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The major market indexes opened lower this morning and appeared to be continuing the downward plunge. But then the buyers showed up. SPX dipped as low as $1738 and then bounced back to close near its highs of the day at $1752, down $4. RUT displayed a similar pattern, closing down $9 at $1094. VIX rose again today, ending the day at 20%, shy of Monday's high at a little over 21%. Trading volume dropped off a bit to 2.6 billion shares of the S&P 500 stocks, but this remains above the 50 dma at 2.2B. Trading volume on the NYSE decreased 2%, but volume was flat on NASDAQ.
The question on all of our minds is simply this: Where is the bottom of this correction? Some have been hanging their hats on a 10% correction; that would be around $1665 on SPX. The 200 dma of SPX is at $1709. Another possibility results when you apply Bollinger bands to the SPX; the lower edge of the band is at $1690, or about -9%. The last three days of trading seem to suggest support at $1740, but that is based on minimal data.
The jobs report on Friday could be the tipping point. ADP released its private payroll report today with 175 thousand new jobs. This is down quite a bit from December's 227k - and remember how badly the jobs report undershot that number? Is this a precursor to a weak jobs report? Or should we give up on the ADP report as having any predictive value?
The other economic datum today was the ISM Services index, reporting at 54.0, up from the December value of 53.0.
I doubt we will see much market action up or down tomorrow. I think everyone will be waiting on the jobs report Friday morning. But I could be wrong. Maybe traders will be selling to reduce their risk going into Friday. I certainly will be evaluating my positions with that in mind.
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Traders found plenty of beat-up stocks at what appeared to be bargain prices after yesterday’s huge sell-off. So the buyers dominated today’s market, in contrast to yesterday. SPX gained $13 to close at $1755 and RUT closed up $8 at $1103. Trading volume fell off from those record levels yesterday with 2.75 billion shares of the S&P 500 stocks trading, but this is still well above the 50 dma at 2.2B. Trading volume dropped 12% on the NYSE and declined 18% on NASDAQ. The VIX opened the day at 20% but closed at 18.7%, down almost three points from yesterday.
The only economic data came in the form of the factory orders report, with a 1.5% decline in December. This was in contrast to the +1.5% increase in November. Apparently, the market believed that was already priced into yesterday’s market drop.
With the S&P 500 down almost 6% for this year through yesterday’s close, one has to be wondering if the correction is over or just getting warmed up. Of course, the usual cast of characters have come out of the shadows with their doomsday scenarios of corrections of 20-30%. Those predictions do succeed in drawing attention and selling books. Evidence for the bulls' camp came from the fact that SPX didn’t sell off into the close; it closed near its high for the day. But I won’t breathe easier until SPX closes above the resistance level at $1773 to $1780. That was the strong support level that held the market for a week. Breaking back through that area to the upside will be a very bullish sign.
AAPL was the only “green” stock on my screen yesterday. I think playing that $495 close a couple of days ago as a long term low makes a lot of sense for a high probability trade.
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SPX spiked upward at the open this morning and then climbed to hit its intraday high around 1 pm ET. SPX closed up $20 at $1794. RUT tacked on $17 to close at $1139. Trading in SPX the last four days appears to be confirming that support level at $1773. SPX made up a lot of recent losses today, but is a long ways from resistance at $1850, so be careful about going bullish just yet. RUT broke through the 50 dma, but couldn't hold it, closing just below that level. That 50 dma at $1140 and resistance at $1147 are good levels to watch in RUT.
I don't care for how the VIX moved today. It opened at 16.4%, dropped to just below 16%, but then rose to close at 17.3%, roughly unchanged from yesterday's close. While the market was trading upward most of the day, VIX rose over one percentage point. That is what we call a VIX divergence. It could be foretelling a market drop tomorrow. Trading volume fell off from yesterday with 2.5 billion shares of the S&P 500 stocks trading. Trading volume dropped 11% on the NYSE and decreased 4% on NASDAQ.
Initial unemployment claims came in at 348k, up 19 thousand from last week. Continuing unemployment claims are flat at three million. Fourth quarter GDP rose at an annualized rate of 3.2% and pending home sales fell 8.7% in December.
