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The markets chopped back and forth all morning anticipating this
afternoon's FOMC announcement. When the announcement finally hit the wires, the
markets dropped a bit and the standard analysis was that traders were
disappointed with the Fed's Operation Twist. But operation twist was
telegraphed plainly to the markets over the past few weeks; I think that news
was “baked into” the market’s pricing. So the market sold off on the news (buy
the rumor; sell the news).
I think the first reaction of analysts was to study all of the details
concerning Operation Twist, but then they stumbled onto some unusual Fed
language: “Moreover, there are significant
downside risks to the economic outlook, including strains in global financial
markets.” In my
experience, the Fed has always used very obtuse and measured language that
keeps everyone guessing the real meaning. But “significant downside risks” is
pretty plain and strong language. That may be what led to the flurry of selling
in the last hour of trading today.
SPX lost $35 to close at $1167 while RUT closed at $665, down $25. Trading
volume spiked upward with 3.9 billion shares of the S&P 500 stocks trading
today, well over the 50 dma. Trading volume was also up on the NYSE and NASDAQ, with increases of 32%
and 13%, respectively. Today’s big drop took the major market averages back
near the middle of the trading range we have been in for the past six weeks or
so. Will we retest the lows of early August?
I took this opportunity to close the Oct 770/780 calls in my RUT Oct iron
condor, leaving the 500/510 put spreads in play. I have been forced to hedge
the call spreads several times over the past few weeks, so when I had an
opportunity to close those spreads for a profit, I took it. Presumably, I will
have an opportunity to reposition those call spreads farther OTM later this
month. At that time, I will also roll the put spreads upward and confirm most
of those gains.
So now we watch for clues: Retesting the lows? Breaking through to a full fledged bear market? Bouncing back and staying in this trading range?
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The markets traded up strongly today, but the bears pulled the market back during the last hour of trading. SPX traded up to $1220, a strong resistance level, and pulled back to close at a small $2 loss at $1202. RUT traded down $12 to close at $690. Trading volume was flat to down with 2.9 billion shares of the S&P 500, down from yesterday and below the 50 dma. Trading volume on the NYSE and the NASDAQ was up 1%.
Traders are focused on the FOMC statement due out tomorrow afternoon. In my opinion, there is an unrealistic expectation for the Fed to somehow pull the market out of this hole. Much discussion has focused on the expected "twist" program, but very few economists have an expectation that this would have much effect on the economy or the markets. Thus, my expectation is for the FOMC to disappoint the markets tomorrow. It is unclear whether this is priced in or not - perhaps today's sell-off was the anticipation of the announcement? In any case, it is hard to build a bullish case for this market.
My Oct iron condor at 500/510 and 770/780 stands at a P/L = -$1444 with delta = -$46 and theta = +$111. Now we return to Fed watching.
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The S&P 500 slowed its advance today as it hit areas of resistance around $1220. SPX closed up $7 at $1216, but RUT noticeably slowed with a meager $1 advance to close at $714. Trading volume jumped upward with 3.9 billion shares of the S&P 500 trading today, well above the 50 dma. Trading increased 59% on the NYSE and increased 36% on NASDAQ. But much of this volume increase was due to options expiration. The University of Michigan consumer sentiment survey for September was released this morning, 57.8, up slightly from August's 55.7. The department of labor released unemployment data for the states today, showing that unemployment rose in 26 states, fell in 12 states, and remained unchanged in the remaining 12.
RUT settled at $717.19 this morning, so all of the spreads in my Sept iron condors on RUT will expire worthless. That results in a 13% gain for one position and a 19% gain for the other position. It is worth noting that both of these condors originated about a week before the market crashed in August and yet they made nice profits - the power of adjustments!! This brings the year to date gains for the Flying With The Condor™ service to 29% - pretty impressive when compared to a 3% loss for the S&P 500 over the same period of time. Perhaps you should consider auto-trading this service. Returns this high are normally only available to multimillionaire investors in private hedge funds with hefty performance fees. A 29% return for only $149 per month is a great value and isn't likely to stay that low for long.
The Oct iron condor on RUT stands at a P/L of -$3,324 with delta = -$33 and theta = +$47. All eyes are focused next week on the FOMC and any statements regarding additional monetary policies designed to shore up the economy. My guess is that traders will be disappointed. But, in the meantime, focus on your family for the weekend. Worry about Monday's market Monday morning.
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Traders apparently were expecting better news from Europe over the weekend. S&P futures tanked last evening and the negativity continued into today's markets. SPX traded down as low as $1188 before recovering some of the losses to close at $1204, down $12 on the day. RUT also lost $12 to close at $702. No significant economic data was released today. Obama revealed his plan to create jobs and that certainly didn't help today's markets. It was the same old "soak the rich and keep on spending" message. Traders saw this as a signal that the political camps are digging in for a prolonged fight. Nothing significant is likely to come out of Congress until after the 2012 elections. If this analysis is correct, this sideways, choppy market is likely to continue. The exception might occur if the infamous double dip actually came to pass. Signs of a renewed recession will push the markets to new lows. But the bullish case is supported by the unusual situation we have today where stock yields are better than bond yields - that is pushing money into equities out of bonds. But the headline risk from Europe may instead push those monies to the safety of cash (short term treasuries).
I removed the call hedges on my Oct condor this morning; this is the third time I have been whipsawed into and out of these hedges. My maximum profit on this position has been seriously eroded. I may have an opportunity to reposition this condor and improve the potential; we'll see. The position now stands at a P/L of -$3164, delta = -$80 and theta = +$130. The two-day FOMC meeting starts tomorrow. I don't expect anything to come out of that meeting that will affect this market one way or the other.
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Today turned out to be a positive day in the markets, but this morning illustrated the extreme precariousness of this market. The market opened up positively and traded upward, and then lost about $12 in about 5 minutes or less. As it turned out, the panic was based on a report of a committee vote in Austria dealing with procedural agenda arrangements for the eventual vote of their Parliament on the European bailout package. Within a few minutes, the markets recovered and traded upward steadily until the last 30 minutes of the day, when they sold off. SPX ran as high as $1202 before closing at $1189, up $16 for the day. RUT gained $12 to close at $704. Markets were encouraged by reports that the leaders of Germany and France assured Greece they would have emergency loans available to prevent default until the European Union bailout package became available.
Retail sales came in flat for August as did the PPI. A flat PPI was reassuring since many analysts have been concerned about inflation heating up. But flat retail sales were a concern.
Trading volume in the S&P 500 rose to the 50 dma at 3.6 billion shares; trading on the NYSE dropped 2% while volume rose on NASDAQ by 19%.
Today's trading reinforced two conclusions about this market: 1) It is an extremely volatile market - and those words don't do it justice. It can turn and run you over while you go to get a snack. 2) We are trapped in a trading range of about $1120 to $1220 (you might define the range a bit differently if you use the intraday highs and lows). Be cautious.
My September condors are well positioned to have all of the current remaining spreads expire worthless. All of the spreads are over two standard deviations OTM. My Oct condor stands at a P/L of -$3,000 with delta =-$70 and theta = +$120. The call spreads at 770/780 are under pressure. We'll see what tomorrow brings.
