Dr. Duke's Blog

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Written by Dr. Duke

Created: 27 January 2014

The markets opened slightly up this morning and everyone breathed a sign of relief. Then the bottom fell out. SPX fell from the high of $1796, achieved in the first hour of trading, to a low of $1773 a little after 12:30 ET. Then it recovered to an afternoon high of $1794 before selling off into the close at $1782, down $9 on the day. RUT lost $16, closing at $1128 after trading as low as $1121. The difference on the RUT chart is that it never bounced back up into positive territory.  The sell-off into the close on both SPX and RUT is not a good sign. I would have thought today and tomorrow would have given us relatively flat days of trading in advance of the FOMC policy announcement on Wednesday. But a serious bout of selling dominated today's markets. Last week's declines are trickling through the markets and traders are taking their profits. The intraday highs this afternoon were taken as opportunities to take profits go to the sidelines. It remains to be seen whether the Fed's statements will calm the market or send it plunging further downward.

SPX bounced today almost precisely at the support level set by market highs in late October and early November ($1772). Today's close is just above the 4% correction level at $1776. The highs from late October on the RUT chart ($1123) just happen to coincide with a 5% correction. RUT's low today was $1121. So both SPX and RUT caught themselves in the downward slide this afternoon at the highs from October. This represents a larger pull back for RUT because it continued to set new all-time highs after SPX had stalled. That brings us to the key question: will a 5% correction be enough? I don't think we will receive an answer to that question anytime soon.

The only economic data reported today were new home sales for December, coming in at an annualized rate of 414k, down from November's 445k. The next significant economic news for this week comes Wednesday afternoon from the FOMC.

My Feb RUT iron condor only consists of the 1210/1220 call spreads for now (I will likely re-establish the put spreads when the smoke clears). So that position stands at a net gain of $760 on 20 contracts or +4%. If I do nothing and the call spreads expire worthless, the Feb position will close at a 6% gain - not bad for a month like this.

We return to the market correction watch tomorrow. $1772 is a key support level on SPX. If that fails to hold, the next obvious support on the chart is at $1729, near the 7% correction level.

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Written by Dr. Duke

Created: 24 January 2014

Pundits of every stripe have been predicting correction for several weeks, if not months. So the market action yesterday and today shouldn't have been too surprising. The S&P 500 Index (SPX) has now lost 61 points since January 15th, constituting a pullback of 3.3%. And most of that was accomplished over just two days! Technical analysts will tell us that a market correction can't really be called a correction unless it exceeds 7%, so we aren't there yet, but we are nearly half way. In 2013, we had several pull backs of the 4-5% variety, and the brave souls who bought the dips were well rewarded. I have already drawn the 4% and 5% lines on my SPX chart at $1776 and $1758, respectively. Maybe I should add $1721 (7%). My analysis of this market boils down to three principal alternatives:

1) Just another 4-5% pull back, or

2) An authentic correction of 7-10%, or

3) The beginning of a full fledged bear market.

I haven't been shy about my conservative outlook. Government ineptitude and antagonism toward business are strangling private enterprise, so it isn't surprising that this is the slowest economic recovery in history. But the economy is muddling along in spite of all of the road blocks and hindrances. So the third alternative seems unlikely to me, especially with a Federal Reserve that is willing to do anything to prop up the markets. That leaves me expecting a pull back of some kind, but unsure of the magnitude. I think the current pull back could get uglier and move into the full correction mode, given some significant stimulus - something like the downgrade of our treasury debt that occurred in 2011.  If we just continue to receive mediocre economic data, I am inclined toward the 4-5% pull back scenario. But that doesn't mean I am loading up on SPX calls. I remain cautious.

SPX closed at $1790, down $38. RUT closed at $1144 for a loss of $28. VIX spiked up to 18.4% - and didn't pull back toward the end of trading. Hmmm. As you might expect, trading volume spiked upward with 3.1 billion shares of the S&P 500 stocks exchanging hands. Trading jumped 15% on the NYSE and was up 16% on NASDAQ.

This week was almost devoid of economic data. But next week will offer many possible market moving events:

Monday: New Home Sales and AAPL earnings
Thursday: 4th Qtr GDP and GOOG earnings
Friday: Chicago PMI and University of Michigan Consumer Sentiment

I closed the 1110/1120 put spreads in my RUT Feb iron condor today. That leaves me with a current P/L of +3% and a maximum potential gain of +8%, assuming scenario three plays out and the call spreads expire worthless. That adjustment will allow me to enjoy my weekend. I hope you can as well.

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Written by Dr. Duke

Created: 21 January 2014

SPX challenged its resistance level at $1850, but pulled back to close at $1844, up $5 on the day. But RUT broke out to a new all-time high at $1176, up $7. Trading volume is down a bit from Friday, but remains above the 50 dma with 2.5 billion shares of the S&P 500 trading today. Trading volume dropped 12% on the NYSE and decreased 8% on NASDAQ. Volatility remains low with the VIX at 12.9%, although the VIX spiked up to 13.4% this morning and then pulled back.

