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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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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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The markets appeared to stabilize today, but I am not coming out of the bomb shelter just yet. Tomorrow's FOMC announcement may cause some fireworks or it could be a dud. It is impossible to predict the Fed, much less the market's reaction. SPX gained $11 to close at $1793 and RUT also gained $11 to close at $1138. Volatility continued its decline with the VIX decreasing by 1.6 points to 15.8%. The VIX decline is significant because it suggests that the big institutional traders are not too concerned about tomorrow's announcement tipping us over the cliff. SPX and RUT are in parallel positions, both trading between the November highs as support and the December highs as resistance. It would seem surprising if this is all of the correction, but I don't think we can be too confident until after the Fed announcement.
Trading volume dropped off today with 2.4 billion shares of the S&P 500 trading. Trading on the NYSE dropped 22% and trading volume on NASDAQ declined 15%.
Durable goods orders declined 4.3% in December, down from November's positive 2.6% gain. The Case Schiller Housing Price Index for November was about flat with the previous month at 13.7% for November. The consumer confidence report from the Conference Board came in at 80.7 for January, up from 77.5 in December.
Grab your popcorn and wait for the FOMC announcement tomorrow at 2 pm ET.
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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.
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The markets opened slightly up this morning and everyone breathed a sign of relief. Then the bottom fell out. SPX fell from the high of $1796, achieved in the first hour of trading, to a low of $1773 a little after 12:30 ET. Then it recovered to an afternoon high of $1794 before selling off into the close at $1782, down $9 on the day. RUT lost $16, closing at $1128 after trading as low as $1121. The difference on the RUT chart is that it never bounced back up into positive territory. The sell-off into the close on both SPX and RUT is not a good sign. I would have thought today and tomorrow would have given us relatively flat days of trading in advance of the FOMC policy announcement on Wednesday. But a serious bout of selling dominated today's markets. Last week's declines are trickling through the markets and traders are taking their profits. The intraday highs this afternoon were taken as opportunities to take profits go to the sidelines. It remains to be seen whether the Fed's statements will calm the market or send it plunging further downward.
SPX bounced today almost precisely at the support level set by market highs in late October and early November ($1772). Today's close is just above the 4% correction level at $1776. The highs from late October on the RUT chart ($1123) just happen to coincide with a 5% correction. RUT's low today was $1121. So both SPX and RUT caught themselves in the downward slide this afternoon at the highs from October. This represents a larger pull back for RUT because it continued to set new all-time highs after SPX had stalled. That brings us to the key question: will a 5% correction be enough? I don't think we will receive an answer to that question anytime soon.
The only economic data reported today were new home sales for December, coming in at an annualized rate of 414k, down from November's 445k. The next significant economic news for this week comes Wednesday afternoon from the FOMC.
My Feb RUT iron condor only consists of the 1210/1220 call spreads for now (I will likely re-establish the put spreads when the smoke clears). So that position stands at a net gain of $760 on 20 contracts or +4%. If I do nothing and the call spreads expire worthless, the Feb position will close at a 6% gain - not bad for a month like this.
We return to the market correction watch tomorrow. $1772 is a key support level on SPX. If that fails to hold, the next obvious support on the chart is at $1729, near the 7% correction level.
