Dr. Duke's Blog

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Written by Dr. Duke

Created: 06 January 2015

Hello everyone! Vacations are nice, but it's time to get back to work. The markets appeared to be rebounding at the open this morning, but then things turned dark. SPX hit its low for the day around 1:30 pm ET, but then traded up to about $2016 and gave us hope before turning downward to close at $2003, down $18 on the day. RUT followed suit, dropping $20 to close at $1161. Volatility increased to 21.3% on the VIX, up 1.4 points. The VIX ranged as high as 23% today before pulling back a bit. Both SPX and RUT ended the day with moderately long lower shadows on their candlesticks. This is hinting that we are closer to a bottom, but that is always hard to predict. I took a pass through the price charts of several stocks I trade and many of those charts were showing signs of either finding support or bouncing higher. Long lower candlestick shadows were common.

But that brings me back to wondering why the market is pulling back. Aren't lower oil prices good for almost everyone? The other scary goblin trotted out for us by the bears is Greece and their coming election. The only thing that worries me about Greece is that it may be a hint of coming attractions for us in this country: crushing debt, a preponderance of government bureaucrats, and a population that believes it is entitled to continued handouts.

Certainly, the core economic and employment data aren't strong and robust. But they aren't signaling recession either. The basic economy is strong, but we aren't seeing the strong creation of jobs to accelerate growth out of the recession. By most measures, the Standard and Poors 500 Index is modestly over-priced at worst. But these 5% and 10% pull backs in the market every few weeks are strange and don't seem to make much sense, at least not to me.

Trading volume continued to build today as people get back to work. 2.7 billion shares of the S&P 500 companies traded today, up significantly higher than the 50 dma at 2.0B. Trading on the NYSE increased 14% and trading volume increased 20% on NASDAQ. The ISM Services survey for December was released with a rating of 56.2, down from November's 59.3. Factory orders were unchanged in November with another decline of 0.7%. The FOMC minutes will be released tomorrow and the jobs report comes on Friday. Perhaps this data will stabilize the market.

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Written by Dr. Duke

Created: 22 December 2014

The next two weeks will likely be mostly sideways trading in lower volume. But, as I write that, I realize that much of what we know about market behavior based on history has been turned upside down this year. Just one example was the recent 5% correction in the midst of everyone expecting the Santa Claus rally that has a solid history behind it. The options legend, Larry McMillan, wrote in his newsletter this week, "In nearly 45 years of trading, I don't think I've ever seen a market as wild as the one has been this month." That makes me feel better. I am particularly pleased that our November and December iron condor positions in the Flying With The Condor™ service achieved positive returns in the midst of this craziness.

SPX closed up $8 at $2079 today and RUT gained $6 to close at $1202. Trading in the S&P 500 stocks was down a bit today at 2.0 billion shares; the 50 dma = 2.3B. Trading volumes on the NYSE and NASDAQ were both up by large percentages over Friday, but this is the usual post-expiration Friday drop-off. Volatility has almost returned to its pre-correction values, with the VIX closing at 15.3%, down 1.2 points today.

Existing home sales reported for November at an annualized rate of 4.93 million, down from last month's 5.25 million. Analysts were surprised; they had expected around 5.20 million.

The stock and option exchanges will be open for normal hours tomorrow and Friday. They will be open until 1:00 pm ET Wednesday and closed Thursday.

Is your shopping done?

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Written by Dr. Duke

Created: 19 December 2014

I don't know about you, but this market is exhausting. I cannot become accustomed to the swift pullbacks, followed by stellar runs to the upside that recover all of the losses in just a few trading sessions. This last one is another extreme case; SPX lost $102, or 5%, in 7 trading sessions, and then recovered nearly all of that loss in just three sessions! SPX closed today at $2071, up $9, and just shy of where the pullback started only two weeks ago. RUT closed up $4 at $1196. RUT is still trying to recover its losses from the March highs around $1210. RUT has traded weaker than SPX most of this year, but it actually provided the early signals of a recovery this week, posting a gain on Tuesday while SPX was still trading downward. Volatility peaked on Tuesday, with the VIX spiking up over 25% intraday. The VIX closed today at 16.5%, down 0.3 points.

The sharp reversal this week cost me in my January iron condor on SPX. Insurance is never free in this business, but the quick market reversal cost me as I closed my February call options that were hedging my January position. The January condor retains a profit potential of about +6.5% and is well positioned with the 2160/2170 call spreads well OTM. The original potential gain was 17%, so the insurance was costly, but it worked. We are still in the game and have salvaged the trade.

SPX settled today at 2061.01 (RUT settled at $1191.29). My SPX Dec 1940/1950 and 2100/2110 spreads expired worthless. I closed the 2080/2090 call spreads yesterday. They stood 1.7 standard deviations OTM, so the probabilities were definitely on my side. But we have been witnessing some large gap opens to the upside this week. I decided the risk wasn't worth it. Call me a wimp, but I have the scars to show what happens sometimes if you venture out there too far. This closes my SPX December position for a gain of 5.8%. Similar to the January position, December's profitability was reduced by the hedging efforts on the upside as the market ran higher after the October pullback.

