of continuing unemployment claims rose slightly to 4.63 million from 4.62 million last week. RUT traded as high as $720 in the morning but then declined the rest of the day to close down $6 at $710. SPX tried to break through its 50 day moving average (dma) at $1174 this morning, but was rebuffed and traded down to $1157, a loss of $14. Trading volume was flat to decreased with a 6% decrease on the NYSE and a 2% increase on NASDAQ. Trading in the S&P 500 stocks came in at 4 billion shares, below its 50 dma at about 4.5B shares.

Today I rolled the balance of my May 710/720 calls up to 730/740 and left the June 650 calls in place as a hedge to the up side. This brought the Greeks back in line at delta = -$28 and theta = +$473. The June RUT iron condor is positioned at 580/590 and 790/800 and stands at a P/L of -$520 with delta = -$31 and theta = +$107. So I am left nursing my May position to minimize its losses as we approach expiration week while the June condor is well positioned (for now).