OTM index put volume is increasing, suggesting some institutional hedging of their portfolios just in case the often predicted correction actually occurs. If the markets continue to trade sideways, we may successfully blow off some of the excess without a lot of damage. RUT's strong push higher today was certainly a sign of bullish strength.

Today was a light day for economic data, and the balance of the week doesn't have any significant reports scheduled, unless you count the weekly unemployment claims. But those weekly reports don't often move the market.

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Written by Dr. Duke

Created: 17 January 2014

The Russell 2000 Index (RUT) made consecutive all-time highs Wednesday and Thursday, but retreated $5 today to close at $1168. SPX lost $7, closing at $1839. Volatility remained unchanged with the VIX at 12.4%. As one might expect on an options expiration Friday, trading volume was up with 2.6 billion shares of the S&P 500 trading. Trading on the NYSE rose 28% and volume rose 11% on NASDAQ.

SPX is now down about $9 or -0.5% since the first of the year. The stock almanac's January barometer is looking pretty weak at the halfway point. SPX appears unable to generate sufficient momentum to break out to new highs above $1850. On the other hand, it remains pretty strong, not really giving up much ground. Next week looks to be slow in terms of economic data, so the most likely market moving events may be the continuing stream of earnings announcements. But so far, those announcements haven't built much excitement. The bears haven't been able to generate any momentum when the market has appeared weakest so far this year. Today was good example; as the markets pulled back, volatility remained flat. The bulls are reserved, but confident.

We had several economic reports today: housing starts came in at an annualized rate of 999k in December, down from 1107k; building permits followed that trend with 986k in December, down form 1017k. Industrial production dropped in December to +0.3%, down from +1.0%; capacity utilization was flat at 79.2%. The University of Michigan consumer sentiment survey declined in January to 80.4 from December's 82.5. Maybe this mediocre data contributed to the markets trading weakly sideways today. The losses accelerated in the last hour of trading, but the markets bounced back in the last few minutes so the closes came in above the day's lows.

SPX settled today for the January options at $1846.06. As I write this blog, the RUT settlement value has not yet been released. You may check this link to see it posted later today on the CBOE web site.

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Written by Dr. Duke

Created: 15 January 2014

The S&P 500 Index is coming very close to breaking out and setting a new all-time high. SPX gapped upward at the open this morning and traded as high as $1851 before pulling back to close at $1848, up $10. The previous closing high is $1848 from December 31. RUT gained $8 to close at $1171, a new all-time high. Volatility remained unchanged with VIX at 12.3%. Trading volume rose with 2.6 billion shares of the S&P 500 stocks changing hands. Trading volume increased 13% on the NYSE and increased 4% on NASDAQ.

The Beige Book, the minutes from the last FOMC meeting, was released today and appeared to fuel the market's advances. More Fed districts reported moderate economic growth in November and December than previously reported. Plus, eight out of the twelve districts reported higher hiring rates. The Empire State manufacturing report jumped to 12.2 in January from December's 2.2. PPI increased 0.4% in December and increased 1.2% for the entire year of 2013.

This market's strength continues unabated. One can argue all day long that the underlying economic numbers don't support such exuberance, but one has to trade what he sees, not what he thinks makes sense. Today's increase on RUT makes it virtually certain that the put spreads from my January condor will expire worthless. Unfortunately, that starts the new year with a loss of $1,100 on 20 contracts. or -9.6%. The original iron condor was adjusted twice and both spreads were rolled higher. If I had not closed the call spreads Friday, I could have closed on Monday for a small gain, but that's the old 20:20 hindsight thing.

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Written by Dr. Duke

Created: 14 January 2014

We observed severe market drops repeatedly last year that proved, in retrospect, to be excellent buying opportunities. The last two days of trading provide one more example. SPX closed down $23 yesterday but gained $20 today to close at $1839. RUT also recovered almost all of yesterday's losses, gaining $16 to close at $1163. VIX declined a full point to 12.3%. So the bulls have done it once again. Perhaps the market gods are training us to "go all in" on the next dip and then surprise us with a severe correction (I don't have a better theory).

Trading volume fell off today as the markets rebounded with 2.2 billion shares of the S&P 500 trading. Trading volume declined by 12% on both the NYSE and NASDAQ.

SPX now has a pretty well defined sideways trading channel from a low of $1810 set in late November to the high of $1850 defined in late December. I think using those two levels as triggers for one's trading posture makes sense. In my opinion, the most difficult aspect of last year's trading was handling the frequent price whipsaws, similar to what we saw yesterday and today. The worst whipsaw of last year was a $46 swing on SPX in only four days! Why is this market so volatile?  I am sure there are many viable answers. I am inclined to think that the "great experiment" by the Fed in supporting this market has made seasoned traders nervous. They have never experienced a market with FOMC intervention of this type and aren't sure what to expect. As a result, their fingers are quick to hit the exit button and then jump back in at the slightest of signs. They don't want to miss such a huge bull market, but they also worry that the "great experiment" could end badly.

