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The markets opened in positive territory this morning and traded gradually upward until about 2:30 ET, when the exact opposite of yesterday's market action occurred - a strong rally to close at the highs of the day. RUT closed at $661, up nearly $20 and the SPX ran $28 to close at $1098. The S&P 500 traded at a slightly decreased volume from yesterday at about 4 billion shares (below the 50 dma). Trading was down 7% on the NYSE and was flat on NASDAQ. This strong performance on the U.S. markets came after weak performances in Asian and European markets. Pending home sales data may have helped set a positive mood. Pending home sales for April are up 6% from March, and up 25% from April of last year.
So the extreme back and forth swings of this market continue. It is probably more profitable right now to be selling antacids than trading. My condors are in pretty good shape at this point with the June RUT 590/600 and 710/720 iron condor underwater by $2200 with position delta = -$17 and position theta = +$285, so this position is nearly delta neutral but is building some large positive theta decay. The July RUT 520/530 and 750/760 iron condor stands at a P/L of -$240, position delta = -$21 and position theta = +$95, so this position is also very delta neutral and the theta/delta ratio is strong at over four to one.
If you are a delta neutral trader, this market is probably causing you a serious case of self-doubt. But hang in there. The probabilities are on your side. If you decide to sit out July because June went badly, and then July looks like it would have been profitable if you had been in the trade, what will you do? A delta neutral trader must trade every month and must control his losses in the bad months. Predicting the direction and volatility of the markets is very difficult at best. Trading delta neutral is the alternative approach to the crystal ball.
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The markets traded downward this morning but then recovered and traded choppily up and down the rest of the day until the last hour of trading, when the market sold off strongly and closed at new lows for the day. RUT closed at $641, down $20 after trading as high as $663 this morning. The SPX behaved in a similar pattern, closing down $19 at $1071, after trading as high as $1095 this morning. We are surprisingly close to the intraday "flash crash" low set at $1066 May 6. The most common explanation for the sell-off was the Attorney General's announcement of a criminal investigation into the Gulf oil spill. That certainly should affect energy stocks but it isn't clear to me why that should cause a broad based sell-off in the markets. This is one more example of the extreme nervousness and volatility characteristic of this market. Favorable economic news boosted stocks this morning; construction spending was up 2.7% and the Institute for Supply Management index came in at 59.7 for May, greater than expected by the analysts. Trading volume was essentially flat with a 4% increase on the NYSE and a 3% increase on NASDAQ. The S&P 500 stocks traded 4.2 billion shares, flat from yesterday and below the 50 day moving average.
Our markets strike me as behaving in classic day trader fashion with the frequent late-day sell-offs. Day traders close all of their positions at the end of the day to avoid any overnight risk exposure. In similar fashion, traders may be taking money off the table to avoid any overnight announcements or events from Europe, Israel, North Korea, etc.
My June RUT condor now stands at a P/L of -$2100, delta = -$7 and theta = +$233. So the greeks for this position look good, but the volatility of this market is a constant threat. My July condor actually sits in the black with a P/L of +$380, delta = -$22, theta = +$72. Now we wait to see if this market rebounds or follows through to the downside in the morning.
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Normally, traders would be euphoric after a bullish day like today, but the nervousness still overhangs the market. In my own accounts, I closed some bullish trades for nice gains that should, in more rational times, be expected to continue on for more profits, but I decided to take my money off the table and wait and see what tomorrow brings. On the other hand, in my delta neutral trading, I sold the June 710/720 call spreads today to complete the June 590/600 and 710/720 iron condor on RUT and also established my July 520/530 and 750/760 iron condor on RUT before the holiday weekend. June's greeks stand at a position delta of -$68 and theta = +$135 while the freshly minted July position stands at a delta of -$38 and theta = +$80.
Today's strong open and steady gains throughout the day began with China denying the rumors from yesterday about reconsidering their Euro debt holdings. This fueled increases in the European markets, strengthened the Euro and set the stage for the US markets. Initial unemployment claims declined by 14k to 460k and continuing claims dropped almost 30k to 4.607 million. GDP grew 3% in the first quarter and while this was less than the 5.6% growth in the fourth quarter, analysts regarded this as more good news supporting an economic recovery, albeit a slow one. RUT ran up $28 to close at $671 and the SPX closed at $1103, up $35. Both indexes closed at their highs for the day - a rather bullish indicator. After the recent volatility, one might have expected some profit taking after such a strong move upward, but it didn't happen. Trading volume declined with a drop of 23% on NYSE and a 3% increase on NASDAQ. Trading in the S&P 500 stocks dropped below the 50 day moving average to about 4.5 billion shares.
So, now what? Will traders take money off the table before the holiday weekend? We'll see. As yesterday demonstrated, it only takes a rumor to bring this market down in a hurry.
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The holiday weekend began early for many traders; volume was light in the markets today. Trading was generally sideways and downward with many traders taking off some positions rather than be exposed to surprising news over the long weekend. SPX closed down $14 at $1089 after bouncing off $1085 late in the day. That makes $1085 a "early warning" trip wire on Tuesday. RUT ran down $9 to close at $662.
Today's pullback eased my condors into a better position with June's greeks at a position delta of -$75 and theta = +$201. With about three weeks to go, theta is starting to build in the June position. The July condor is roughly at breakeven with delta = -$35 and theta = +$78.
Those of you who watch Fast Money on CNBC listened to Dennis Gartman of The Gartman Letter discuss this market last evening and say he has never seen anything like these wild swings back and forth in over 35 years of trading. Check out his newsletter; he is well known among hedge fund and institutional traders. Hopefully, the craziness is over, but only time will tell.
Have a restful and thankful holiday weekend.
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High volatility continued today with the major indexes gapping up at the open and climbing from there before selling off in the late afternoon. An unexpected boost of 15% in April's new home sales and a 2.9% increase in durable goods orders helped fuel the early optimism. Many attribute the sell-off to a Financial Times article suggesting China is considering lightening their substantial Euro holdings, driving the Euro lower late in the day. RUT held up better than the other indexes, closing up $3 at $643 while the SPX dropped $6 to close at $1068. Trading volume was down at the major exchanges with a 9% decline on the NYSE and a 7% decline on NASDAQ; but the S&P 500 traded almost 6 billion shares, near yesterday's high levels. Today's trading action just reinforced the nervousness we have seen on the trading floors so often of late.
Today's candlestick on the SPX chart was the classic shooting star, a common reversal signal when it occurs at the top of a bullish trend; SPX is certainly not in a bullish trend, but it is disconcerting that the buyers who took the markets up early in the day could not hold those highs. So today's trading action may not be an indication of a further leg downward, but it does suggest we may have difficulty resuming a bullish trend anytime soon.
I sold the RUT June 590/600 put spreads this morning to begin to recreate my June iron condor. But the late day trading reversal certainly worries me after establishing that position. We'll see what the market brings tomorrow.
