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SPX opened this morning just above the 200 dma, but that was short-lived. As the day wore on, the selling intensified. Traders appear to be spooked by the prospects of a debt rating downgrade and the old news of a weak economy and continued high unemployment. All of the major market indexes logged large losses. SPX closed at $1254 for a loss of $33. And RUT lost $26 to close at $767. SPX is now in the area of $1250 to $1260 where the downturns in March and June both landed before turning upward. Trading volume was again up significantly with four billion shares of the S&P 500 trading. Trading was up 13% on the NYSE and was also up 7% on NASDAQ.
The one anomaly on the day was VIX. VIX opened at 24.2% and closed at 24.8% - unusual for a day where the major indexes lost so much value. This suggests that large institutions aren't aggressively buying protection in this market and that seems surprising.
My Aug and Sept iron condors on RUT have only their put spreads in play now; both call spreads have been closed. The put spreads are at 670/680. Earlier today I would have considered those to be in a safe position, but today's market drop has me wondering. It is interesting that the debt limit deal that everyone seemed convinced a week ago was so crucial now appears to be irrelevant. Tomorrow should be interesting. If the broad market indexes continue downward tomorrow, we will have broken the lows set in the last two corrections. Then we will have to seriously consider the prospect that the bull market has ended and a new bear market trend has begun.
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Traders were encouraged by news of a debt ceiling deal this morning and stocks traded up strongly. But then it seemed that reality came crashing down on everyone - the ISM manufacturing index came in at 50.9 for July, down significantly from last month's 55.3, reminding us that the economy continues to struggle. In addition, many analysts finally tumbled to the prospect that America's debt rating was likely to be downgraded since the debt ceiling deal didn't really address the long term debt problem. SPX ran as high as $1307 before collapsing to a low of $1275, and then gradually rebuilding as the day went on. SPX closed at $1287, down $12 on the day. RUT lost $4 to close at $793. SPX closed above the 200 dma at $1285, but just barely. Trading volume was down from Friday's elevated levels, but remained high with 3.3 billion shares of the S&P 500 trading today; trading volume was down 4% on the NYSE and was down 3% on NASDAQ.
I took the opportunity to close the 900/910 call spreads of my Sept RUT condor, confirming a nice gain on the upper side of that position. The 670/680 put spreads remain almost two standard deviations OTM. Ironically, I also have the 670/680 put spreads remaining in the August condor position, but those spreads are about three standard deviations OTM. Unless the U.S. declares bankruptcy, the Aug and Sept condors should close with gains of 14% and 13%, respectively.
With the focus turning to the debt rating agencies, Standard and Poors and Moody's, this market malaise isn't likely to end soon.
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Markets tried to add some small gains today, but were pulled back this afternoon to modest losses. SPX closed at $1301, down $4 while RUT closed down $1 at $799. RUT ran as high as $810 before being pulled back down. Trading volume on the S&P 500 dropped a bit from yesterday but remains above average at 3.3 billion shares.
Initial unemployment claims dropped to 398k, down from last week's 422k. Continuing claims dropped by 17 thousand but remain around 3.7 million. Pending home sales rose 2.4% in June, but this was down from last month.
My Aug condor consists only of 20 contracts of the 670/680 puts with delta = +$24 and theta = +$82; the delta of the 680 puts = 5. The Sept iron condor on RUT stands at a P/L of +$100 with delta = -$6 and theta = +$73. Since I don't expect much progress on the debt ceiling issue, I suspect we have more of this dismal sideways to downward action in front of us for a while.
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The markets continued their sideways to downward dance today. And the debt ceiling was all anyone at CNBC could talk about - more Chicken Little drama. Ironically, the concern appears to boil down to whether our debt will be downgraded by S&P and/or Moody's (lest we forget, the same people who said all of that sub-prime mortgage debt was just fine). Most sane observers who haven't drank the kool-aid agree that a default on the debt is very unlikely. The irony derives from the fact that it is highly unlikely that the eventual compromise in Congress will do anything substantive to actually decrease our debt or even decrease the rising rate of debt creation. So the downgrade is probably coming, and it appears that the experts aren't too sure about what that means. Many speculate about rising interest rates, but considerable uncertainty persists. And, of course, the equity markets don't like uncertainty. We "fix" uncertainty by discounting the prices.
The first quarter GDP growth was revised downward to 1.3% from 1.7% and second quarter GDP grew 1.3%. This revived talk of a double dip in the economy; that spooked traders as much or more than the debt ceiling debate. The Chicago PMI report dropped a bit to 58.8 for July (61.1 in June). So traders didn't have much good news today, and it showed in the markets. SPX closed at $1292, down $8 and RUT dropped $2 to close at $797. SPX was seriously down at the open, but bounced off the 200 dma and recovered to be in positive territory briefly before selling off in the afternoon. Trading volume was up again with 3.5 billion shares of the S&P 500 trading. Trading volume was up 15% on the NYSE and up 10% on NASDAQ. The VIX closed at 25.3%, up again today. It is interesting to note that the 200 dma held when the market corrected in mid June. Will it serve as support again? The 200 day moving average of the SPX stands at $1285. It is worthwhile to keep an eye on that line in the sand.
My puts remain from the Aug iron condor on RUT, and so far, are OK with a delta of 5 on the short $680 puts. The Sept condor now sits perfectly delta neutral at delta = +$7 and theta = +$75. But the rising IV has taken its toll, forcing the P/L back to break-even. But remember: the ultimate profitability has not changed; if we are forced to close the put spreads prematurely, the increased IV will hurt us, but if we stay in the position to expiration, our full profit is still feasible.
So your assignment for the weekend is clear: postpone any more market worries until Monday morning and enjoy your family and friends. Remember what is truly important.
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Traders came near to panic selling, especially in the last hour of trading today. SPX sliced down through its 50 day moving average on increased volume - not a good sign. SPX closed at $1303, down $28. RUT lost $24 to close at $801. Over 3.5 billion shares of the S&P 500 traded today. We haven't seen that level too often this year and only a handful of times this summer. It seems the durable goods orders declining 2.1% in June after a 2% increase in May was discouraging to traders, and the Fed Beige Book just reinforced the fact that the economic recovery is slow at best. Then one has only to add on the breathless media attention to the debt squabbles to see why some traders are starting to run for cover.
I took today's downturn as an opportunity to close the 890/900 call spreads in my Aug RUT iron condor. The remaining 670/680 put spreads are about three standard deviations OTM, but it wouldn't take many days like today to start to be a problem for those spreads. The Sept RUT condor stands at a P/L of +$200 with delta = -$3 and theta = +$67. The Greeks reaffirm that this position is now very well centered on the index, but the spike upward of IV today weighed on my condors (VIX jumped to 23%). Days like today remind us to stay calm and just follow our trading systems; even when everyone (especially on CNBC) appears to be in a panic, stay calm and follow your rules.
