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After SPX bounced so strongly last Thursday, the markets appear to have stabilized. SPX has been gaining while RUT and the NASDAQ Composite have been more flat lined. SPX closed today up $6 at $2089 and RUT lost $4 to $1154. Volatility was essentially unchanged today with the VIX rising a tenth of a point to 18.5%. This is a relatively light economic data week, but any economic data is being eclipsed by the vote in Britain about continued Euro Zone membership. We should hear the results here before the market opens Friday morning. I regularly read many financial blogs and web sites, and listen to as much of the financial cable news as I can stomach (too much politics in all of them). My general impression is that everyone is freaked about the possibility of Britain leaving the EU. Of course, both sides have their horror stories if they lose - it isn't obvious to me who is correct. But I'm just a trader, not a macro-economist. What does concern me is whether this is just another "tempest in a teapot" or if the U.S. markets are likely to make a big move either way on Friday.
When the market bounced so strongly last Thursday, I sold the weekly SPX 2030/2040 put spreads, now up 6%. I will close that position tomorrow or Thursday at the latest. SPX at $2040 is strong line of support, but Brexit may test support. At a minimum, it all makes great theater.
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A short time ago, it seemed that the bullish mood of the market was being held in check by the prospect of another interest rate hike at this week's FOMC meeting. But the bears are taking control even in advance of the Fed announcement. SPX lost $17 or 0.8% today to close at $2079. Today's close was in the neighborhood of SPX's December high and just above the 50 dma at $2077. RUT closed down even more than SPX, down 1.1% at $1151. This breaks RUT's late December high and is just above the 50 dma at $1132.
Market volatility tells the story. The implied volatility on SPX, the VIX, closed today at 21%, up four points today alone. VIX opened last Thursday at 14%. From 14% to 21% in only three days is a big move. VIX rose last week as the SPX was still trading higher - a classic VIX divergence. This was the sign that weakness was imminent. Several of my iron condor positions were pressured on the top side last week, but I felt confident in not hedging those positions based on the VIX divergence.
Today's continued market weakness triggered IBD's Big Picture (Investors Business Daily) to move from Confirmed Uptrend to Uptrend Under Pressure.
No significant economic data were reported today. The big kahuna of economic data is the FOMC announcement Wednesday afternoon. Analysts are betting on the Fed delaying the next rate hike until later this year.
Let the Fed watch begin.
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The S&P 500 index (SPX) closed at $2099 today, up 2.3% this week alone. The Russell 2000 Index (RUT) closed at $1150, up $11. This strong bullish week has a lot of people seeing only blue skies - is that appropriate? Today's close on SPX at $2099 is approaching the high set last month, so some traders are talking about a break-out. When we expand the SPX chart, the picture is much less bullish. The end of the dot com era ended with SPX around $1525 in March 2000. SPX beat that by a few points in October 2007 before the financial meltdown. In May of last year, SPX hit another all-time high around $2135. The bulls unsuccessfully attempted to break that high in June and July last year, but then the flash crash hit in August. But those persistent bulls, led by the Fed, pushed the SPX back to roughly $2115 last November. Should we be excited SPX is on the doorstep of that $2115 mark? My answer is no. Looking at the big picture, we see that the S&P 500 has been flat or declining since those highs in May 2015. I will want to see a couple of closes above $2135 before breaking out the champagne.
Consider the small caps in the Russell 2000 Index (RUT) and we see an even weaker picture. RUT hit its all-time high in June of last year around $1295, and it only made it back to $1205 last November, shy by 7%. RUT closed today at $1150; it would have to rally 13% to reach the 2015 high. Again, we see a similar picture to SPX in that RUT remains far off of its 2015 highs. But that deficit is much larger in the case of RUT.
Now add in today's weak GDP number for the first quarter (+0.8% growth) and the less than stellar earnings announcements of the past few weeks. And the FOMC appears to be doing its best to telegraph another interest rate hike at the June meeting. This doesn't look like the setup for the equity markets breaking out to new all-time highs.
In this environment, I think it prudent to take profits when they are available and be cautious. Consequently, I closed the June RUT iron condor from the Flying With The Condor™ advisory service this week for a 13% gain. That freed up capital to roll out and establish a new position in the August expiration. I feel safer when I have more time to hedge and adjust positions, especially in this market.
Enjoy your holiday with family and friends. But remember the true meaning of this Memorial Day. We have a lot to be thankful for due to some incredible sacrifices.
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The prospect of the markets making new highs seems to be elusive. SPX closed at $2099, up $2, after a trading day that was mostly underwater. RUT gained $8 to close at $1163. Volatility was flat with the VIX unchanged at 14.2%. The high for SPX from last November was just above $2110, and SPX touched that level intraday in mid-April, but fell back. This latest run higher now seems to have stalled. Trading volume remains below average at 2.0 billion shares of the S&P 500 stocks; the 50 dma is 2.2 billion shares. The markets hit their lows for the day right after the open this morning and then slowly improved throughout the day. Some analysts attributed the improvement to prospects of an oil production deal from tomorrow's OPEC meeting, but it is anyone's guess what will come out of that meeting.
Economic data remain mediocre at best, even though the President began a pep rally tour on the economy in Indiana today. Yesterday, the Chicago PMI dropped from 50.4 to 49.3 for May. Today's ISM manufacturing index continues to flirt with that 50 level - the dividing line between economic expansion and contraction, coming in at 51.3 for May, up from 50.8. Over the past ten months, we have had five reports over 50 and five under fifty. Construction spending declined 1.8% in May after a 1.5% gain in April. This is the largest decline in construction spending in five years. The minutes from the last FOMC meeting, the Beige book, gave the economy faint praise as "showing moderate economic growth". The decline in construction spending has prompted several analysts to reduce their second quarter GDP estimates.
If we turn to a review of historical price data from the Stock Traders Almanac, we see that we are entering the weakest three months of the year for the markets, July through September. From 1971 through 2016, the NASDAQ Composite declines in June and hits negative numbers in September, before beginning to recover in October. Based on historical data alone, we might be well served to limit our involvement in the markets for the next couple of months. I think the uncertainties of the presidential election will add even more price volatility for the next few months. It will be hard for the bulls or the bears to take control of this market.
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The equity markets took off higher today with SPX gaining $28 to close at $2076, near the December 2015 high just above $2080. RUT traded even more strongly, up $24 to $1135. Volatility dropped about 1.4 points to 14.4% on the VIX. Trading volume popped up as well with 2.1 billion shares of the S&P 500 trading, but remains below the 50 dma at 2.3B. Trading rose 11% on the NYSE and was up 3.5% on NASDAQ. The strength of today's move prompted IBD to shift to an assessment of "Market In Confirmed Uptrend".
New home sales may have had a role in today's strong market, as they reported an annualized rate of 619 thousand homes for April, up from March's 531 thousand. This is the highest new home sales number since January of 2008.
We closed the volatility trade we entered on ULTA in the trading group on May 6th for a 23% gain. This trade began as a diagonal call spread and was predicated on the June options rising in implied volatility as the earnings announcement approaches. Join us in our next trading group meeting June 2nd.
We have two positions open in the Flying With The Condor™ service; the Jun RUT iron condor at 1010/1020 and 1220/1230 stands at a net gain of 14% and the July SPX condor at 1860/1870 and 2170/2180 is up 10%.
The second estimate of first quarter GDP will be reported Friday. Will that pull the market back into the sideways channel? Or will that report be revised upward and energize the bulls? SPX is close to resistance around $2080, the high from last December. The next resistance level is $2110, the high from November of last year.
