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Comments from Fed officials yesterday and today have scared the markets once again. Recall May 22? Bernanke's attempt to be very clear about the FOMC's game plan wasn't well received. The market gave back 6% by June 24, but then, even more surprising, recovered all of those losses and hit new highs in short order. SPX lost $10 to close at $1697 while RUT lost $11 to close at $1052. Volatility rose nearly one point to 12.7% (as measured by the VIX).
Trading volume rose to 1.9 billion shares of the S&P 500 stocks, but this remains below the 50 dma at 2.3B. Trading on the NYSE increased 23% and also increased on NASDAQ, but not quite as much at +5%.
This is a light week for economic data, so it is hard to predict where this market may be heading. Depending on which Fed official is quoted each day may make a huge difference. If Bernanke frowns as he gets out of his limo, the market may crash! Maybe it isn't quite that bad, but I'm not far off the mark. In fairness, it is true that this scenario is new to Wall Street. No one knows how to value this market in the absence of Fed stimulus. Perhaps many traders have simply decided to take their profits and go on vacation.
Watch the area of $1680 to $1690 on SPX; that has been a strong support area through most of July. If we break down through there, we could find ourselves at the 50 dma at $1650 in no time. A similar area to watch on RUT's chart is $1040 to $1045. RUT's 50 dma is at $1009.
Today's market pull back was just the right medicine for my August iron condor on RUT. It now stands at a net 13% loss with position delta = -$90 and position theta = +$279 (on 20 contracts). My Sept position at 930/940 and 1120/1130 (mistyped those strikes yesterday) stands at a 5% gain with position delta = -$33 and position theta = +$70 (on 20 contracts). Both condors are back closer to delta neutral with today's pull back. I will apply the two sigma rule to the August position this Friday.
So we return to Fed watching...
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The ISM Services index came in this morning for July at 56.0, up from 52.2. But that didn't seem to have much effect on the markets; they traded in a choppy sideways pattern all day. But the bears could not take advantage of this indecision. The bulls held their own and minimized any damage. SPX closed again above the key $1700 level, at $1707, down $3 on the day. RUT gained $3 to close at $1063. Trading volume was minimal with 1.6 billion shares of the S&P 500 stocks trading. Trading volume dropped 19% on the NYSE and dropped 13% on NASDAQ.
The big news of the day was a record inflow of 40.3 billion dollars into equity funds in July. This reflects a large bond sell off but much of the capital coming out of the bond market is going into money market funds. While many traders are chasing this bull market, many are choosing safety and remaining in cash. The large equity inflows may be interpreted positively as part of the driving force behind this bull market. The contrarian viewpoint points out that the large inflow of capital often comes around the market peak. Hmmm...
The EuroZone PMI came in at 50.5 for July, up from June's 48.7, so Europe may be coming out of its recession. But it is early to make that call. Many European countries remain in serious economic difficulty.
My Aug condor continues to limp along with a net loss of 20% and position delta = -$204 and position theta = +$312. I am right on the edge of closing a portion of the call spreads and taking those losses. At this point, each day of time decay makes a big difference. My Sept iron condor on RUT at 930/940 and 1020/1030 stands at a net gain of $440 with delta = -$52 and theta = +$78. The indexes had a moderately strong upward move in the last minute of
trading today; RUT gained over a dollar in the last minute. It's hard to
say if that is a leading indicator of tomorrow's trading or just some
random move. Most of the one minute candlesticks were just one or two cents, so that last minute stood out on the chart.
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After digesting the FOMC announcement, the markets opened very aggressively this morning. SPX gained $21, closing at a new record of $1707. RUT also set a new record high at $1060, up $15. Volatility dropped a half point to 13.0%. Trading volume dropped off a bit with 2.3 billion shares of the S&P 500 stocks trading. Trading on the NYSE dropped 5% and trading on NASDAQ declined 4%.
The ISM manufacturing index came in at 55.4 for July, a two year high, and up from June's 50.9. This added fuel to the bullish sentiment of this morning's market.
Many analysts were watching for the jobs report tomorrow as the next significant market moving event this week. So this extremely bullish day in advance of the announcement was a bit surprising. Assuming the ADP report earlier this week is an early indicator of a more positive jobs report tomorrow, perhaps this bullish trend continues tomorrow. But an alternative view is that we set market highs today and a strong jobs report makes the market reconsider the Fed beginning to withdraw their stimulus and results in a bit of a pull back - difficult to predict. All one can do is hedge your positions.
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The jobs report this morning was the last market moving event in a full week. The report disappointed the street with 162 thousand new jobs. The unemployment rate dropped to 7.4%, but many analysts brushed that away with concerns about a record low in the Labor Force Participation Rate, and the fact that many of the reported new jobs are part time, not full time.
The more positive number of 200k jobs reported by ADP earlier in the week didn’t correlate very well with the jobs report and this probably was a large part of the market’s disappointment – their expectations had been built up. You can see evidence of that in the bullish trading late in the day yesterday.
SPX closed at $1710, up $3 and RUT closed at $1060, flat on the day. Today’s disappointing jobs report would have sunk a weak market, but it couldn’t sink this market, with today’s closes matching or beating yesterday’s closes. So the economic environment may be weak, but the bullish market trend continues.
Volatility hit a recent low with a VIX reading of 12%. One has to go back to mid-March to find a lower value of VIX. One can view that as a bullish indicator, i.e., traders are confident the uptrend will continue. Or one can view this as a low before the VIX spikes upward, i.e., the calm before the storm.
Many analysts are skeptical of this bullish market because the underlying economic data are so weak. But one must remember that the corporate earnings this quarter have largely beat estimates. This economic recovery is certainly the weakest in history by a long shot, but companies are making money and that drives share prices.
Have a great weekend. Next week looks to be a slow week in terms of economic data, but we'll see if that correlates with a calm market. After all, this week didn't have the fireworks I would have predicted.
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The Chicago PMI came in at 52.3 in July, up from 51.6 in June. This was slightly better than analysts expected. ADP issued their private jobs number at 200 thousand jobs created in July; traders were encouraged that this positive number may be indicative of a good jobs report Friday. GDP for the second quarter came in at an annualized gain of +1.7%. This was up from the first quarter and beat analyst expectations.
The FOMC announcement was largely unchanged from the previous announcement with a couple of key changes. Perhaps most significantly, there was no discussion of ending the quantitative easing programs; anyone who was expecting a timetable is disappointed. The committee also changed their assessment of the economic recovery to a slightly more pessimistic posture with language of a "moderate recovery" changed to a "modest recovery". The FOMC is also starting to see some early signs of growing inflation but doesn't see that as an imminent threat (yet). Increasing inflation is probably the largest risk to the Fed's stimulus programs.