I keep a spreadsheet with the difference between Thursday's closing price and Friday's settlement price for SPX and RUT for 2006 through 2014 (I will upload it to my website in the free downloads section). The averages for 2014 for SPX and RUT are $8.74 and $6.14, respectively.

Hard to believe that 2014 is coming to an end. It seems like I just trained myself to write 2014 instead of 2013. But then, you know what they say about old dogs...

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Written by Dr. Duke

Created: 16 December 2014

Both yesterday and today, the market opened higher, but couldn't hold it. The market danced around the unchanged mark much of this afternoon, but traded off strongly in the last thirty minutes of trading. SPX dropped $17 to close at $1973, but RUT stayed in positive territory almost all day, closing down one dollar at $1139. The VIX was up about a point most of the day, but spiked toward the end of trading, closing at 23.6%, up over three points. Trading volume spiked up with 2.7 billion shares of the S&P 500 stocks trading. Trading volume rose 11% on the NYSE and was up 6% on NASDAQ.

I still don't get the panic surrounding lower oil prices. This is putting a lot of extra money in the pockets of consumers. I was working for a major oil company in the nineties when oil dipped below $10 a barrel; it was good for everyone except the oil companies. In fact, I was in the chemical subsidiary and we posted better numbers because of having cheaper feedstock.

In any case, the market is showing some signs of slowing its plunge. Tomorrow's FOMC announcement could push the market over the edge in this market environment. At times like these, traders tend to read too much into these announcements. Or maybe the Fed will give us some assurance. Maybe.

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Written by Dr. Duke

Created: 12 December 2014

The markets took another leg down today with the S&P 500 dropping $33 to $2002, just above the 50 dma and below the high set back in September. SPX also closed at its low for the day. A close below the 50 dma on Monday will be significant. RUT behaved even more bearishly, gapping open lower and closing at its low for the day, down $15 at $1152. Trading volume spiked higher with 2.4 billion shares of the S&P 500 trading today. Trading increased 13% on the NYSE, but only increased 3% on NASDAQ. Closing at the lows and trading in higher volume are two strong signs of a serious trend, in this case, a bearish trend. On the other hand, a look at the price chart confirms strong support around $2000 on the S&P 500, so there is a good chance we will see it bounce next week.

It was easy to hear the talking heads today blaming market woes on the falling price of oil. To my mind, this is more grasping at straws to explain market behavior. Unless you happen to be in the oil business, lower oil prices are good for most industrial sectors and certainly put more money in consumers' pockets. Market analysts of all stripes have been telling us the market had gotten ahead of itself for some time. It was time for a breather.

But that doesn't explain this market behavior. Price volatility has been extreme for most of the past two years; we have experienced sudden and severe pull backs, followed by vertical ascents to take us right back where we started in short order - how does that make any sense? Did the economy collapse and rebound in just a few trading sessions? Take the last plunge for an example. SPX dropped $192 or 9.5% in 19 trading sessions (9/19 to 10/15). It only required 12 sessions to bounce back and fully recover that loss, and in fact, climbed even higher from there. I'm not naive. I know many emotional and political factors influence the markets, but fundamentally, we expect basic economics to ultimately drive the capital markets. Stockholders want a return on their investment and they project cash flow to analyze those prospects. How does this make any sense?

In any case, this drop was helpful for my SPX December iron condor, taking the pressure off the remaining 2080/2090 call spreads (rolled half to 2100/2110), but less helpful for the 1840/1850 puts spreads in my SPX January condor. We have a big weekend ahead of us with our Christmas party tomorrow evening. If you are in the Chicago area, you're invited! Drop me an email for the address.

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Written by Dr. Duke

Created: 10 December 2014

The markets traded lower Monday and Tuesday, but bounced significantly before the end of the trading session and gave traders hop for the next day. But that wasn’t true today. SPX, RUT and the NASDAQ composite all closed at or near the lows of the day. SPX closed at $2026, down $34. RUT dropped $26 to close at $1162, and NASDAQ lost $82 to close at $4684. It seems like yesterday that analysts were speculating about NASDAQ breaking $5000.

As one might expect, volatility popped up significantly today with the VIX closing at 18.5%, up nearly four points in a single trading session.

Trading volume was also up, with 2.4 billion shares of the S&P 500 stocks trading. The 50 dma is 2.2B; trading in the S&P rose slightly above the 50 dma yesterday and rose a bit higher today. Trading on the NYSE rose 4%, but fell 8% on NASDAQ – not sure what that was about.

As always, the talking heads were searching for answers for the market’s drop; the consensus appears to be lower oil prices. Lower oil prices hurt tar sands and oil shale producers, but they help everyone else.

I think a better answer is simply that this strong bull market needed a rest. $2015 marks the September high on SPX and is the next support level. But today's trading seemed more serious than just "taking a breather". We'll see... Where did Santa Claus go?

