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As everyone begins to think about the FOMC announcement tomorrow, the market traded strongly higher today. SPX gained $21 to close at $2043. And RUT fully participated for a change, up $16 at $1132. Volatility contracted nearly two points with the VIX at 21%. Trading volume fell off a bit with 2.7 billion shares of the S&P 500 stocks trading. Trading dropped 10% on the NYSE and declined 6% on NASDAQ.
The CPI reported flat for December, down from +0.2% last month. The Empire manufacturing survey from the NY Fed improved a bit for December but remained negative at -4.6, up from -10.7.
Everyone is obsessing about the FOMC announcement and a possible interest rate hike tomorrow afternoon. Today's strong market was surprising to me. Has the fear of a global economic slowdown been alleviated somehow? Do we know what the Fed will do tomorrow? For that matter, do we know how the market will react?
If you have any December index options that are anywhere near the money, you might consider closing them. There may be some wild swings in the market and implied volatility for the next two days. I closed the 1940/1950 put spreads in our December SPX condor today. Assuming the 2160/2170 call spreads expire worthless, this condor is closed for a loss of $64 per contract or -8%. We hedged the position three times and rolled spreads twice - a busy month! This brings the Flying With The Condor™ trade alert service to +40% for 2015. Since SPX is down about 1% for the year, that is a superb performance. Our SPX Jan iron condor positioned at 1850/1860 and 2210/2220 stands at a net gain of 8% and is perfectly delta neutral.
Get your chips and snacks out for the Fed watch...
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The slide in oil prices paused today, or bounced if you are an optimist. Many analysts attribute the market bounce to that hope of a bottoming of oil prices. SPX gained $10 to close at $2022, but RUT continues to be more negative, closing down $8 at $1116. Volatility pulled back almost two points with the VIX closing at 22.7%. Trading volume rose with 2.9 billion shares of the S&P 500 stocks trading. Trading volume rose 8% on the NYSE but dropped 2% on NASDAQ.
Have we now entered the waiting period for the FOMC announcement on Wednesday? Maybe.
Has the recent sell-off been principally driven by the prospects of slower economic growth, evidenced by lower demand for oil? I am inclined to think so. But part of the sell-off could be anticipation of a rate hike by the Fed this week.
That leaves us with the $64,000 question (how many of you remember that TV show?): how will the market react to a rate hike or possibly continuation of the current near-zero interest rates? I have more questions than answers. This is a spooky market, so limit your risk. Don't bet on a direction.
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Trading volume fell off today, perhaps beginning a "wait and see" trend into the Fed announcement next week. SPX gained $5 to close at $2052 and RUT gained $3 to close at $1149. But volatility didn't contract much; the VIX closed at 19.3%, down 0.3 points. The bulls are being held back by the bears quite effectively. SPX had traded up to $2068 in the afternoon, but then was pulled down into the close at $2052. Trading volume declined with 2.2 billion shares of the S&P 500 trading. Trading volume declined 17% on the NYSE and declined 12% on NASDAQ.
Has the generally bearish tone of trading the past couple of weeks suggested that an interest rate hike by the Fed will be traded downward in the markets? Perhaps so. But one could also argue that the market sell-off is already baked into the current market prices because everyone seems to assume the rate hike is a done deal. This FOMC announcement is unquestionably the most anticipated announcement in Fed history (at least during my history). We may see some extreme spikes and whipsaws next Wednesday afternoon. And expiration week often has a wide range of implied volatility swings anyway, so next week may be a record breaker.
Initial unemployment claims reported at 282k, up from last week's 269k. Continuing unemployment claims rose 82 thousand to 2.243 million.
The December SPX condor in my Flying With The Condor™ service stands roughly at break-even with position delta = $1.57 per contract; the probability of both spreads expiring worthless is 96%. The spike in volatility this week has hurt the P/L of my positions. The January SPX position stands at +5% with 35 days to expiration. I will decide tomorrow whether to close the December positions or allow them to go through the weekend. In no case will the December condors remain open past Tuesday.
The Fed watch begins...
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Oil prices traded lower again today. That coupled with an anemic retail sales number spooked traders. SPX lost $40 to close at $2012. RUT traded down $25 to close at $1124. All of this downward pressure on stock prices spiked trading volume with 2.8 billion shares of the S&P 500 trading today. Trading volume rose 16% on the NYSE and also increased 18% on NASDAQ. Volatility bumped up five points with the VIX at 24.3%.
Lower oil prices are a two edged sword. The energy companies are hurt but the higher cost oil production operations like oil shale and tar sands are devastated. But these low oil prices result in lower gasoline prices for consumers, which can be a boon to consumer spending. But consumers are hunkering down. Retail sales rose 0.2% in November, especially lethargic for this time of the year. A bigger concern is lower commodity prices in general may be signaling declining demand. Does this suggest a global recession on the horizon?
The Producer Price Index (PPI) reported +0.3% for November, up from the -0.4% of October. Retail sales increased 0.2% for November, up from +0.1% for October. The University of Michigan consumer sentiment survey reported a small increase for December, up from 91.3 to 91.8.
The most bearish observation for the technical analysis of the SPX chart was the breaking of support at $2020. Up until the last hour of trading, that support level from mid-November appeared to hold, but the markets traded lower for the last hour of trading. The only bright spot was a slight recovery so SPX didn't close at its low for the day, but it was close.
Now the spotlight is even more intensely focused on the FOMC announcement and their decision on interest rates. It had been a foregone conclusion that the Fed would begin the process of raising interest rates this month. Now it isn't as clear.
I don't think many of us traders will have a relaxed weekend. I reduced much of my risk today, but...
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I didn't expect any sustained trend in the markets until we get past the FOMC announcement next week, but this week's trading has been steadily downward. The S&P 500 has lost 2% of its value in the past three days. SPX closed today at $2048, down $16 and RUT lost $14 to close at $1146. The VIX moved up two points to close at 19.6%. RUT broke through its 50 dma yesterday and SPX broke its 50 dma today. RUT found support at $1140 in October and November, so I am watching to see if that level holds once again. The analogous support level on the SPX chart is $2020. SPX traded over a wide range today, trading as high as $2080 by about 10:30 am ET, but then trending downward until early afternoon.
There wasn't any significant economic data reported today. Oil prices, fears of a global recession, and anticipated interest rate hikes seem to dominate traders' concerns. Bernanke was surprised by the market's swift reaction when he mentioned raising interest rates a couple of years ago. I still find it a bit surprising if a 25 basis point interest rate hike will send this market over the cliff. At a minimum, we can expect some significant market volatility next week. But when I look at the market's price action since last Thursday, I have to wonder, "more volatility?"
I think it will be prudent to look closely at your positions and decide whether you want to carry them into the FOMC announcement.
