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Just before the open this morning, the futures were deep in the red and trading started fast and furious downward. It appeared to be a continuation of yesterday's flight to cash. SPX broke through the lows set on May 6 ($1065) and even the low set in February at $1057 before rebounding as high as $1090. The markets staged a strong rally into the close in the last twenty minutes - a bullish sign going into a weekend when you might expect caution to rule. RUT closed at $649, up $9 and SPX rose $16 to close at $1088. Financial stocks led the market's gains, based on both the German Parliament approving the Greece bailout plan as well as the US Senate's passing of a financial reform bill, removing some of the associated uncertainty. Trading volume was high, but not too much higher than yesterday with a 10% increase on the NYSE and flat on NASDAQ; over 7 billion shares of the S&P 500 stocks traded today, slightly up from yesterday.
A piercing candlestick pattern was displayed on both the SPX and RUT charts today. Today's candle did not extend (or pierce) more than halfway into yesterday's black candle, which would be the strongest reversal signal, but it was significant. But this market has been prone to sudden and wide swings back and forth, so one has to be very cautious about assuming a reversal is signaled. However, one sign that yesterday was the end of the correction was simply the extremely dire tone that was universal on all of the financial news programs yesterday. Everyone I heard on CNBC was insisting it was going lower and going to get worse before it improved.
I closed the 790/800 call spreads of my June RUT iron condor this morning for $0.15, but I didn't roll the calls down. I decided it was wise to take a little bit of a "wait and see" attitude before rolling those spreads downward (my recent scars are tender). So now I am just holding the 580/590 put spreads and am about $2k underwater; but if I do nothing more and these put spreads expire worthless, I will be up about $2k. I will look for an opportunity to open new call spreads next week.
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Today's market was significantly different than recent volatile days of trading in that the market just traded down and down and down. It appeared that the SPX had bounced off of its 200 day moving average (dma) yesterday but it just sliced through that level and is threatening to break through the low of $1065 set in the so-called flash crash on May 6. SPX closed at $1072, down $43 on the day. RUT behaved similarly with a drop of $34 to close at $640. RUT's low on May 6 was $638. The markets had staged a rally and started to recover some of the losses this afternoon, but then dropped to new lows for the day after hearing that the Senate had taken one step closer to financial reform. The markets are running scared due to the European debt crisis and the uncertainty surrounding financial reform in the US markets. Not surprisingly, today's huge drop occurred with increased volume; trading on the NYSE increased 28% and increased 30% on NASDAQ. Trading in the Standard and Poors 500 nearly reached 7 billion shares. The surprise of an increase in unemployment claims to 471k from 446k probably didn't help the mood on the street today. However, continuing unemployment claims decreased by 40k to 4.625 million.
I took my largest loss ever in my May RUT iron condor (-$8,080) today. That is what happens when you violate your own rules. I should have closed this position last Friday or Monday morning at the latest. The June position is now also under pressure with a P/L of -$2,080, delta = +$56 and theta = +$40. So now everyone speculates on whether we have hit bottom or not. The futures can change a lot over the next sixteen hours, but they are down right now, suggesting more losses tomorrow. All of the talking heads are negative at this point; if you are a contrarian, that may be a good sign.
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Triple digit days on the DJIA were unusual once - but no more. After a positive open this morning, the markets traded slowly but surely downward all day. The Euro strengthened this morning, but then began sliding back; this strengthened the dollar and appeared to start the selling on Wall Street. RUT closed down $13 at $683 and the SPX closed at $1121, down $16. Trading volume was flat to slightly increased with a 7% increase on the NYSE, but only a 1% rise on the NASDAQ. The stocks of the S&P 500 traded about 5 billion shares, about flat from the last couple of days and slightly above the 50 day moving average. Today's economic news was generally positive with April's housing starts at 672k, up from March's 635k; but April's building permits dropped from 685k to 606k. April's Producer Price Index (PPI) declined 0.1%, alleviating some of the inflation fears generated last month with the 0.7% increase. But concerns of a growing sovereign debt crisis in Europe and the possible effects on global financial institutions appeared to drive the markets lower.
My condor positions are continuing pretty much as they were. The May position is trimming its losses but the put spreads will have to be closed soon; position delta has increased to +$192 with theta = +$833. The June position is in excellent shape with delta = +$14 and theta = +$85.
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Selling pressures continued today, driving the S&P 500 to break its 200 day moving average at $1102, and then bouncing from $1101 to trade back up to close at $1115, a net loss of only $6 for the day. RUT traded in a similar pattern, but didn't recover as well as the SPX; RUT dropped $8 to close at $675. Trading volumes were higher across the board with an increase of 17% on NYSE and 15% on NASDAQ. At one point today, the DJIA was off $186 - we continue to see violent swings both down and then back up. It appears that the European debt crisis and uncertainty surrounding financial reform legislation continue to weigh on this market.
The Consumer Price Index (CPI) dropped 0.1% in April, easing any inflation fears from last month's small increase. The FOMC minutes from the last meeting were released this afternoon; the minutes included news that there were no immediate plans to sell the mortgage-backed securities acquired during the financial crisis. This appeared to drive the markets higher this afternoon.
My iron condor spreads remain close to where they were yesterday. I will close some or all of the May position tomorrow. Increased volatility pushed the June position into the red with a P/L of -$580, delta = +$27 and theta =+$76.
The question of the hour is whether this market correction has touched bottom or not. The pattern of trading on Monday and today of trading down to intraday lows and then recovering are signs of a reversal in the trend, but predicting the market is anything but a science. It seems to me that the debt problems of Greece boiling over into a global crisis have been overblown and resulted in the markets overlooking good earnings reports and modestly improving economic data here in the states. But it is unclear what news could reassure the markets and reverse this correction.
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It seems like I am almost continually commenting on this market's extreme volatility. Perhaps we need to re-define a volatile market, e.g., perhaps we should not comment on a wild day in the markets unless the Dow loses or gains at least 200 points! In any case, today was another one of those days. The markets opened and made a brief run upward before collapsing and then staged a huge rally to actually finish the day with gains! RUT opened the day and made a brief run up as high as $704 before dropping to $678 by mid-afternoon. RUT closed up $2 at $696. SPX traded similarly and closed at $1137, up $1. SPX traded as low as $1115 today, near Friday's close of $1111 - does this establish the area of $1111 - $1115 as a good support level? Maybe - two data points are slim support.
The only economic data of any significance was the Empire State Manufacturing Index. It reported a value of 19.1, down from last month's 31.9, but still showing positive gains; the employment index portion of this report rose for the fifth consecutive month. But the falling Euro and European fiscal concerns overwhelmed other news. But the Euro rebounded in the afternoon relative to the dollar, and the weakening dollar may have been behind the afternoon's rally.
My May iron condor continues to limp along with a position delta of +$48 and theta = +$924. That huge theta is helping erase some of the losses, but I should hasten to point out that I do not recommend having an iron condor position open during expiration week unless the remaining spreads are greater than two standard deviations OTM. But these are unusual times and I am trying to minimize losses in this position - remember when your parents used to say, "do as I say, not as I do"? By contrast, the June RUT iron condor is sitting fat and happy with delta = +$8 and theta = +$71. So, I will continue to nurse the May position along to gain as much time decay benefit as possible before closing this position.