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Written by Dr. Duke

Created: 04 December 2014

This time of year is historically bullish, e.g., the Santa Claus rally and so on. But we are in a tiring bull market. SPX was up over 30% last year and has climbed even higher this year, now up 12% year to date. It is only natural to expect some slowing, sideways consolidation trading. Traders will refer to the market "taking a breather" and so on. On Monday, it looked like a pull back or correction was starting, but the bears could not take advantage of that down day and the bulls took the reins back. When you think about it, even in October, once the bulls took control, we traded straight up - what a run! So the bulls are clearly in control, and this is their time of year, so they have historical trends on their side. On the other hand, this bull is tired; it has been a long run. Maybe this conflict of the historical bullish season of the year coupled with a tired market that needs to consolidate explains this market. Anyway, it's a thought.

SPX pulled back a bit, closing down two dollars at $2072. RUT dropped back $6 to close at $1173. Volatility remains pretty low with the VIX closing at 12.4%. Trading volume has remained pretty low for the past six weeks or so; volume on the S&P stocks has run below the 50 dma pretty consistently throughout November. Today was no exception with 1.9 billion shares of the S&P 500 trading (the 50 dma = 2.2B). Trading volume dropped 6% on the NYSE and increased 1% on NASDAQ.

The Challenger job cuts report came in 21% lower in November - much better news than October's 12% increase. Initial unemployment claims came in at 297k this week, down 17k. Continuing claims rose 39 thousand to 2.4 million. The unemployment data jump around a lot, but the trend is clearly downward, but at a slower than desired rate. Tomorrow's jobs report will be interesting, given a market that seems a bit nervous. Monday's weak retail sales news from the holiday weekend caused a sell-off, but it didn't last. The bulls came roaring back.

It seems like many of the guests on CNBC have been predicting a correction all year, but betting on the bulls has continued to be the winning play. We'll see...

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Written by Dr. Duke

Created: 02 December 2014

I was surprised we finally had a bit of a pullback in the markets, but it was very brief. SPX gained everything it lost yesterday, closing at $2067, up $13 (it lost $14 yesterday). RUT wasn't quite so strong with a gain of $14 to close at $1168. Volatility backed off a bit with the VIX losing almost one and one half points to close at $12.9%. Trading volume dropped off a bit from yesterday with 2.1 billion shares of the S&P 500 stocks changing hands. Trading volume on the NYSE dropped 12% and declined 3% on NASDAQ.

The only economic data today was a report on construction spending, up 1.1% for October, a nice improvement after the 0.1% drop in September.

My December iron condor on SPX remains hedged to the hilt and thus far, that is holding the net loss (assuming we closed today) to about -5%. I have not sold the put spreads for the January position; I considered it yesterday, but thought we might see more weakness before the market resumed its march higher.

The FOMC's Beige book will be released tomorrow. We may have some volatility surrounding that announcement.

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Written by Dr. Duke

Created: 01 December 2014

 I hope you all had a wonderful Thanksgiving.

We have become accustomed to the markets rising every day, so what's going on? SPX clipped off $14, closing at $2053 while RUT traded even more weakly, gapping open lower and closing at $1154, losing $19 on the day. One would expect trading volume to pick up from the holiday-shortened session Friday, but trading in the S&P 500 stocks actually bumped up to 2.3 billion shares, popping up over the 50 day moving average, at 2.2 billion shares. Trading volume rose 19% on the NYSE and rose 78% on NASDAQ. The VIX gapped open higher this morning and closed one full percentage point higher at 14.3%.

The ISM manufacturing index reported today at 58.7 for November, a drop from October's 59.0. Today's market weakness appeared to be primarily driven by the weak retail sales over the Thanksgiving holiday, coming in 11% lower than last year. There were also weaker economic reports from China and Europe, raising the specter of a global economic slowdown. the Fed's Beige book comes out Wednesday, amid reports that the FOMC members are worried about deflation; if that is explicitly addressed in the minutes, we could see additional market weakness. Of course, this week's economic news builds up to the jobs report Friday.

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Written by Dr. Duke

Created: 26 November 2014

Today's market was typical of pre-holiday markets, with low trading volume and small price moves. SPX gained another $6 to close at a new closing high of $2073 and RUT gained $4 to close at $1191. Volatility is basically flat with the VIX at 12.1% (down one tenth of a point today). Trading volume on the S&P 500 isn't out yet, but trading was down 13% on the NYSE and down 11% on NASDAQ.

A host of economic data posted today with initial unemployment claims reported early due to the holiday with 313k claims, up from last week's 292k. Continuing claims dropped from 2.33 million to 2.32 million. Durable orders posted an improvement of 0.4%, a nice change from last month's decline of 0.9%. The Chicago PMI dropped off significantly to 60.8 from last month's 66.2. The University of Michigan consumer sentiment survey declined to 88.8 from 89.4. New home sales posted an annualized rate of 458k for October, up slightly from 455k.

There wasn't anything in this host of economic data that was particularly alarming or encouraging. Coupled with lightly staffed trading desks, the markets didn't really react.

Over bought indicators continue to build as this market heads higher. I don't see a correction in the immediate future, but it seems like we are overdue for some sideways cooling off. The markets will be closed tomorrow and only open for a half day of trading on Friday, so not much market movement is anticipated until everyone returns on Monday.

Happy Thanksgiving. Count your blessings - yes, even that crazy uncle.