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The next two weeks will likely be mostly sideways trading in lower volume. But, as I write that, I realize that much of what we know about market behavior based on history has been turned upside down this year. Just one example was the recent 5% correction in the midst of everyone expecting the Santa Claus rally that has a solid history behind it. The options legend, Larry McMillan, wrote in his newsletter this week, "In nearly 45 years of trading, I don't think I've ever seen a market as wild as the one has been this month." That makes me feel better. I am particularly pleased that our November and December iron condor positions in the Flying With The Condor™ service achieved positive returns in the midst of this craziness.
SPX closed up $8 at $2079 today and RUT gained $6 to close at $1202. Trading in the S&P 500 stocks was down a bit today at 2.0 billion shares; the 50 dma = 2.3B. Trading volumes on the NYSE and NASDAQ were both up by large percentages over Friday, but this is the usual post-expiration Friday drop-off. Volatility has almost returned to its pre-correction values, with the VIX closing at 15.3%, down 1.2 points today.
Existing home sales reported for November at an annualized rate of 4.93 million, down from last month's 5.25 million. Analysts were surprised; they had expected around 5.20 million.
The stock and option exchanges will be open for normal hours tomorrow and Friday. They will be open until 1:00 pm ET Wednesday and closed Thursday.
Is your shopping done?
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I don't know about you, but this market is exhausting. I cannot become accustomed to the swift pullbacks, followed by stellar runs to the upside that recover all of the losses in just a few trading sessions. This last one is another extreme case; SPX lost $102, or 5%, in 7 trading sessions, and then recovered nearly all of that loss in just three sessions! SPX closed today at $2071, up $9, and just shy of where the pullback started only two weeks ago. RUT closed up $4 at $1196. RUT is still trying to recover its losses from the March highs around $1210. RUT has traded weaker than SPX most of this year, but it actually provided the early signals of a recovery this week, posting a gain on Tuesday while SPX was still trading downward. Volatility peaked on Tuesday, with the VIX spiking up over 25% intraday. The VIX closed today at 16.5%, down 0.3 points.
The sharp reversal this week cost me in my January iron condor on SPX. Insurance is never free in this business, but the quick market reversal cost me as I closed my February call options that were hedging my January position. The January condor retains a profit potential of about +6.5% and is well positioned with the 2160/2170 call spreads well OTM. The original potential gain was 17%, so the insurance was costly, but it worked. We are still in the game and have salvaged the trade.
SPX settled today at 2061.01 (RUT settled at $1191.29). My SPX Dec 1940/1950 and 2100/2110 spreads expired worthless. I closed the 2080/2090 call spreads yesterday. They stood 1.7 standard deviations OTM, so the probabilities were definitely on my side. But we have been witnessing some large gap opens to the upside this week. I decided the risk wasn't worth it. Call me a wimp, but I have the scars to show what happens sometimes if you venture out there too far. This closes my SPX December position for a gain of 5.8%. Similar to the January position, December's profitability was reduced by the hedging efforts on the upside as the market ran higher after the October pullback.
I keep a spreadsheet with the difference between Thursday's closing price and Friday's settlement price for SPX and RUT for 2006 through 2014 (I will upload it to my website in the free downloads section). The averages for 2014 for SPX and RUT are $8.74 and $6.14, respectively.
Hard to believe that 2014 is coming to an end. It seems like I just trained myself to write 2014 instead of 2013. But then, you know what they say about old dogs...
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The markets took another leg down today with the S&P 500 dropping $33 to $2002, just above the 50 dma and below the high set back in September. SPX also closed at its low for the day. A close below the 50 dma on Monday will be significant. RUT behaved even more bearishly, gapping open lower and closing at its low for the day, down $15 at $1152. Trading volume spiked higher with 2.4 billion shares of the S&P 500 trading today. Trading increased 13% on the NYSE, but only increased 3% on NASDAQ. Closing at the lows and trading in higher volume are two strong signs of a serious trend, in this case, a bearish trend. On the other hand, a look at the price chart confirms strong support around $2000 on the S&P 500, so there is a good chance we will see it bounce next week.
