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Traders returned from the Labor Day holiday amid concerns for the health of the European Banks. This weighed heavily on financial stocks in our markets, and those selling pressures led to some profit taking in other sectors as well. The European financial concerns drove the Euro down and led to increased strength in the U.S. dollar, further weakening U.S. equities. I expected increased trading volume coming off the holiday weekend, but trading volume was weak virtually across the board. Trading was down 13% on the NYSE, but up 2% on NASDAQ. The S&P 500 stocks traded down significantly from last week to 2.7 billion shares, well below the 50 dma at 3.6 billion shares. RUT lost $14 to close at $629 and the SPX closed at $1092, giving up $13. Both indexes broke down through new support levels, which are the old resistance levels broken on the way up last week. The SPX broke down through its $1100 resistance level but remained above the 50 dma at $1082; RUT stopped just above its 50 dma at $627. I didn't find today's weakness too alarming due to the low volume and the fact that it wasn't based on some fresh economic news that the markets found to support the double dip fears.
My Sept iron condor is in excellent position with its P/L of +$2,350, delta = $1 and theta = +$82. The call spreads are over four standard deviations OTM while the put spreads are 3.4 standard deviations OTM. I made some adjustments to the Oct condor today that improved its position to a P/L of -$340, delta = -$29 and theta = +$117. For the directional trader in you, I suggest AAPL. I was impressed with AAPL today as the market indexes all pulled back significantly while AAPL lost less than a dollar per share. I have had the Jan 2011 270/300/330 call butterfly on AAPL for a couple of months and I think this remains a strong year-end play.
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The markets were pleasantly surprised by the nonfarm payroll data this morning. The loss of 54 thousand jobs was greeted positively because the street was expecting worse news; the unemployment rate rose slightly to 9.6% but that wasn't regarded as a significant change. The markets opened strongly on this news and ran up until mid-morning when the ISM Service Index reported out at 51.5 while 53.0 was expected. The markets pulled back sharply but then slowly recovered throughout the day to close near or at the highs for the day. The SPX blew through resistance at $1100, then pulled back, but then closed at $1105, up $14 for the day. RUT behaved similarly, closing at $643, up $11. All in all, it was a bullish day in the markets with the exception of weak trading volume. Trading volume of the S&P 500 stocks dropped to 3 billion shares while trading on the NYSE and the NASDAQ both declined 1%.
My condors stand approximately where they were yesterday; the Sept condor is up $2,290 with delta = +$2 and theta = +70. My Oct condor stands at a P/L of -$520, delta = -$99 and theta = +$65. When the market opened so strongly this morning, I hedged the Oct condor, but then I took the hedge off when RUT pulled back so strongly. Of course, by the end of the day, I should have had that hedge in place - the classic whipsaw.
All the signs for the past three days have been very bullish - the market appears to have significantly changed its mood. Even mediocre economic news is now being regarded positively - a big change from several weeks ago. What happens on Tuesday when everyone returns from the holiday weekend? Will the bulls remain in control?
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The markets opened strongly up this morning in spite of a disappointing ADP jobs report of a loss of 10,000 jobs. The August ISM Manufacturing Index reported out at 10 am and surprised traders with a value of 56.3 for July, up from 55.5 for June. This fueled the market's rise for the balance of the day. Undoubtedly, the market's strong rise this morning was fueled by traders covering their short positions, but it was a surprisingly strong day for the markets. The major indexes closed at or near their highs for the day. SPX bumped up against the 50 dma at $1081 and closed at $1080, up $31. RUT ran up $23 to close at $625, near its 50 dma at $628. Trading volume was down a bit from yesterday, with a 7% decline on the NYSE and a 3% increase on NASDAQ. The S&P 500 stocks traded 3.9 billion shares, slightly down from yesterday but still above the 50 dma.
