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The long awaited downgrades of the sovereign debt of nine European countries were announced today and talks broke down for negotiating Greek debt to avoid an outright default. With those headlines alone, you might have expected a bloodbath in our markets, but that wasn't the result. SPX dropped as low as $1278 but recovered much of the early losses to close at $1289, down $6. RUT also lost $6 to close at $764. The other surprise was trading volume. Trading in the S&P 500 was flat from yesterday at 2.8 billion shares; this is just below the 50 dma at 2.9B. Trading on the NYSE was up 4% and volume was down 1% on NASDAQ.
A similar story was told in the VIX. It jumped early today to 22.4% but closed at 20.9%, for an increase of 0.4 points. The University of Michigan Consumer Sentiment report came in for January with a 74.0 reading, up from last month's 69.9.
I must admit to being surprised at this market's reaction to the negative European debt rating news. One must conclude that the fears of a spreading "European contagion" are not as strong as I once thought. GS only traded down by $2.25 today. And remember we had a potential "double hit" to financial stocks with the European debt news and the disappointing earnings announcement from JPM.
Today's slight pull back actually helped my Feb iron condor spread on RUT with 20 contracts. It now stands at a net gain of $2,020 with position delta = -$38 and position theta = +$74. I don't always mention it, but remember that position Greeks are dependent on the number of contracts, so if your position Greeks don't match mine, that is likely the reason. Earlier today, I was a bit concerned about negative developments in Europe over the weekend impacting world markets Monday while our exchanges are closed. A couple of years ago, something similar happened, leaving us with hugely negative futures for Tuesday morning. But today's recovery from intraday lows shows significant underlying strength in this market. I still worry, but not quite so much...
Enjoy your weekend. If you get a chance, download Martin Luther King's "Dreams" address. I think you will be surprised how far afield we have drifted from his dream. Now, more than ever, we focus on a man's color, not his character.
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Most traders were expecting good economic news this morning with lower unemployment claims and robust retail sales for December. But that wasn't the case. Unemployment claims rose to 399k, up from last week's 375k and retail sales for December rose a tepid 0.1%. Thus, markets traded down and hit lows mid-morning. However, the bulls then started buying and drove the markets slowly higher the balance of the day. SPX closed at $1296, up $3 and RUT also rose $3 to close at $770. Trading volume was flat from yesterday with 2.8 billion shares of the S&P 500 trading. Trading volume was up 2% on the NYSE and down 3% on NASDAQ.
The bullish news is that SPX has now closed above support at $1285 for three trading sessions. Support was tested yesterday and today, but it held in both cases; note the long tails on yesterday and today's candlesticks. By contrast, RUT only today has finally reached the late October highs around $770. So the same story continues to play out in the markets: there is sufficient moderate to good economic news here in the states to support the markets, but the specter of European sovereign debt holds the markets back. If you follow the seasonal trends of the stock market, you know that we are entering a traditionally weak part of the year following the Santa Claus rally. But this year may be different. The market seems to do its best to surprise us just when we think we have it figured out.
My Feb RUT iron condor at 590/600 and 840/850 stands at a P/L of +$1,700 with position delta = -$50 and position theta = +$79. The 840/850 call spreads are just outside of one standard deviation OTM. The 670/680 put spreads are all that remain of my Jan RUT iron condor position.
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Traders appear to be forgetting about their concerns over the European sovereign debt crisis. SPX broke resistance at $1285, set in late October and closed at $1292, up $11. RUT followed suit, running up $11 to close at $765. Unlike SPX, RUT didn't break the October highs at $770. These new highs were set on increased volume with 3.2 billion shares of the S&P 500 trading today; the 50 dma is at 3.2B. Trading volume was up 16% on the NYSE and increased 2% on NASDAQ. The VIX dropped down to 20.7%, the lowest level since late July, just before the August crash.
There was no significant economic news to boost the market today. The true test of this bullish rally will be a negative news item out of Europe. Has the fear of "European contagion" been completely eliminated? Or do traders just have a short memory? Perhaps the prospect of continuing to sit on the sidelines is just proving too frustrating.
My Feb iron condor on RUT stands at a P/L of +$1,780 with position delta = -$41 and position theta = +$74 (20 contracts). The 840/850 call spreads remain outside of one standard deviation with 37 days until expiration, but the theta/delta ratio is deteriorating as the index heads higher. The question on everyone's mind is simply whether the broad indexes can continue higher or if deteriorating US and European debt issues will drag the market back into a tight trading range.
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Just as I was starting to think our markets had shaken off fear of the European sovereign debt crisis, we start the day with the major indexes down based on concerns from across the pond. But the markets fought back to close flat or with small gains by the end of the day. SPX closed unchanged at $1292 and RUT gained $2 to close at $767. Trading volume dropped off with 2.9 billion shares of the S&P 500; this is right at the 50 day moving average. Trading was down 10% on the NYSE and was down 6% on NASDAQ.
Today was a light day for economic news here in the states, but tomorrow will bring unemployment claims and retail sales for December.
AAPL finally took a breather from its upward climb today. If you are considering trading AAPL in advance of their earnings announcement, you might check out my blog today over at Traders' Library.
My Feb RUT iron condor stands at a P/L of +$1,700 with a position delta of -$41 and theta = +$80. I haven't mentioned it lately, but I am still carrying the Jan RUT 670/680 put spreads as the remnant of the latest January condor position. That trade stands at +$720 with position delta = +$7 and theta = +$21. The short puts have a delta of 2 and stand nearly three standard deviations OTM with eight days remaining. I will probably close the remaining put spreads next week and initiate the March condor.
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Today was another low volume, largely no-movement kind of day. This becoming the norm for this market. SPX gained $3 to close at $1281 while RUT gained $4 to close at $754. SPX chopped largely sideways today; it traded as low as $1274, so support held even on an intraday basis. RUT is stalled at the long-term resistance level around $750 - $755. This is the portion of the RUT chart that corresponds to the $1270 level on SPX, so while SPX has broken that long term resistance level, RUT has been unable to close decisively above that level. Trading volume in the S&P 500 declined again today to 2.6 billion shares; the 50 dma is at 2.9 billion shares. The 50 dma has been steadily declining since roughly mid-October of last year. Trading volume on the NYSE was up 2% and increased 6% on NASDAQ. The VIX moved up about a half point to 21% today - probably not significant.
Today was a light news day, so there wasn't much to push traders one way or the other. The bulls continue to be held back by fears of the European sovereign debt issues, while the bears have to admit to strong corporate earnings. In fact, on a P/E basis, the S&P 500 is about as inexpensive as it has ever been. So the markets are trapped in this trading range. If something decisive were to be accomplished in Europe, there is a strong pent-up bull market lurking in there.
My Feb RUT iron condor 590/600 and 840/850 continues to build profits with a net P/L of +$1,920 and position delta of -$27 and theta = +$71. Although the current gains are tempting, this position has the potential for a $3,400 gain, so I will be patient and allow time decay to do its thing.
