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The S&P 500 Index is coming very close to breaking out and setting a new all-time high. SPX gapped upward at the open this morning and traded as high as $1851 before pulling back to close at $1848, up $10. The previous closing high is $1848 from December 31. RUT gained $8 to close at $1171, a new all-time high. Volatility remained unchanged with VIX at 12.3%. Trading volume rose with 2.6 billion shares of the S&P 500 stocks changing hands. Trading volume increased 13% on the NYSE and increased 4% on NASDAQ.
The Beige Book, the minutes from the last FOMC meeting, was released today and appeared to fuel the market's advances. More Fed districts reported moderate economic growth in November and December than previously reported. Plus, eight out of the twelve districts reported higher hiring rates. The Empire State manufacturing report jumped to 12.2 in January from December's 2.2. PPI increased 0.4% in December and increased 1.2% for the entire year of 2013.
This market's strength continues unabated. One can argue all day long that the underlying economic numbers don't support such exuberance, but one has to trade what he sees, not what he thinks makes sense. Today's increase on RUT makes it virtually certain that the put spreads from my January condor will expire worthless. Unfortunately, that starts the new year with a loss of $1,100 on 20 contracts. or -9.6%. The original iron condor was adjusted twice and both spreads were rolled higher. If I had not closed the call spreads Friday, I could have closed on Monday for a small gain, but that's the old 20:20 hindsight thing.
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We observed severe market drops repeatedly last year that proved, in retrospect, to be excellent buying opportunities. The last two days of trading provide one more example. SPX closed down $23 yesterday but gained $20 today to close at $1839. RUT also recovered almost all of yesterday's losses, gaining $16 to close at $1163. VIX declined a full point to 12.3%. So the bulls have done it once again. Perhaps the market gods are training us to "go all in" on the next dip and then surprise us with a severe correction (I don't have a better theory).
Trading volume fell off today as the markets rebounded with 2.2 billion shares of the S&P 500 trading. Trading volume declined by 12% on both the NYSE and NASDAQ.
SPX now has a pretty well defined sideways trading channel from a low of $1810 set in late November to the high of $1850 defined in late December. I think using those two levels as triggers for one's trading posture makes sense. In my opinion, the most difficult aspect of last year's trading was handling the frequent price whipsaws, similar to what we saw yesterday and today. The worst whipsaw of last year was a $46 swing on SPX in only four days! Why is this market so volatile? I am sure there are many viable answers. I am inclined to think that the "great experiment" by the Fed in supporting this market has made seasoned traders nervous. They have never experienced a market with FOMC intervention of this type and aren't sure what to expect. As a result, their fingers are quick to hit the exit button and then jump back in at the slightest of signs. They don't want to miss such a huge bull market, but they also worry that the "great experiment" could end badly.
I think the lesson for us small fry trying to survive in this market of charging elephants is to be cautious and stay hedged; don't be afraid to exit early. I closed my RUT Jan call spreads in the market rally Friday afternoon; if I had waited, I could have done much better on Monday. But I don't think you can afford to take that chance. You might get stepped on by an elephant.
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Incredible as it sounds, we received the worst unemployment report in decades this morning, and the market rallied. Traders are reasoning that the Fed will not dare accelerate their reduction of the quantitative easing programs, given such bad news. So the party continues.
The non-farm payrolls report, aka the jobs report, came out this morning and shocked everyone. Only 74 thousand new jobs were reported; economists were expecting over 200 thousand. The unemployment rate dropped to 6.7% because another 340 thousand people left the work force. The labor participation rate hit 62.8%, the lowest level since 1978. That's sobering because I suspect a good number of you weren't even born yet in 1978. The effects of ObamaCare can be seen in the average work week hours declining to 34.4. More and more companies are avoiding the high cost of ObamaCare by converting full time employees to part time.
SPX declined to its low of the day at $1832 around 11:30 am ET, but then recovered those losses to trade sideways until the last hour of trading, when SPX rallied to close at $1842, up $4. RUT tracked its big brother, closing up $6 at $1165. Volatility declined with the VIX dropping almost three quarters of a point to 12.2%.
This morning, I thought my January iron condor was out of the woods, or if I had a problem, it would be to the downside after that terrible jobs report. As the markets rallied this afternoon, I thought it prudent to close my 1175/1185 call spreads for $1.80. Assuming the put spreads expire worthless, this will result in a loss of $1,100 on 20 contracts, or -9.6% on capital at risk.
It almost seems like this market is bulletproof. That is ominous. But I will try to forget about all of that and enjoy the weekend with family.
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Markets opened upward but subdued this morning, but the bears started selling in earnest around noon ET. SPX lost $23 to close at $1819, and RUT closed down $16 at $1148. Volatility bumped up over one point with the VIX closing at 13.3% - but this is still a relatively low level. Trading volume spiked upward with 2.4 billion shares of the S&P 500 stocks trading today. Trading volume increased 8% both on the NYSE and on NASDAQ.
Several news sources pointed to comments by Dennis Lockhart, the Atlanta Fed president. He said he favors further tapering of the stimulus programs and that may have been the trigger for the selling spree this afternoon. If that's true, we may see a pop back upward tomorrow as calmer heads dominate trading. Analysts this morning were pointing to the market's strength in the face of an extremely poor jobs report as evidence of a continued bull market. But, by the end of trading, bearish analysts were saying this is the beginning of the long awaited correction. As we saw repeatedly last year, this is a nervous market and can turn on a dime with a news report or even a rumor.
So we are left with the questions of the past several weeks: Is this market at excessive levels and therefore primed for a correction? Or will it blow off the excess by trading sideways for a few weeks or months? We'll see.
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One of the traditional Wall Street historical measures is to predict the new year's market performance based on the first five days of January's trading. SPX started the year at $1846 and closed today at $1837. I am not a big fan of these stock almanac type of patterns, but I can't ignore them either. However, this year's first five days is more weak and sideways than bearish. It is certainly true that last year's first five days of trading did correctly predict a strong market, although with unprecedented price volatility.
SPX closed unchanged at $1837 and RUT was also unchanged at $1157. Trading volume was up a bit with 2.4 billion shares of the S&P 500 trading today. Volume increased 4% on the NYSE and increased 3% on NASDAQ. SPX traded to its low of the day at $1831 shortly after the open and then strengthened. The Fed minutes were released this afternoon and it seemed like the market slowly declined thereafter to nearly match the low about thirty minutes before the close; but a rally in the last few minutes brought SPX back to unchanged on the day.
My Jan RUT iron condor stands at a net P/L of -$1760 on 20 contracts or -10% with position delta = -$150 and position theta = +$440. The 1175/1185 call spreads remain squeezed, but the theta decay is helping more each day as we near expiration. I might manage to collect a small gain after all.
