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As noted in my blog yesterday, I was concerned whether the major indexes could hold as support the resistance levels they broke yesterday, e.g., $1042 on SPX. Well, they did better than that, they closed above yesterday's closing prices. SPX closed at $1070, up $10 after trading as low as $1058, well above the strong resistance level of $1042 that was broken yesterday. RUT closed at $620, up $9. RUT traded down to $612, which was yesterday's close, but then rallied to close at $620. So the DJIA, SPX, and the RUT all traded down and tested yesterday's closing prices before trading higher today. All of this price action was very bullish and supports the idea of a bottom on the correction having been reached. However, it was on even lower volume than yesterday; trading on the NYSE was down 8% and trading was down 5% on the NASDAQ. Less than 4 billion shares of the S&P 500 stocks traded today, down from yesterday and well below the 50 day moving average, which is just below 5 billion shares.
A reduction in the number of initial unemployment claims cheered the market; the numbers came in at 454k this week, down from 475k last week. Similarly, the number of continuing claims dropped by 230k to 4.41 million. However, it is difficult to know how many of those 230k are now employed or whether they simply ran out of benefits.
My Aug condor is pretty much unchanged from yesterday with a P/L of -$1720, delta = -$37, and theta = +$97. The theta/delta ratio is high and the current value of the index is close to equidistant from the OTM call and put spreads. The price action of the past few days may have you looking for bullish trades, but beware of the low trading volume. This market is still dangerous.
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I am running out of superlatives to describe recent market action. It seems like traders are being jerked back and forth nearly every day. It reminds me of Greek mythology where the Gods toy with the humans - the market Gods are having fun with us. No significant economic news came out today to justify this huge run. In fact, the talking heads on CNBC were having a hard time explaining the move today. Perhaps the absence of bad news was sufficient motivation for traders. Trading volume was light today with a 1% decline on the NYSE and a 3% rise on the NASDAQ. The S&P 500 stocks traded 4 billion shares, flat with yesterday and well below the 50 day moving average.
SPX closed at $1060, up $32, while RUT ran $22 to close at $612. Big moves on light volume shouldn't be trusted so beware of tomorrow's market; don't just blindly start going long. It would not be surprising to see some of today's gains given back. I will be watching to see if SPX can close above the critical $1042 resistance level that was broken today. Closing above $1042 for a couple of sessions will offer some reassurance that a bottom has been reached.
I rolled the 730/740 call spreads of my RUT Aug iron condor down to 680/690 this morning. The put spreads are split between 510/520 and 550/560. At the close today, this position is well positioned with a position delta = -$14 and position theta = +$93.
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Trading volume dropped dramatically from yesterday; it almost seemed as though traders had positioned themselves for the unemployment report and the actual announcement was a non-event. Trading volumes were down significantly across the board. Trading on the NYSE dropped 32% while trading on NASDAQ dropped 39%. The S&P 500 stocks traded 3.2 billion shares, down significantly from yesterday's 5.5 billion shares.
Nonfarm payrolls dropped 125k but much of that was expected due to census workers being released. The unemployment rate dropped from 9.7% to 9.5% and factory orders dropped 1.4% in May. So the news wasn't terrible, but it wasn't very reassuring either. The market traded up at first but then began a slow decline through most of the day. The major indexes tried to recover the day's losses in the last hour of trading, but still ended in a loss. RUT lost $6 to close at $599 while the SPX closed at $1023 for a loss of $5.
My Aug iron condor on RUT at 550/560 and 730/740 stands at a P/L of +$280, delta = -$27 and theta = -$48. The delta of my $560 puts is at 29, so I can't release the Sept put hedge. A combination of the two Sept puts and the fact that I closed half of my put spreads has resulted in my theta going negative. This situation can't be allowed to continue long. If the market doesn't bounce back upward next week, I will be closing the rest of the put spreads and rolling them downward. That will restore our positive theta. Yesterday's and today's market action appear consistent with creating a bottom, but the low volume forces us to defer our conclusion. So remain vigilant.
Enjoy the holiday.
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The markets opened up pretty strongly this morning, but soon lost their momentum and started selling off. However, the Russell 2000 Index (RUT) stood out from the pack today and just continued to sell off all afternoon. It was the only major index to post a loss for the day. RUT closed down $9 to close at $590, matching the intraday low set last Thursday. SPX traded up and tested resistance at $1042 before retreating to close at $1028, a gain of $5. The price action of RUT and SPX over the past three sessions appears to be establishing a bottom for the correction. The volatility index (VIX) ran up earlier in the day but ended the day essentially unchanged at 30%. The ISM Services Index reported out at 53.8, down from last month's 55.4; economists expected a drop, but not quite that much. That report, at 10 am ET, appeared to start the slow sell off in the markets. Trading volume was mixed; it was 18% higher on the NYSE and 29% higher on NASDAQ, but the S&P 500 stocks only traded 4 billion shares, well below the 50 day moving average.
The strong market action this morning prompted me to remove the Sept put hedges on my Aug RUT condor and I re-established half of my put spread position down at 510/520. As it turned out, it would have been nice to have had those Sept puts in place, but I didn't see the sell-off coming. My condor's position delta and theta are now similar at +$58 and +$41, respectively. When the delta and theta of your position are similar, you are in a weak position and either a market move or an adjustment is imminent. So I will be watching to see if RUT breaks through support at $590 and SPX breaks through support at $1010. If those support levels are broken, we may be seeing the beginning of a bear market trend rather than a bull correction.
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The futures were pretty negative about an hour before the open today, but they worked their way up to flat by the open, but the market plunged within a few minutes and worked toward significant lows before starting to rebound. By the end of the day, much of the losses had been recovered. RUT lost $5 to close at $605, but traded as low as $590 before rebounding. SPX had a similar pattern, trading down to $1010 before rebounding to close at $1027 for a loss of $3. Both the SPX and the RUT displayed the classic hammer candlesticks today, a common reversal pattern. However, the lower shadow sets the support level that may be tested several times before a reversal actually unfolds. Tomorrow's unemployment numbers may be the stimulus. Trading volume was up today: up 19% on the NYSE and up 32% on the NASDAQ. The S&P 500 stocks traded 5.5 billion shares, above the 50 dma.
The question on my mind at this point is whether we are still in a correction of a bullish trend, or whether we have started a new bearish market trend. RUT's close today is just below the lower edge of what appeared to be a consolidating range over the past six weeks. With SPX closing below $1040 for two trading sessions, that index has clearly broken out of the consolidating range of $1040 to $1120. However, today's hammer may be establishing a new lower support level for this basing pattern.
The economic news that precipitated this morning's drop was a 30% drop in pending home sales, an increase of 13k in initial unemployment claims, an increase of 43k in continuing unemployment claims, and a weak ISM manufacturing index report. The stage appears to have been set for a disappointing unemployment report tomorrow morning. We may retest those lows set this morning.
I closed half of my Aug 550/560 put spreads for $2.60 this morning and held my Sept 560 puts. This has kept my Aug condor at breakeven since the Sept puts are profiting nicely. In fact my position was actually profitable this morning before the market started rebounding. Now we wait to see how the market reacts to the unemployment report in the morning. Today's rebound on stronger volume was a hint that support has been reached, but the unemployment numbers could cause a selling spree that retests those lows.
