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The markets bounced back upward strongly today and it was hard to say why. Many analysts pointed to the earnings announcements from Best Buy, TJ Maxx, and other retailers, but closer analysis reveals a mixed bag. Actually, this is becoming a common theme for this market: big moves up or down with the market analysts struggling to understand the drivers. SPX closed up $6 at $1652 and RUT soared $15 to close at $1029. However, it is interesting that volatility did not decrease by any meaningful amount. VIX closed at 14.9%, down only two tenths of a point. Hmmm...
SPX tried to move back above the 50 dma at $1658, but failed to hold it. By contrast, RUT blew through the 50 dma at $1020, closing well above at $1029. This strong performance by RUT would seem to be a bullish sign, but I'm not sure any of our conventional wisdom holds in this market.
Trading volume was pretty flat with 1.9 billion shares of the S&P 500 stocks trading, up from yesterday's 1.8B but well below the 50 dma. Trading volume on the NYSE dropped 0.2% and trading volume on NASDAQ decreased by 9%.
I have resisted adding any new positions this week because of the release of the minutes from the last FOMC meeting tomorrow afternoon. It should be a "yawn", but who knows with this market? Everyone is trying their best to read the tea leaves and that often leads to imagined boogeymen.
My Sept iron condor on RUT stands at a net gain of 8% with position delta = +$17 and position theta = +$89. Now we wait on the market's reaction to the Fed minutes...
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That is the question as the markets trade downward again today. SPX broke through its 50 day moving average (dma) and lost $10 to close at $1646. RUT lost $11 to close at $1013. Volatility rose almost one point with VIX closing at 15.1%. Trading volume was down from Friday. Trading volume always drops off from expiration Friday, but the trading in the S&P 500 stocks has dropped each day from Thursday of last week; today 1.8 billion shares traded; the 50 dma = 2.2B. Trading volume on the NYSE was down 21% and volume was down 5% on NASDAQ.
SPX broke the support level at the 50 dma today, but it also broke through support at about $1652, set in late June just before the bottom of that pull back was reached. The next solid support level for SPX is around $1610. RUT's chart is equally ugly with RUT decisively breaking through the 50 dma at $1019. The next support level on RUT is around $1000.
There was no economic news to drive the market today, but we have the FOMC minutes from the last meeting being issued Wednesday afternoon. That would be a good time to be on alert for some market volatility. It appears that traders have now concluded that the Fed will announce tapering of the stimulus programs at the September meeting and they are taking money off the table. The last time traders were spooked about tapering, RUT bottomed around $951 (-5%) and SPX bottomed around $1574 (-6%). Alternately, we could look at 5% and 6% pullbacks, respectively, from the early August highs and that gives us $1010 on RUT and $1607 on SPX. That analysis takes us quite a bit lower on SPX, but RUT is very close at today's close of $1013.
Fortunately, my put spreads in the Sept position are still relatively far OTM at 930/940. The position stands at a net gain of 7% with delta = +$38 and theta = +$64. I think it is reasonable to assume we won't continue to drop until September 18 when the FOMC announcement comes out and Bernanke holds his press conference. So the question is, where is the equilibrium point where traders are comfortable and willing to tread water in advance of the announcement?
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The bulls and the bears appear to be at a stalemate here. For several days now, the market has opened strongly and spurted upward, but then quickly reversed downward. Much of the news and CNBC commentary throughout the day has been focused on Bernanke and the FOMC. Everyone is consumed with the Fed tapering their QE programs and arguing about whether that tapering will begin in September.
A good example was this afternoon when one of the FOMC members was quoted as saying that tapering wouldn't begin in September. The markets popped up a bit on that news, but it didn't take long before those gains were lost and the market actually dipped lower. In the meantime, it appears as though traders are sitting on the sidelines, reluctant to commit additional capital to this market. SPX lost $9 today, closing at $1685. RUT closed down $4 at $1048. The VIX increased about half a point to 12.9%.
Trading volume continues to be very low and this is actually consistent with the stalemate view expressed above. Only 1.8 billion shares of the S&P 500 stocks traded today and the 50 dma stands at 2.3B shares. Trading on the NYSE decreased 3% and trading volume dropped 1% on NASDAQ.
