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Bernanke surprised the markets today by announcing that economic conditions do not yet justify beginning a reduction of the Fed's stimulus programs. This announcement certainly was a surprise to most market analysts, but Bernanke's message has been remarkably consistent - the market just didn't listen. Bernanke laid out the conditions for beginning tapering back in June, viz., an improvement in the unemployment rate to 6.5% or lower. Ironically, the market threw a tantrum at the mention of tapering at that time, but now is surprised by Bernanke following his own stated guidelines. Perhaps this was a classic example of crowd psychology.
Markets spurted higher on the FOMC announcement, and one could argue that was a predictable response to the idea of continued stimulus. But perhaps a large amount of today's rally was short covering because so many traders expected the announcement of tapering and were expecting the market to drop at least somewhat in response.
SPX gained $21 to close at a new all-time high of $1726. RUT also set a new all-time high at $1077 with an $11 gain. Volatility pulled back a bit with the VIX paring off nearly a full percentage point to 13.7%. Trading volume spurted higher with 2.4 billion shares of the S&P 500 stocks trading. Trading on the NYSE increased 42% while trading volume increased 21% on NASDAQ.
A couple of economic reports this morning were over-shadowed by the FOMC. Housing starts in August rose by eight thousand to 891k. But building permits dropped from 954k to 918k in August.
Today's surprising rally didn't change the position for my September iron condor at 940/950 and 1120/1130. Both spreads are over two standard deviations OTM, so I will allow these spreads to enter expiration this weekend and expire worthless for the maximum gain of 15.2%. This brings the year to date results for the Flying With The Condor™ service to +7.9%.
So what should we expect tomorrow - a continued rally or some profit taking?
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The major market averages all traded up substantially again today. With all of the talk about tapering and Bernanke's replacement, who would have guessed two strong trading days in succession before the FOMC announcement? It is just one more example of how difficult it is to predict market direction. The cynic in me thinks all of those guests on CNBC take a strong, confident position with the idea that if they are correct, they can use that for marketing material for the next several months. If they're wrong, they just need to come out with a new prediction. But I digress...
SPX gained $7 to close at $1705, roughly $5 off its high for the year. RUT continued to outperform SPX, hitting a new all-time high at $1066, up $10. The VIX increased about two tenths of a point to 14.5%, probably the result of institutions hedging their portfolios in front of the FOMC announcement tomorrow. Trading volume fell off a bit from yesterday with 1.8 billion shares of the S&P 500 stocks changing hands. Trading volume on the NYSE dropped 11% and decreased 2% on NASDAQ.
The principal economic data reported today was the CPI, which came in basically flat at +0.1% for August. The NAHB Housing Market Index came in flat for September.
So now we turn to the FOMC announcement tomorrow afternoon. Who knows how the traders will react tomorrow afternoon? From all of the commentary on CNBC, it appears that the most common expectation is for the Fed to announce the beginning of tapering tomorrow. I find the bullishness of the past few days to be surprising in that light. It wasn't long ago that the market dropped 6% on just the possibility of tapering sometime later this year. Have we now talked ourselves into thinking everything is OK? One possibility for tomorrow is the classic, "sell the news". Or will the markets sell off if Bernanke says the economy still needs Fed stimulus? We'll see. Watch your exposure; it could be very volatile.
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The markets opened modestly higher this morning but quickly weakened and traded lower. SPX hit a high of $1690, matching yesterday's high, but then closed very close to its low of the day ($1682) at $1683, down $6. RUT lost $7 to close at $1049. Volatility rose a bit with VIX closing at 14.3%, up a half point. Trading volume was flat to down with 2.0 billion shares of the S&P 500 stocks trading (flat from yesterday). Trading on the NYSE dropped 2% and trading volume declined 3% on NASDAQ.
This week's unemployment data showed some additional improvement with initial unemployment claims of 292k, down 31k from last week. Continuing unemployment claims declined 73k to 2871k. Maybe that is what drove the initial spurt in the markets at the open this morning. But that bullishness didn't last.
My September iron condor on RUT stands at a P/L = +$2,360 or +13.5% with position delta = +$5 and position theta = +$85. Both spreads are over two standard deviations OTM; the maximum gain for the 20 contract position is $2,560 or 14.7%.
Retail sales, PPI and consumer sentiment all report tomorrow - will those reports move the market? I doubt it. I think the FOMC announcement next Wednesday is the market's focus at this point.
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The markets rallied today, on a day that should have been a bit subdued as we look forward to the FOMC meeting Tuesday and Wednesday. The general consensus was that it was a relief rally due to Larry Summers withdrawing his name for nomination as the next FOMC chairman. That seems like an over-reaction to me, but I suppose the street prefers the more predictable Fed under the leadership of Yellin, since she would be expected to smoothly transition from Bernanke's policies. In the meantime, Obama emphasized his intransigence in negotiating over the debt ceiling and spending, so the FOMC chair is the least of our problems in Washington.
SPX gained $10 to close at $1698 and RUT gained $2 to close at $1056. On a percentage basis, RUT's gain was much less than that of its big brother, SPX. Does that signal a slowing of the markets, or is it just noise? The candlestick on RUT today appears to be a shooting star, as RUT traded as high as $1065 before pulling back to close at $1056. The shooting star may signal the top of a bullish trend, but it requires confirmation; it is often a false signal.
Trading volume increased today with 1.98 billion shares of the S&P 500 trading. Trading on the NYSE increased 15% and trading on NASDAQ increased 5%.
The Empire Manufacturing Survey decreased to 6.3 for September, down from the previous 8.2. Industrial production increased slightly to +0.4% from flat last month. Capacity utilization also bumped up slightly to 77.8% from 77.6%.
My September iron condor on RUT continues to cruise along toward its maximum gain with a current P/L of +$2,557 with delta = -$1 and theta = +$6. I would expect tomorrow to be a slow day in the markets as we anticipate the Fed announcement Wednesday - but that is what I expected for today...
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The major market indexes traded higher today, but on lower volume. SPX gained $5 to close at $1689 but RUT closed unchanged at $1055. RUT's price behavior together with decreased trading volume suggests a slowing of this rally as traders look forward to the FOMC meeting next week. Trading in the S&P 500 stocks decreased to 2.0 billion shares while trading on the NYSE declined 12%. Trading volume on NASDAQ dropped 6%. As concern about Syria falls off, we may start to see increased taper anxiety in advance of the FOMC announcement and Bernanke news conference.
No substantial economic data were reported today. The big news was Apple's large drop in stock price to roughly where it was before Carl Icahn's famous tweet. In fact, Icahn said today on CNBC that he was buying more shares at this lower price. It will be interesting to see where this story goes.
My September iron condor on RUT stands near its maximum gain with a net P/L of $2,420 or +14% and a position delta of -$7 (nearly perfectly delta neutral) and position theta = +$49. The temptation at this point to close for much of the potential gain, but if you are trading larger numbers of contracts, the trading commission costs become an inhibiting factor. Allowing spreads to expire worthless is attractive as long as you don't allow that to draw you into taking too much risk. So we will watch these spreads closely between now and expiration next week and close if the market starts to threaten either side.
