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Quadruple witching resulted in a surge of trading volume with 2.8 billion shares of the S&P 500 stocks trading today. Trading on the NYSE was up 42% and trading volume on NASDAQ increased 35%. This level of S&P trading volume has only been exceeded three times this year. SPX gained $3 to close at $1963 and RUT closed up $4 at $1188. Volatility rose a smidgeon with the VIX closing at 10.9%, probably the result of institutions hedging for the weekend.
There was no economic data of any significance reported today. I found one aspect of the FOMC announcement on Wednesday a little unusual. The committee said the economy is weakening a bit and lowered their GDP forecast to +2.3% for 2014. In light of the 1.5% decline in the first quarter, that forecast requires an average of quarterly growth rates over 3% - that strikes me as extremely optimistic. Perhaps Yellen is a politician after all.
The other disconnect from reality for the FOMC is on inflation. They don't think we have any inflation and have no concerns whatsoever. I'm not an economist, but I know I am paying more for food and gasoline. It doesn't feel like zero inflation to me. Perhaps it is similar to our fudging of the unemployment rate statistics. An unemployment rate of 6.3% really isn't too bad. During my lifetime, I have seen periods of solid economic growth with 6% unemployment. But this economy isn't healthy by any measure; just ask your neighbors and look at all of the empty commercial buildings. True unemployment is much higher than 6%.
SPX set another all-time high today. This bull market doesn't seem right to me. I just can't see the economic fundamentals to drive such exuberance. What worries me is this: history tells us that the higher and more frothy the market trades, the harder it falls. I would really prefer some sideways consolidation trading to cool things off a bit. But, you trade what you see, not what you think should be.
Have a great weekend.
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Think of this market as your dad sleeping off Thanksgiving dinner on the couch. SPX has had a huge run over the past month, so a little sideways consolidation trading isn't too surprising. SPX opened and ran up to $1941 this morning, but then dove down to $1931 just after noon. Then SPX just chopped sideways the balance of the day, closing at $1938, up $2. RUT behaved similarly, closing up $4 at $1167. Volatility rose just a touch with the VIX closing at 12.7%, up a half of a point.
Trading volume was light with 1.8 billion shares of the S&P 500 stocks trading, still well below the 50 dma. Trading volume on the NYSE rose 8%, but volume dropped 4% on NASDAQ.
The Empire manufacturing index from the New York Fed came in at 19.3 for June, up slightly from 19.0 in May. Industrial production for May reported at +0.6%, an increase over the previous month's 0.3% decline. Capacity Utilization rose slightly in May to 79.1% from April's 78.9% level.
We may see light trading tomorrow as well, since the FOMC announcement is due Wednesday afternoon. I don't expect anything really new from the Fed announcement, but it is hard to predict the market's reactions. It isn't always rational (or at least doesn't match my rationale).
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The markets traded down for the second day in succession, causing the doom and gloom types to restart their "sky is falling" commentary. But it does raise the interesting question of how high is too high? I would be one of the first to point out the obvious weaknesses in our economy: unemployment and underemployment remain very high, and there are empty commercial buildings on every corner. On that basis, one cannot justify this bullish market. But one can't ignore the fact that publicly traded companies, by and large, have been turning in reasonable earnings, and we can't forget the Fed. They are still pumping a lot of money into this market. This recent run in SPX may be just taking a breather, rather than setting up for the "big crash".
SPX closed at $1944, down $7. RUT also dropped off, closing down $6 at $1167. SPX hit its low for the day around $1940 just after 2pm ET, but then recovered much of its losses into the close. RUT traded in a similar intraday pattern. If you plot the Bollinger bands on SPX, you will see that this index has been running along the upper edge of the band for about two weeks, so taking a couple of days to rest wouldn't be unusual at all. Volatility rose a bit to 11.6%, still a relatively low level. Trading volume remains low with 1.7 billion shares of the S&P 500 trading today, almost identical to yesterday and well below the 50 dma at 2.0 billion shares. Trading volume on the NYSE and NASDAQ both dropped off by 1% today.
I closed the 1040/1050 put spreads in my June iron condor on RUT today for $0.08, resulting in a nice 23% gain for June. My motivation was two-fold. One the one hand, I am hedging myself just in case the sky is falling. On the other hand, I wanted to free up some capital for the possibility of entering a new July condor while we still have a reasonable amount of time left.
No economic data of any significance was reported today. Tomorrow brings unemployment claims and retail sales. The PPI and the University of Michigan consumer sentiment numbers report on Friday.
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For the past couple of weeks, it has seemed as though there was no end to this bullish run higher. Then the markets weakened on Tuesday and doubt set in. Thursday brought a significant decline and it appeared as though some degree of a correction had begun - perhaps just a slight decline and mostly sideways trading or perhaps the big, nasty correction so many have been predicting. But the bulls reasserted themselves today with SPX closing at $1936 for a gain of $6. RUT also strengthened a bit, closing up $3 at $1163. These aren't big gains, but it does tend to quiet the "sky is falling" crowd.
Expecting this bull market to continue straight up as it has for the past few weeks is silly. But predicting a severe market crash is an overreaction and ignores some obvious factors. First of all, corporate earnings have continued to grow; companies have been turning in reasonable results - it isn't boom city, but it isn't terrible by any measure. Secondly, and maybe more importantly, the Fed is still very much in this market, pumping in billions of dollars each month.
This discussion is meant to set up the question we are probably all thinking about: is the market going to continue up or correct back lower? I don't have the answer, but I have my own "best guess", for what it's worth. For the reasons cited above, I think the bulls have the edge. However, trees don't grow to the sky, and markets tend to ebb and flow in their progress, whether it is a bull or a bear market. By most measures, this market is fully valued, if not over-valued, so a little bit of a pause certainly would make sense. But this minor pause of the past three or four days may not last. After all, strong bull markets in the past continued higher long after everyone thought they were overbought. And this market has the Fed on its side. So my best guess is a slightly bullish to sideways market.
That is why Ihave been using diagonal spreads for the past several weeks; they seem to fit this market nicely. I also sold a call spread on RUT earlier this week to set up a new RUT condor. If RUT continues higher next week, I will sell the put spread; if not, I will wait.
Happy Father's Day to all of you out there. Enjoy the weekend.
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Leadership of this bull market passed to small caps and the NASDAQ last week, and that trend was still evident today. SPX gained $2 to close at $1951, but RUT gained $11, closing at $1176. Trading volume remains anemic with 1.7 billion shares of the S&P 500 trading today; trading volume on the S&P 500 has only touched the 50 dma twice since the first of May. Trading volume declined 2% on the NYSE, but rose 9% on NASDAQ. Volatility increased a bit, with the VIX closing up four tenths of a point at 11.2%.
No significant economic data were reported today; retail sales, the PPI, CPI, consumer sentiment, and unemployment claims report later this week. The FOMC meets next week.
My June iron condor on RUT, positioned at 1040/1050 and 1220/1230, has been enjoying strong profitability during this bull run since the 1220 strikes are so far OTM. But the relentless drive of RUT higher caused me to close those call spreads today - better to lock in a 22% gain rather than risk losing much of those gains later. It seems reasonable and rational to assume this market will level out or pull back, but reasonable and rational aren't words we should use when discussing market price movement.
I noted that SPX, RUT and the NASDAQ composite all surged higher today, but pulled back a bit as the day wore on, leaving longer upper shadows on the candlesticks. This wasn't pronounced enough to call it a signal, but it may be an early sign of a slowing of the bulls' charge. It certainly wasn't enough to cause me to hold my June RUT call spreads any longer.
