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The president and the media are getting their way, trying their best to scare everyone with the prospects of a global meltdown that starts with the U.S. defaulting on the debt. Haven't we heard this before? Did we go over the fiscal cliff? Did sequestration force us into recession? But it appears that the propaganda is starting to work. If you tell a lie long enough, everyone believes it. SPX broke through the 50 dma today, and appeared to be in free fall thereafter, closing at $1655, down $21. RUT gave way as well, breaking support at $1062 and then the 50 dma at $1050, closing down $19 at $1047. Volatility spiked upward, with the VIX touching 21% intraday and closing at 20.3%. VIX is now roughly where it was at the bottom of the pullback that ended June 24. But Obama still insists he will not negotiate, so we may see further declines in the markets before this is over.
I watch CNBC all day and I find it fascinating how several guests have pointed out why it is highly unlikely, if not impossible, that we will default on the treasury debt (see yesterday's blog for the details). But the hosts all continue to breathlessly worry about what will happen if we default. One has to wonder why.
Bearish technical data is starting to accumulate. The percentage of NYSE stocks that are above their 50 day moving averages (dma) has continued to decline since May, even as the market hit new highs. This shows a deterioration of the underlying health of the market even as the overall averages hit highs in August and September. And we have the historical tendency for market crashes occurring in October. The silliness in Washington coupled with the media propaganda may succeed in crashing this market in spite of the economic underpinnings. Don't get me wrong; the economy is certainly weak, and this is the weakest and longest economic recovery in history. But we are not in or near recession status. This drama is being orchestrated.
As it turns out, I was wise to close the put spreads on my October iron condor on RUT. It now stands at a gain of 7%; if the call spreads expire worthless, which now appears highly probable, we will end that trade with an 8.4% gain and our Flying With The Condor™ gains will be up +11% for the year. We are still lagging behind the S&P 500, but we are gaining on it.
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The incessant drumbeat of Armageddon and global financial disaster appeared to finally start to weigh on the market today. SPX dropped off $14 to close at $1676 and RUT closed down $12 at $1066. Trading volume dropped off again today with 1.7 billion shares of the S&P 500 stocks trading. Trading volume was flat on the NYSE and decreased 6% on NASDAQ. Volatility spiked up nearly three points with VIX closing at 19.4%.
From a technical standpoint, SPX has now broken through support at the 50 dma. RUT traded down very close to the support level around $1065. So far, the markets have held up rather well, but the spike in volatility today is worrisome.
My October condor consists only of the RUT 1110/1120 and 1130/1140 call spreads at this point and each day brings more gains via time decay; we now stand at a gain of 4.2% and the delta of the 1110 calls is 8, so the position is very safe; the maximum potential gain is 8.4%.
Be sure to hedge your positions. October is historically a dangerous month and Washington is adding to that danger.
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We were told the sequester was going to be a huge disaster and it seems we are being told the same story once again. But the markets are basically saying, "Ho hum. It's business as usual". SPX dropped a whole dollar to close at $1694 while RUT dropped $5, closing at $1083. This is the first in several sessions where RUT closed down more than SPX. Of course, as the debt ceiling deadline approaches, the market may not be as benign. SPX opened at $1692 and traded down to the 50 dma at $1680 before bouncing back up to close at its high of the day. If you look at the SPX chart, the last three sessions have reinforced the strength of that 50 dma support line.
Trading volume was basically flat with two billion shares of the S&P 500 trading. Trading on the NYSE was flat and volume declined 3% on NASDAQ. We probably won't have a jobs report Friday, so many traders were focused on the ADP private jobs report today; it came in at 166k and that disappointed analysts who were expecting 170-180k.
It doesn't look like we are going to see an end to this mess in Washington anytime soon, so I bought some VIX calls today. That is a speculative trade, so don't jump into it unaware. I made 25% today, but could lose it all tomorrow if a surprise compromise were reached overnight. But Obama's interview with CNBC after the market closed communicated his continued refusal to negotiate on anything. My way or the highway...
But my trades are doing well, so I can at least take some comfort in that as Rome burns.
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Obama and his allies are telling everyone that the end is near. It is almost as though he wants the market to crash. But the markets ignored him and traded back upward today with SPX tacking on $12 to close at $1691, coming close to making up yesterday's losses. RUT gained $7 to close at $1078. VIX decreased about nine tenths of a point to 16.7%, still a relatively high level of volatility. The low yesterday represented a 3% pullback on SPX, so the spike to 18% volatility yesterday was roughly in line with the last pullback in late August. Today's bounce also reinforced the support level on SPX at the 50 dma at $1680. So that becomes an excellent "line in the sand" to keep an eye on.
There were no economic reports today; normally the non-farm payroll report would have issued this morning, but that office was shut down. It doesn't appear that we missed it. By the way, one of the lies being knowingly perpetrated by many politicians and their lapdog media friends is that we are in danger of defaulting on the treasury debt. The facts are that tax revenue continues to flow into the treasury during the shutdown at the rate of over two hundred billion dollars per month. One month's interest on our treasury debt is about twenty billion dollars. Therefore, the only way we can default on our debt is if Obama orders his treasury secretary to do just that to further his political agenda. There is plenty of money to pay the interest due on our debt even if the politicians are still fighting over the debt ceiling (the debt ceiling only needs to be raised to accommodate all of the other spending in addition to our interest payments). I encourage you to check my figures.
I closed the put spreads in my October iron condor on RUT a few days ago because of my concern that the markets might melt down amid all of this rhetoric about the sky falling. With today's rally in the markets, I considered adding new put spreads to the position to boost the potential gains, but we only have two weeks left until expiration. I would have had to enter a position around 990 to 1000 on RUT to collect a reasonable credit. I decided the risk wasn't worth the additional gains. If the current call spreads expire worthless, a gain of 8.4% will result. That's more than respectable - no need to walk out on the thin ice.
Enjoy your weekend. It is cooling off here in Chicago. Fall is here.
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Economic data has been rather positive both yesterday and today with the Chicago PMI increasing to 55.7 in September from August's 53.0. The Dallas Fed manufacturing survey jumped significantly from the August report of 5.0 to September's 12.8. And then today, the ISM manufacturing survey reported 56.2 for September, up from 55.7. So the economic data has been encouraging traders and apparently, they don't see the Washington political impasse to be a tradable issue. Or, more correctly, perhaps they don't see it as an impasse that will last long or cause any real economic damage.
I closed the 910/920 put spreads in my RUT Oct iron condor today. The remaining position stands at a net P/L of -$1,100 or -6%.