The Producers Price Index, PPI, was announced this morning for July and, surprisingly, was a big fat zero. I would have thought we would be seeing the early signs of an inflation surge with all of this money being pumped into the markets. I think this reflects the extreme weakness of this economy; it is much weaker than reported in the media.
My Aug condor position at 970/980 and 1080/1090 stands at a 7% loss, assuming both spreads expire worthless this weekend, and that appears likely at this point. Fortunately, my Sept condor position stands at a P/L of +$1620 or +10% with position delta = -$15 and position theta = +$68. This is a good example of managing the risk on each trade so that losses are constrained to be of the order of the gains in a good month.
So now we return to the market watch. Try not to fall asleep.
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Analysts and market gurus have been predicting a correction for most of this year. And since the market reversed on a dime and recovered all of the 6% correction in June, they have resumed their message: a correction will be good for the market. Well, today they received at least a start on their healthy market elixir. SPX lost $24 to close at $1661 while RUT closed at $1028, down $20. Volatility popped up almost two points, with VIX closing at 14.7%. Although I was a bit surprised VIX didn't spike higher on today's market move.
Many observers thought the market was reacting to the weak Philadelphia Fed and Empire Manufacturing numbers, but the futures were down over ten points before those reports were released. The Philadelphia Fed survey for August came in at 9.3, down markedly from July's 19.8. The Empire Manufacturing survey dropped a bit to 8.6 from last month's 9.5. Industrial production and capacity utilization data were both flat for the month. The CPI came in at +0.2%; is it starting to inch up? Initial unemployment claims dropped to 320k, down 15k, while continuing claims dropped 54k. All in all, the data didn't seem too bad. After all, you would think we would be getting accustomed to poor economic data. I'm not sure what started this down draft, but traders were anxious to protect their gains once it started. Today also didn't fit the "good news is bad news" theory of predicting whether the Fed will start to taper stimulus. On that basis, one would have thought today's weak data would have rallied the market.
SPX sliced through support at $1680 and $1670, and appeared to find support at the 50 dma ($1657), hitting a low of $1659 today. The mid-June peak at $1052 may be a support level to watch if the 50 dma is breached. RUT is in "no man's land" on its price chart. RUT gapped down at the open and broke support at $1040. The 50 dma is at $1018 and solid support can be found at $1000.
This pullback essentially guaranteed that my Aug spreads on RUT at 970/980 and 1080/1090 will expire worthless this weekend. My Sept position at 930/940 and 1120/1130 stands at a gain of 8% with position delta = +$27 and position theta = +$60.
Will this really get ugly or is this just a minor pull back as the market awaits the September FOMC meeting?
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The markets plunged at the open this morning, but almost immediately recovered and had traded back to "even" by noon. But then SPX weakened and recovered a bit before the close at $1689, down $2. RUT traded more aggressively, recovering its opening losses before 10 am ET, and stayed in the black all day, closing up $5 at $1054. Trading volume dropped again today with 1.7 billion shares of the S&P 500 stocks trading. Trading volume on the NYSE and on NASDAQ each dropped 8% today.
Volatility dropped almost one point to 12.8% (as measured by the VIX).
Today was a light day for economic news. We get retail sales tomorrow, the PPI Wednesday, and then the CPI and unemployment claims on Thursday. Barring any surprises in those announcements, I expect this market to continue sideways as everyone is either on vacation, or sitting on the sideline pondering whether tapering will start in September. A CNBC survey of economists found a large majority expecting the Fed to begin tapering in September in spite of the fact that the unemployment rate will not be even close to the 6.5% figure Bernanke stated as their trigger. Why would Bernanke go to such an extent to communicate that guideline and then ignore it?
My RUT Aug condor at 970/980 and 1080/1090 stands at a 7% loss with delta = -$42 and theta = +$194. Our earlier adjustments of this position as the market traded straight up have successfully minimized the loss. The Sept position at 930/940 and 1120/1130 is up $1520 or +9% with delta = -$23 and theta = +$63. The good news is that the September position has already recovered the August losses.
RUT has been trading much more bullishly than SPX the past 2-3 sessions. SPX is being held back by strong resistance at $1700. Time will tell if RUT is effectively forecasting an increase by SPX or whether RUT will be pulled back by the blue chip stall.