Both RUT and SPX convincingly broke out of the trading ranges of the past several days; if SPX can break through its 50 dma at $1081, the next resistance level will be $1100. RUT's next strong resistance level is in the area of $640 to $645.My Sept RUT condor is strongly positioned with a P/L of +$1,950 with position delta = +$16 and position theta = +$94. The "sweet spot" for this condor is around $640; both spreads are now greater than two standard deviations OTM with 15 days to go. The Oct condor is being stressed by this large upward move. It stands at a P/L of -$280 with position delta = -$56 and position theta = +$90. The delta of the $690 call is up to 14. The reduction in the theta/delta ratio shows the weakening of this position as RUT rallies. It will be telling if the traders open the day taking profits tomorrow, as has been typical of recent rallies. And, of course, the bogeyman of the unemployment report is lurking around the corner.
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Most market watchers were surprised by the strong bullish day yesterday, but they may be even more surprised by today's strong follow through. The major indexes traded steadily higher all day and closed at or near their highs for the day. This is a bit surprising given the jobs report due out tomorrow morning. One might have expected some modest pullback at the close as traders considered the possibility of a poor unemployment report tomorrow morning. The report of initial unemployment claims came in at 472k this week, down six thousand from last week. Continuing unemployment claims also dropped slightly to 4.456 million from last week's 4.479 million. Pending home sales rose 5.2% and factory orders for July rose 0.1%. It is hard to find economic news to account for the recent rallies; it just seems the mood on the street has changed. SPX blew through its 50 dma to close at $1090, up $10 while RUT rose $7 to close at $632. Trading volume dropped off significantly today with a 17% decline on the NYSE and a 22% decline on NASDAQ. 3.1 billion shares of the S&P 500 stocks traded, a 21% decline from yesterday's strong volume day.
My Sept iron condor on RUT at 530/540 and 740/750 now stands at a P/L of +$2,270 with a position delta of +$8 and position theta of +$54. Both spreads are greater than two standard deviations OTM. Closing the 20 contract position now would leave about $500, including commissions, on the table. My normal rule would be to evaluate this trade next Friday and, if both spreads were still OTM by over 2 SD, I would allow them to go into expiration. But I may be tempted to close this position after the holiday and take my profits because I still consider this a dangerous market. The Oct iron condor is a bit underwater at P/L = -$460, delta =-$71, and theta = +91. The 690 calls have a delta of 15, so we are close to triggering an adjustment. If tomorrow's market pulls back a bit, that will help this Oct position but be indifferent for the Sept position.
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Watching today's market reminded me of Shakespeare's quote. The markets opened down, then recovered and chopped sideways until weakening after the FOMC minutes were released. Then the markets recovered to close essentially unchanged for the day. SPX closed unchanged at $1049 after trading as low as $1041 and as high as $1055. RUT, in a similar pattern closed unchanged at $602. Even more surprising is that all of this thrashing back and forth occurred on a large surge in trading volume - just when we thought everyone had left for the weekend. The S&P 500 stocks traded 3.7 billion shares, right at its 50 dma. Trading volume on the NYSE was up 54% and up 30% on NASDAQ.
This morning's market reacted to the plunging Chicago PMI at 56.7, the lowest reading since last November but then was encouraged by the Consumer Confidence numbers increasing to 53.5 from last month's 51. More positive news came from the 4.2% increase in housing prices from the Case Schiller Housing Price Index. Just after the FOMC minutes were released, the market didn't appear to have much of a reaction. But then the markets sold off pretty hard but recovered before the close. Apparently, reading some of the FOMC committee's comments wasn't really news, but it reinforced a sobering view of the economy. RUT is almost exactly in the middle of the $588 - $617 trading range it has established recently. SPX tested support at $1040.
My Sept iron condor sits at a P/L of +$1,290, delta = +$44 and theta = +$106 and the Oct iron condor has a P/L of +$40 (essentially breakeven), with delta = -$22 with delta = +$91. Both trades are well positioned with strong theta/delta ratios. As long as we trade within the range of the past few weeks, these trades should remain strong. However, this market is still a very volatile, tricky market; it could fall off the edge at any moment. Watch your positions carefully.
