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The S&P 500 Index (SPX) closed today at $2397, down $2 for the day. The Russell 2000 Index (RUT) closed at $1392, essentially unchanged (up twenty two cents). But the NASDAQ Composite Index closed up $18 for a new all-time high of $6121. Normally, we see these three major market indices to be somewhat in sync. Most commonly, we draw conclusions for the divergence of the large blue chips represented in the S&P 500 from the small to mid-cap stocks of the Russell 2000.

SPX is bouncing off resistance at the upper edge of a trading channel that dates back to March 1st. RUT has been even more neutral, currently in the middle of a trading channel that dates back to the first week of December. However, the NASDAQ is a different story. That price chart has been steadily climbing higher since the election and today was no exception. NASDAQ is being driven by the high technology stocks that are on fire. Stocks like AAPL, AMZN, FB, ISRG, PCLN, GOOGL and many others are driving the NASDAQ Composite. It wasn't long ago that Google was approaching $500, and I thought that to be rarified air, but no more. Many NASDAQ stocks are approaching $1,000 per share. PCLN closed at $1911 today. We are in the midst of a high tech boom in the stock market. Most smaller companies and the large traditional blue chips were not invited to the party.

I find it interesting that the very success of these NASDAQ stocks is scaring many analysts. Predictions of a correction or worse are common. Price measures, such as P/E ratios and dividend yields do indeed suggest an overbought market, but far from historical extremes. Recent earnings announcements have been very positive with large numbers of companies beating analyst estimates and the outlooks for next quarter have been generally positive. Anyone who has much market experience will be quick to tell you that corrections are exceedingly hard to predict. Bull markets will ignore a lot of negative news and then one day... they won't.

What is a trader to do? I have been buying diagonal call spreads on some of these hot NASDAQ stocks. I am hedging my bets a bit by selling the front dated call slightly in the money. That gives me a lower break-even price, allowing the trade to tolerate some minor pull-backs. But don't take a long nap. This market requires close monitoring.

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The major market indices continue to trade sideways, and volatility is quite low. SPX closed today at $2391, up less than three dollars. The volatility index for the S&P 500 index, VIX, closed at 10.5% today, near the lows for this year. SPX has been trading in the range of $2320 and $2400 since mid-February. Powerful market forces are arrayed on either side of this market. The bulls are citing a more business-friendly administration, a reduction in regulations and prospects of tax reform. The bears cite several months of stellar market advances, high price/earnings ratios, and an aging bull market. It doesn't seem as though any negative news affects the market. Every dip is quickly bought, but the market can't seem to quite make the break-out to new highs either.

For the last couple of months, I have been loading my portfolio with iron condor positions on the S&P 500 index (SPX), The Russell 2000 index (RUT) and the NASDAQ 100 index (NDX). Today, I sold the NDX May 5375/5400 and 5800/5825 iron condor for a credit of $195 per contract. Yesterday, I sold the NDX June 5200/5225 and 5825/5850 iron condor for $506 per contract. The disadvantage of selling iron condors in this environment is the low implied volatility, which lowers the option premiums. On the other hand, that low volatility is one more sign of the sideways, treading water nature of this market, and that favors these trades.

Don't neglect trade management. Entering this positions and then going on vacation is a prescription for disaster. Be sure you have a clear plan for risk management, e.g., if SPX breaks down through $2300, I will buy one $2300 put for every ten condors. Establish a series of these rules and trade what the market gives you each day. Don't try to predict its movement tomorrow.

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SPX closed today at $2359, down four dollars, after bouncing off the 50 dma at $2341. This mirrors last Monday, when the 50 dma provided support for SPX. I am paying close attention to the 50 dma as my trigger for adjusting and closing positions. The Russell 2000 Index behaved even more bearishly today, breaking down through the 50 dma, and closing down $16 at $1370. But the NASDAQ Composite is still holding up rather well, closing today at $5895, down $17, but near the top of its recent trading range.

SPX and RUT are solidly in sideways trading patterns, but seem to have enough bullish support to hold the line when the bears mount a charge to the downside. My concern is what event might finally rattle the bulls. This rally was built on expectations of a better economy under the new administration, but Washington gridlock appears to remain the norm. When the bulls lose faith, it could get ugly.

Will the jobs report this Friday be the seminal event?

In the meantime, classic delta-neutral trades are a good fit for this market.

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We are well into earnings season. IBM was weighing heavily on the Dow Jones Industrial Average today after disappointing analysts during their earnings announcement yesterday. But the heavier weight on the markets is the diminishing euphoria that pushed the markets higher after the election last year. The realities of politics and the difficulty of delivering on campaign promises is throwing cold water on this market.

The Standard and Poors 500 Index (SPX) closed down four dollars today at $2338, but the Russell 2000 Index (RUT) closed five dollars higher at $1367. Volatility rose a bit with the VIX rising a half point to 14.9%.

Trading volume in the S&P 500 stocks ran at 1.9 billion shares today. Trading volume has run below the 50 day moving average (dma) since March 20th. Below average trading volume tells us that the large institutional players aren't panicking and selling, but it also tells you that those same players aren't going "all in" either.

Pull up the price chart for SPX. Draw trend lines at $2320 and $2400. SPX has traded sideways within this channel since mid-February. This  sideways trading channel is even more obvious in RUT, and has been in place since early December.

So what should we be trading today?

In spite of the overall market averages trending sideways, there are a few high fliers that deserve a bullish trade. Consider BABA, CMG and ISRG for straight forward bullish trades: long stock, covered calls, diagonal call spreads, etc.

Non-directional options trading strategies are perfect for this type of sideways market. Consider "at the money" calendar spreads, butterfly spreads, and iron condor spreads on the major market indices (SPX, RUT, and NDX).

Good trading.

 

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Market analysts have been nervous since last Tuesday's meltdown. The "sky is falling" gurus have been preaching correction to anyone who would listen. But the balance of last week's trading was somewhat reassuring - sideways beats going farther down. But the doomsday gurus appeared to be getting their wish this weekend as the futures plunged. The SPX futures this morning were downright ugly and SPX opened at $2329 and traded down as far as $2322 before finding support. Then a steady grind higher began that lasted virtually all day, hitting its high for the day at $2345 just a few minutes before the close at $2342, down two dollars on the day. The 50 day moving average (dma) stands at $2332, so technical analysts will observe that support at the 50 dma held, even though it briefly dipped below support intraday. The other positive piece of data was found in today's trading volume in the S&P 500 companies: 1.9 billion shares with the 50 dma at 2.1 billion shares. The final positive indicator came in VIX, the volatility of the S&P 500. VIX spiked to over 15% this morning, but immediately began its retreat, closing at 12.5% for the day. The trends in volatility and trading volume show that traders didn't panic.

Tomorrow's opening will be crucial to see if the market follows through on today's reversal, but the preponderance of the evidence seems to point to the bulls retaining control of this market.

The Russell 200 Index (RUT) displayed a similar trading pattern to SPX, opening weak, hitting a low at $1335, but then recovering at close at $1357, up three dollars on the day. This close for RUT places it squarely within the sideways trading channel of the past four months.

Looking forward this week, the only significant economic data scheduled to report is the final estimate of fourth quarter GDP on Thursday. Unless there is a big revision downward, that report isn't likely to move the market; we already know last year's growth was anemic. Maybe the risk to the bulls is in the political realm, but predicting Washington political moves makes predicting market tops and bottoms look easy.