I think the lesson for us small fry trying to survive in this market of charging elephants is to be cautious and stay hedged; don't be afraid to exit early. I closed my RUT Jan call spreads in the market rally Friday afternoon; if I had waited, I could have done much better on Monday. But I don't think you can afford to take that chance. You might get stepped on by an elephant.

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Written by Dr. Duke

Created: 13 January 2014

Markets opened upward but subdued this morning, but the bears started selling in earnest around noon ET. SPX lost $23 to close at $1819, and RUT closed down $16 at $1148.  Volatility bumped up over one point with the VIX closing at 13.3% - but this is still a relatively low level. Trading volume spiked upward with 2.4 billion shares of the S&P 500 stocks trading today. Trading volume increased 8% both on the NYSE and on NASDAQ.

Several news sources pointed to comments by Dennis Lockhart, the Atlanta Fed president. He said he favors further tapering of the stimulus programs and that may have been the trigger for the selling spree this afternoon. If that's true, we may see a pop back upward tomorrow as calmer heads dominate trading. Analysts this morning were pointing to the market's strength in the face of an extremely poor jobs report as evidence of a continued bull market. But, by the end of trading, bearish analysts were saying this is the beginning of the long awaited correction. As we saw repeatedly last year, this is a nervous market and can turn on a dime with a news report or even a rumor.

So we are left with the questions of the past several weeks: Is this market at excessive levels and therefore primed for a correction? Or will it blow off the excess by trading sideways for a few weeks or months? We'll see.

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Written by Dr. Duke

Created: 10 January 2014

Incredible as it sounds, we received the worst unemployment report in decades this morning, and the market rallied. Traders are reasoning that the Fed will not dare accelerate their reduction of the quantitative easing programs, given such bad news. So the party continues.

The non-farm payrolls report, aka the jobs report, came out this morning and shocked everyone. Only 74 thousand new jobs were reported; economists were expecting over 200 thousand. The unemployment rate dropped to 6.7% because another 340 thousand people left the work force. The labor participation rate hit 62.8%, the lowest level since 1978. That's sobering because I suspect a good number of you weren't even born yet in 1978. The effects of ObamaCare can be seen in the average work week hours declining to 34.4. More and more companies are avoiding the high cost of ObamaCare by converting full time employees to part time.

SPX declined to its low of the day at $1832 around 11:30 am ET, but then recovered those losses to trade sideways until the last hour of trading, when SPX rallied to close at $1842, up $4. RUT tracked its big brother, closing up $6 at $1165. Volatility declined with the VIX dropping almost three quarters of a point to 12.2%.

This morning, I thought my January iron condor was out of the woods, or if I had a problem, it would be to the downside after that terrible jobs report. As the markets rallied this afternoon, I thought it prudent to close my 1175/1185 call spreads for $1.80. Assuming the put spreads expire worthless, this will result in a loss of $1,100 on 20 contracts, or -9.6% on capital at risk.

It almost seems like this market is bulletproof. That is ominous. But I will try to forget about all of that and enjoy the weekend with family.

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Written by Dr. Duke

Created: 08 January 2014

 One of the traditional Wall Street historical measures is to predict the new year's market performance based on the first five days of January's trading. SPX started the year at $1846 and closed today at $1837. I am not a big fan of these stock almanac type of patterns, but I can't ignore them either. However, this year's first five days is more weak and sideways than bearish. It is certainly true that last year's first five days of trading did correctly predict a strong market, although with unprecedented price volatility.

SPX closed unchanged at $1837 and RUT was also unchanged at $1157. Trading volume was up a bit with 2.4 billion shares of the S&P 500 trading today. Volume increased 4% on the NYSE and increased 3% on NASDAQ. SPX traded to its low of the day at $1831 shortly after the open and then strengthened. The Fed minutes were released this afternoon and it seemed like the market slowly declined thereafter to nearly match the low about thirty minutes before the close; but a rally in the last few minutes brought SPX back to unchanged on the day.

My Jan RUT iron condor stands at a net P/L of -$1760 on 20 contracts or -10% with position delta = -$150 and position theta = +$440. The 1175/1185 call spreads remain squeezed, but the theta decay is helping more each day as we near expiration. I might manage to collect a small gain after all.

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Written by Dr. Duke

Created: 07 January 2014

The S&P 500 Index finally turned in a positive number for the new year, rising $11 to close at $1838. RUT followed suit with a ten dollar increase to $1158. Trading volume expanded with 2.2 billion shares of the S&P 500 stocks trading today; trading volume increased 11% on the NYSE but was flat on NASDAQ.

Volatility continued to decline with a little more than a half point drop to 12.9% on the VIX.

Today's gains were significant; SPX recovered about half of its losses since the first of the year in one day. Support at $1810 remains the level to watch for a pullback, while a break above resistance at $1850 would suggest a return to rally mode for the bulls. RUT has been trading in a more narrow range, bouncing off support at $1147; but it couldn't hold its high today at $1160. One of the market measures I watch is the difference between new highs and new lows on the NYSE. While that indicator was steadily declining toward the end of 2013, it appears to be rebounding the last two days. It almost seems as though the market hears all of the CNBC gurus predicting correction and is determined to defy the conventional wisdom. We'll see.