Dr. Duke's Blog

Do you know any trading coaches who discuss the market candidly without any marketing hype? Dr. Duke publishes a weekly newsletter and shares the track records of his trading services. If you have questions about any of his services, Ask Dr. Duke.

Dr. Duke practices what he preaches! You are entering the "No Hype Zone"!

Details: Written by Dr. Duke; Created: 06 January 2014

Markets traded down today on increasing volume, but support levels aren't being broken; so one has to concede that control remains with the bulls, at least for now. SPX lost $5 to close at $1827, while RUT traded down $9 to $1147. Trading volume popped upward with 2.1 billion shares of the S&P 500 stocks trading today; the 50 dma = 2.0B. Volume increased 15% on the NYSE and increased 36% on NASDAQ. But one has to take these increases with a grain of salt, since we are coming off the low volumes of the holidays. Volatility declined slightly with the VIX closing down 0.2 points at 13.6%.

Economic data were mixed today with the ISM services index coming in at 53.0 for December, down from 53.9. But factory orders increased 1.8% in November, which was greatly improved over the half percent decline in October.

It is difficult to confidently say the bears have finally taken control of this market as long as support on SPX at $1810 continues to hold. But consider this: SPX broke out above resistance at $1810 (set back in late November and early December) on December 20. SPX then traded to a high of $1849 on 12/31. SPX has now given back $22 or 56% of that gain. We have a strong support level at $1810 that remains intact, but the bulls have given up a lot of previous gains at this point. It is enough to at least increase one's caution. Even more caution may be generated when you look at the RUT chart. RUT closed today at the late November high of $1147. RUT is already knocking at the door of its support level that is parallel to SPX's $1810. Small caps lead the bull market higher, but they also lead the bear market lower.

My Jan iron condor on RUT now stands at a net P/L of -$2,240 on 20 contracts or -13%, with position delta = -$29 and position theta = +$388. This position is now almost perfectly delta neutral with two weeks to go; as one can see from the theta/delta ratio, time decay is now strongly favoring the position. The danger to this position would be a large sudden move in either direction. A little sideways meandering would be ideal.

Details: Written by Dr. Duke; Created: 03 January 2014

The holidays, plus a snow storm, conspired to keep the markets churning largely sideways on low trading volume. SPX lost one dollar to close at $1831. RUT, by contrast, gained $5 to close at $1156. Trading volume dropped from yesterday's already low number to 1.7 billion shares of the S&P 500 stocks. Trading volume on the NYSE decreased 11% and also decreased 4% on NASDAQ. Monday should give us a better clue as to this market's direction.

Volatility pulled back by about half a point on VIX, ending the day at 13.8%.

There were no economic data reports of any consequence.

Enjoy the balance of the holidays. It's back to work on Monday!

Details: Written by Dr. Duke; Created: 02 January 2014

What a difference a year makes! Remember the first trading day of 2013? It was as strong a spike upward as was today's downward push. SPX closed down $16 or 0.9% at $1832 and RUT dropped $13 or 1.1% to close at $1151. The fact that RUT decreased more than SPX underscores the bearish move, but it is far too early to put on the bear suit. RUT bounced off support at $1147, the high set on November 29th. The parallel support level on SPX is at $1810, and we are not even close to that level. Volatility has risen the past three trading days and gapped open higher this morning, with VIX closing up a half point to 14.2%. But that remains a relatively low volatility historically. Many of us may be expecting a correction and even arguing it is overdue, but today's price action doesn't necessarily signal the beginning of a correction. This could be a more benign cooling of the market exuberance via a period of sideways to slightly downward trading. But the memories of last year are fresh - every one of those dips last year were buying opportunities as the bulls roared back.

Trading volume was up today with 1.9 billion shares of the S&P 500 stock trading, but these increases are off low holiday numbers (the 50 dma for volume on the S&P 500 is 2.1B). Trading volume was up 17% on the NYSE and up 27% on NASDAQ.

My Jan iron condor on RUT is positioned at 1110/1120 and 1175/1185 with a net P/L of - $3,900 on 20 contracts or -22% with position delta of -$65 and position theta = +$270. This position still retains a good profit potential but has been adjusted and repositioned as the market charged forward after the Fed announcement. So it remains underwater from the adjustments and we'll see where this one ends up.

I have read many year end summaries of the 2013 markets and the common denominator of these articles is that it was an odd, outlier of a year. Hedge funds and other professional traders had a tough year. The huge 30% gains of the S&P 500 are deceptive. Very few traders achieved those gains. The markets of 2013 threw traders for a loop with several 4-5% pullbacks that were immediately reversed into the stratosphere. It was a tough year to trade. Hopefully, 2014 will be friendlier to us.