If you followed my lead and closed your index put spreads, don't get too anxious to re-establish those positions. I am giving this market some time to stabilize before exposing any money to another downturn.
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Part of my morning routine is checking the S&P futures to get a sense of the day's markets before the open. But those positive futures were very misleading today. Within a few minutes of the open, the selling began and it continued all day. I expected a little bit of recovery into the close, but it didn't happen. SPX closed down $41 (2.3%) to $1742 and RUT fared even worse, losing 3.2% or $36 to close at $1095. We must back track to June 20th of last year to find another $40+ down day on SPX. As expected, VIX spiked up over three points to 21.4%. Trading volume rose with 3.3 billion shares of the S&P 500 changing hands; trading volume rose 9% on the NYSE and increased 12% on NASDAQ.
What started this rush for the exits? That is always hard to precisely determine. Every guru on CNBC is very certain of his answer, but I have my doubts. The China PMI came in lower for January at 50.5, but that was only down from 51 in December; and this report was out before the market opened, so we should have seen its effects in the futures. The ISM manufacturing index declined to 51.3 for January from 56.5. Construction spending declined 0.1% in December, down from an 0.8% increase in November. The sharp market decline began about 20 minutes before the ISM report and just accelerated from there. As is often the case, it appeared that the impetus to tip this market over the edge didn't have to be a huge event.
SPX sliced through the strong support level at $1773 this morning and did not hesitate to continue lower to break support at $1748. The next possible support level is $1730, set by the mid-September peak last year. Even more bearishly, SPX closed at $1742, just above the lows of the day at $1740. There was no "buy the dip" rally late in this trading day. RUT's close at $1095 is just above the October 1st high of $1088. With today's close, SPX is now almost 6% off of its highs this year. RUT is down 7.4%.
I decided to take advantage of this huge down day and close my RUT Feb 1210/1220 call spreads for $0.10. That closed the February iron condor spread for a net gain of $960 or +7%. That brings our portfolio performance for 2014 to roughly break-even (-0.3%), as compared to the S&P 500, down 5.7%. It is nice to be beating the S&P 500 again; I couldn't seem to manage that last year.
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Markets traded down from the open today; it was almost as though everyone was betting on a negative reaction to the FOMC announcement. SPX traded as low as $1775 within a few minutes of the open this morning; it traded down to $1770 right after the Fed announcement, danced around a bit for the next two hours and closed at $1774, down $19 on the day. RUT followed a similar pattern, losing $16 to close at $1122. One bearish thought: SPX lost 1% on the day, whereas RUT lost 1.4%. RUT normally leads the market higher in bull markets and lower in bearish markets. On the other hand, VIX popped up 1.6 points to 17.4%, well below the high of 18.1% on Friday's strong sell-off. But that could change quickly tomorrow.
Trading volume increased today with 2.9 billion shares of the S&P 500 stocks. Trading on the NYSE increased 24% and increased 11% on NASDAQ.
The FOMC announced that they intend to continue the reduction of quantitative easing by another ten billion dollars per month in February. I was surprised that the market didn't sell off more than it did on that announcement, but perhaps that is a positive signal. Is the market consensus that it can survive just fine without the Fed's support?
SPX is now down 4.1% from its recent highs. While that is in line with the corrections we saw in 2013, many analysts are predicting a much more severe correction, e.g., down 8% to the 200 dma at $1704. A corresponding drop to the 200 dma on RUT at $1055 would represent an 11% correction. An 8% correction on RUT leads to $1087.
The RUT Feb 1210/1220 call spreads are all that is left of my Feb iron condor at this point. That position stands at a net gain of $860 on 20 contracts or +6% (on the original capital at risk) with a maximum potential gain of $1,160 or +8%. If I have the opportunity, I will re-establish put spreads to boost the returns.
My own take is that this market is very nervous and therefore dangerous. Be very cautious, especially about any bullish trades. I am tempted to play GOOG's earnings announcement tomorrow, but that will be a very speculative trade. It may be best to sit on the sidelines for a few days.