It was easy to hear the talking heads today blaming market woes on the falling price of oil. To my mind, this is more grasping at straws to explain market behavior. Unless you happen to be in the oil business, lower oil prices are good for most industrial sectors and certainly put more money in consumers' pockets. Market analysts of all stripes have been telling us the market had gotten ahead of itself for some time. It was time for a breather.
But that doesn't explain this market behavior. Price volatility has been extreme for most of the past two years; we have experienced sudden and severe pull backs, followed by vertical ascents to take us right back where we started in short order - how does that make any sense? Did the economy collapse and rebound in just a few trading sessions? Take the last plunge for an example. SPX dropped $192 or 9.5% in 19 trading sessions (9/19 to 10/15). It only required 12 sessions to bounce back and fully recover that loss, and in fact, climbed even higher from there. I'm not naive. I know many emotional and political factors influence the markets, but fundamentally, we expect basic economics to ultimately drive the capital markets. Stockholders want a return on their investment and they project cash flow to analyze those prospects. How does this make any sense?
In any case, this drop was helpful for my SPX December iron condor, taking the pressure off the remaining 2080/2090 call spreads (rolled half to 2100/2110), but less helpful for the 1840/1850 puts spreads in my SPX January condor. We have a big weekend ahead of us with our Christmas party tomorrow evening. If you are in the Chicago area, you're invited! Drop me an email for the address.
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Both yesterday and today, the market opened higher, but couldn't hold it. The market danced around the unchanged mark much of this afternoon, but traded off strongly in the last thirty minutes of trading. SPX dropped $17 to close at $1973, but RUT stayed in positive territory almost all day, closing down one dollar at $1139. The VIX was up about a point most of the day, but spiked toward the end of trading, closing at 23.6%, up over three points. Trading volume spiked up with 2.7 billion shares of the S&P 500 stocks trading. Trading volume rose 11% on the NYSE and was up 6% on NASDAQ.
I still don't get the panic surrounding lower oil prices. This is putting a lot of extra money in the pockets of consumers. I was working for a major oil company in the nineties when oil dipped below $10 a barrel; it was good for everyone except the oil companies. In fact, I was in the chemical subsidiary and we posted better numbers because of having cheaper feedstock.
In any case, the market is showing some signs of slowing its plunge. Tomorrow's FOMC announcement could push the market over the edge in this market environment. At times like these, traders tend to read too much into these announcements. Or maybe the Fed will give us some assurance. Maybe.
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The markets traded lower Monday and
Tuesday, but bounced significantly before the end of the trading session and gave traders hop for the next day. But
that wasn’t true today. SPX, RUT and the NASDAQ composite all closed at or near
the lows of the day. SPX closed at $2026, down $34. RUT dropped $26 to close at
$1162, and NASDAQ lost $82 to close at $4684. It seems like yesterday that
analysts were speculating about NASDAQ breaking $5000.
As one might expect, volatility popped up significantly today with the VIX
closing at 18.5%, up nearly four points in a single trading session.
Trading volume was also up, with 2.4 billion shares of the S&P 500 stocks trading. The 50 dma is 2.2B; trading in the S&P rose slightly above the 50 dma yesterday and rose a bit higher today. Trading on the NYSE rose 4%, but fell 8% on NASDAQ – not sure what that was about.
As always, the talking heads were searching for answers for the market’s drop; the consensus appears to be lower oil prices. Lower oil prices hurt tar sands and oil shale producers, but they help everyone else.
I think a better answer is simply that
this strong bull market needed a rest. $2015 marks the September high on SPX
and is the next support level. But today's trading seemed more serious than just "taking a breather". We'll see... Where did Santa Claus go?