Details: Written by Dr. Duke; Created: 23 December 2013

Shortly after the open this morning, the Russell 2000 Index (RUT) shot up about sixty points and then dropped back down about 15 minutes later. I have not been able to find an adequate explanation anywhere. NDX was rebalanced this weekend, but RUT wasn't. A spokesman for Russell Investments said it was the result of a "temporary technical issue in the data feed" - whatever that means. Issues like this do a lot to undermine confidence in the markets. Trading volatility in the first 30-60 minutes of the trading session isn't unusual, but this was ridiculous.

The Santa Claus rally continued today with SPX closing up $10 at $1828. RUT closed at $1157, up $11, but hit a high of $1213 during that incident this morning. Volatility continues to contract with the VIX decreasing about three quarters of a point to 13%. Trading volume fell off markedly from Friday with 1.8 billion shares of the S&P 500 stocks trading. Trading volume dropped 52% on the NYSE and decreased 42% on NASDAQ. I guess many traders have already left for the holidays.

As each day brings new all-time highs for the major market indexes, the bears are becoming extinct, and thus the probability of a correction increases. For now, one has no choice but to play the bullish rally, but my "spidey sense" is tingling.

The stock and options exchanges will close at 1:00 pm ET tomorrow and will be closed Wednesday for Christmas.

I wish each of you a special and meaningful Christmas with your families.

Details: Written by Dr. Duke; Created: 20 December 2013

After large gains on Wednesday, the markets stalled on Thursday and many began to question whether the bullish rally was going to regain its previous steam (including me). But today’s strong push higher has probably run over the few remaining bears. SPX closed up $9 at $1818, another all-time high. Every time I write about a new all-time high, I get more concerned about a correction. But shorting this market or any of the market “darlings” has been painful so far.

RUT has traded more bearishly than SPX for several weeks. Thursday was classic example, with SPX trading flat while RUT gave back half of its gains from Wednesday. But the music changed today! RUT gained $21 to close at $1146, just one dollar below its all-time high. RUT moved higher by almost 2% whereas SPX moved up only one half of a percent. Trading volume was off the charts today with 3.2 billion shares of the S&P 500 stocks trading. Trading volume on the NYSE was up 80% and up 67% on NASDAQ - wow! A bullish market plus options expiration conspired to stimulate a flood of trading.

Third quarter GDP was revised upward to 4.1% today and that surprise may have driven some of the bullishness. I will be interested to see if the markets can follow through next week or if we will continue to see the "on again, off again" trading of the last three days.

Enjoy your weekend. Men: the time is nearing to begin your Christmas shopping, but don't jump the gun. You still have a few days.

Details: Written by Dr. Duke; Created: 18 December 2013

Everyone was waiting on the Fed announcement and Bernanke surprised the market by announcing they are beginning to scale back the quantitative easing programs now. Not many analysts expected that. The initial market reaction was what one might have expected; the market traded down. But then it reversed and turned into a huge rally before the day was over with an increase of $30 on SPX, closing at $1811. RUT gained $15 to close at $1134. Volatility pulled back markedly with the VIX dropping almost two and a half points to 13.8%. As one might expect, trading volume shot upward with three billion shares of the S&P 500 stocks trading. Trading volume spiked upward 32% on the NYSE and increased 19% on NASDAQ.

Bernanke announced they would reduce the stimulus programs by ten billion dollars per month and will consider further decreases based on economic data. He speculated that the QE program may be completely phased out by the end of 2014. The Fed's assurance that interest rates will remain low may have reassured the markets, but that isn't new, so I am unsure why the market took off so strongly. Once again, the market has a way of giving us the unexpected.

Housing starts came in at 1091k for November, up over two hundred thousand, but building permits dropped thirty two thousand to 1007k.

Some are saying this is the expected Santa Claus rally. I suppose we will see. The size of this market increase seemed inexplicable on the basis of any of the economic data. Earlier this year, any discussion of the Fed reducing their stimulus was met with a market sell-off. Perhaps the interpretation this time is that the economic recovery must be much better if the Fed is taking this action. I will be interested to see if any follow through occurs tomorrow and Friday.

Details: Written by Dr. Duke; Created: 17 December 2013

Here we are again, waiting on the FOMC announcement. The Standard and Poors 500 Index (SPX) dropped off $6 to close at $1781, while RUT dropped $1 to close at $1119. Trading volume was flat to down with 2.1 billion shares of the S&P 500 stocks trading, slightly down from yesterday. Trading on the NYSE declined 1% and trading decreased 5% on NASDAQ. Volatility has been steadily increasing each for the past several sessions, from 13.5% on December 9 to today's close at 16.2%. This suggests that the big institutional traders are a little concerned about the market's reaction to the FOMC announcement tomorrow afternoon. And I am concerned after watching the VIX steadily rise each day; it even rose yesterday when the market rallied!

That was a significant part of my reasoning in closing the remaining 1030/1040 put spreads from my December condor. These spreads were over four standard deviations OTM, so they appeared safe and most likely would expire worthless this weekend. But I decided it made more sense to confirm a nice gain and stand aside until the dust settles. This completed the close of our December iron condor spread on RUT with a gain of $3,530 on 20 contracts or +25.6%.

The Consumer Price Index (CPI) issued today with a flat, unchanged reading for November. CPI and PPI have been turning in flat numbers for several months, but this doesn't seem consistent with my personal daily shopping. I don't have any structured data, but it certainly seems like many of my food staples have been rising in price.

Buy your popcorn and settle in for the FOMC show tomorrow afternoon. Will the Fed make noises about reducing quantitative easing and cause the market to tank? Or is that news already priced into the weak sideways trading we have been seeing? Or will the oft predicted market correction be triggered as everyone tries to lock in their gains for the year? Or will the Fed assure everyone that the party will continue? It should be interesting...

Details: Written by Dr. Duke; Created: 16 December 2013

Just when you think you have the market figured out, it will surprise you. After weak trading for most of the last week, I thought the most likely course would be quiet trading until the FOMC announcement on Wednesday. But the S&P 500 Index (SPX) opened up very bullishly this morning and hit its high for the day about 30 minutes later. It closed the day at $1787, up $11. RUT rallied upward by $13 and closed at $1120. Trading volume bumped upward with 2.2 billion shares of the S&P 500 stocks trading today. Trading on the NYSE increased 4% and trading volume increased 21% on NASDAQ.

It appears that the Fed watchers have decided nothing will be said about starting to reduce the FOMC's stimulus programs on Wednesday and so the buying spree may safely continue. However, it is interesting that the VIX actually moved up a third of a point to 16% today in an up market. So the markets may be trading upward, but many traders are feeling at least a little bit nervous.

The Empire manufacturing survey came in at +1.0 for November, up from the -2.2 report from October. Industrial production increased 1.1% in November and capacity utilization increased to 79% in November from the previous month's 78.2%. All in all, the economic data reported today were pretty good, but not sufficient for this strong market rally. I think market action now is almost always about the Fed.

I only have the RUT Dec 1030/1040 put spreads still open from the Dec condor. I will decide whether to close them on Wednesday before the FOMC announcement. The 1040 options are now four standard deviations OTM, so they are very safe in ordinary times, but with the Fed meeting...?

Details: Written by Dr. Duke; Created: 13 December 2013

Trading volume fell off today and the market averages didn't move much when all was said and done. SPX closed unchanged at $1775 and RUT gained $4 to close at $1107. Volatility continues to inch higher with the VIX gaining two tenths of a point to close at 15.8%. Trading in the S&P 500 dropped off to 1.9 billion shares. Trading volume on the NYSE dropped 14% and trading on NASDAQ declined 15%. SPX continues to hover in that support range of $1770 to $1780 while RUT appears to be tracking along its 50 dma at $1106.

The only economic news was the PPI report for November, declining 0.1%.

I closed the remaining 1150/1160 call spreads in my December iron condor position on RUT. This results in a current P/L of +$3,430 on 20 contracts or 21% on capital at risk. I will close the 1030/1040 put spreads next week before the Fed announcement. Who knows where that announcement may take the market?

Enjoy your weekend.

Details: Written by Dr. Duke; Created: 12 December 2013

SPX closed down $7 today at $1776. But RUT climbed $2, closing at $1103. Maybe RUT was making up for some of its extreme move downward yesterday. In any case, SPX's move today broke a significant support level at $1780, and closed just above the highs set in late October. Many analysts have been saying that their bullish opinion on this market would only change if SPX broke support at $1780. Now, both SPX and RUT have broken the lower support levels of the sideways channel of the past few weeks. But tomorrow could tell a different story. Trading volume was pretty flat with 2.1 billion shares of the S&P 500 stocks trading. Trading volume rose 1% on the NYSE and dropped 2% on NASDAQ. The VIX rose only a tenth of a point to 15.5%.

Economic news was mixed. Retail sales came in unexpectedly strong with a 0.7% rise in November. But unemployment claims increased 68 thousand to 368k. Continuing unemployment claims rose by 40 thousand to 2.8 million. I have embedded a very telling chart from today's Investors Business Daily below the blog. The normal practice of the Labor Department is to exclude the unemployed workers from the count if they have given up looking for work, and this tends to result in lower unemployment numbers the unemployed "drop out". If one does include these workers into the total number of unemployed, the unemployment rate has been constant to about 11% throughout this recession. This correlates well with my perception, based on people I speak with in my neighborhood, at work and so on. The economic recovery we hear about is largely propaganda or naive ignorance.

My Dec RUT iron condor at 1030/1040 and 1150/1160 stands at a net P/L of +$3,390, or +21% with delta = +$4 and theta = +$167.