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All eyes and conversations are focused on the Fed and tomorrow's announcement and news conference. So why did the bulls go crazy in the markets today? Beats me. I suppose one has to conclude that the consensus is that the Fed will not say anything to suggest a discontinuation of quantitative easing anytime soon. I think this market action just makes it even more likely that we will see extreme volatility in the markets after the announcements tomorrow. SPX gained $13 to close at $1652, but RUT was even more bullish, rising $12 to close at $1000. VIX decreased a touch to 16.6%. Trading volume declined with 2.1 billion shares of the S&P 500 trading. Volume decreased 6% on the NYSE and decreased 1% on NASDAQ.
If we look for economic data to explain today's huge bullish run, we will be disappointed, or at least perplexed. CPI came in for a modest 0.1% increase in May, which is good news on the inflation front. But economists expected 950k housing starts and received 914k. 974k building permits were issued in May, as compared to 1005k last month. So this crop of data just reinforces the now familiar "not too bad, but not too good" theme of the past several months.
My June iron condor on RUT stands at a net gain of $780 or +4% with delta = -$21 and theta = +$118. The July position stands at a net gain of $1,160 with delta = -$49 and theta = +$103.
The bullish nature of the markets this week has me very concerned. I think we are now positioned where even the slightest frown from Bernanke will send the markets tumbling. This Fed announcement and news conference has attracted more attention than any previous meeting, and that sets up the possibility of extreme reactions on the basis of virtually nothing substantive - be careful.
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Traders appeared to be assuming that the Fed isn't likely to change its accommodative posture later this week as they traded the market higher this morning. But the Financial Times reported around 2pm ET that Bernanke will announce that the Fed will begin to taper their QE soon. The selling quickly took the S&P 500 index down $15, but then it recovered somewhat into the close at $1639, up $12 on the day. RUT gained $6 to close at $988. The VIX rose about a third of a point to close at 16.8%.
The bulls were encouraged by two economic data reports this morning; the Empire manufacturing survey came in for June at 7.8, up from a negative 1.4. The NAHB housing market index reported at 52 for June, up from 44. It is telling that an opinion expressed in a publication seems to carry as much weight as economic facts in this market environment. Wednesday afternoon could be a real roller coaster ride.
My June iron condor position on RUT stands at a net gain of $735 or +4% with position delta on 20 contracts at -$19 and theta = +$156. The call spreads are over two standard deviations OTM, so I will allow both the call and put spreads to expire worthless this weekend. The July position stands at a net P/L of +$1,100 (+6.5%) with delta = -$14 and theta = +$106.
Be careful this week; this market is touchy.
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Apparently I was naive to think yesterday's reversal was unusual volatility - today's moves made that look like a walk in the park. Early this morning, the S&P futures were very negative and SPX opened at $1612 and traded down about $4 before starting a steady run upward and never faltered for a moment. SPX closed at $1636, up over $24 - wow! RUT followed suit with a gain of $17, closing at $990. Trading volume was mixed with 2.2 billion shares of the S&P 500 stocks trading (still below the 50 dma); trading on the NYSE increased 8% but trading volume decreased 2% on NASDAQ. VIX dropped off by over two points to 16.4%.
So what incredibly good news prompted this huge move upward? Initial unemployment claims came in this morning and decreased 12 thousand from last week. Continuing claims decreased two thousand out of three million. If you have followed this data, you know that neither of these moves are significant; the trend in unemployment claims has been essentially flat for several months. This report came out well before the market open, so that wasn't the source of the big bull run upward that started about an hour after the market opened this morning. Retail sales reported an increase of 0.6% for May which was a bit better than the previous month's 0.1% increase, but again, that report doesn't seem likely to have unleashed the bulls on a rampage.
Today's candlestick on SPX is the classic bullish engulfing pattern and suggests a reversal of this downward move of the past couple of weeks. However, I find this market's reversals back and forth to be rather erratic and I wouldn't bank on any one signal. The recent price swings defy any common sense. I can almost hear some of you saying that's typical of the markets, and I agree to some degree, but the recent volatility is extreme by any measure and normally the stimulus behind the move is obvious. I believe the source of this extreme volatility is the strong presence of the Fed in today's markets. Traders are left guessing whether Bernanke is about to withdraw the quantitative easing next month or next year. So if you think Ben is staying with us, you go all in, but if you think he is planning his exit, you take your money off the table. That leaves us subject to crowd psychology and rumors as traders run from one side of the market to the other and then back again.
My June position stands at a net gain of $280 or +2% with delta = -$18 and theta = +$207. The July condor position stands at a net gain of +$520 or +3% with delta = -$26 and theta = +$110. The theta/delta ratios of both positions are very strong. I will apply the Two Sigma Rule to the June position tomorrow, and it looks likely that I will close the June call spreads.
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I was surprised by the huge recovery spike upward yesterday. If that was surprising, then today's move back down, wiping out almost half of yesterday's gains was equally surprising. SPX closed down $10 at $1627 and RUT closed at $981, down $8. Last week's jobs report was the most closely watched jobs report in some time. Next week's FOMC announcement and Bernanke's news conference will also be very closely watched. Every word of the announcement will be studied and compared to the last announcement. Bernanke's news conference will be recorded and replayed many times, looking for clues. But this may be similar to people playing the Beatles' records backwards in the sixties, looking for some hidden message. I don't think the message is there.
Bernanke has made it clear that he is looking for significant improvement in unemployment before withdrawing stimulus. If unemployment is improving, it is miniscule at best. In any case, the bottom line is this: 1) I don't expect much movement in the markets between now and Wednesday afternoon, and 2) the latter part of next week could be a wild ride depending on the market's interpretation of the FOMC announcement, rumors, and crowd psychology.
Today's economic data supports the mediocre, muddling along viewpoint of the economy. PPI rose 0.5% in May and industrial production was unchanged. Capacity utilization was flat at 77.6% and the University of Michigan consumer sentiment survey dropped to 82.7 for June from 84.5.
My June condor stands at a net gain of $540 or +3% with delta = -$13 and theta = +$159. I decided not to close the June 1030/1040 call spreads today. They remain not quite two standard deviations OTM. My July position stands at a net gain of $1,040 or +6% with delta = -$3 and theta = +$89 (each position consists of 20 contracts).
Have a nice weekend.
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The S&P 500 opened up this morning and quickly rose $7 to $1638, but then turned and dropped to $1617 - a $21 swing before noon! Then SPX steadily declined to close at $1613, down $14, and near the low of the day at $1611. RUT lost $9 to close at $972 and volatility rose almost another two points, with the VIX closing at 18.6%. This is getting serious. SPX bounced off the 50 dma at $1611 late this afternoon, but appears to be setting up to challenge support at $1600 tomorrow.
The fascinating part of this story is the reasoning given by all of the talking heads: they claim traders are concerned about the Fed reducing its stimulus programs. It seems to me that Bernanke has been extraordinarily open about the criteria for withdrawing the quantitative easing, citing an improvement in unemployment to 6.5% or better. Since unemployment stubbornly remained high and even ticked up a bit in the last report, why the panic? I don't know. It is true that the market is always discounting the future, but this seems extraordinary. Well, we can check the unemployment claims data in the morning, but I doubt that we will see that number of claims have suddenly dropped from last week.
My June condor stands roughly at break-even with delta = +$22 and theta = +$192. The call spreads are slightly less than two standard deviations OTM and the put spreads are over two standard deviations OTM, so this position is quite safe with just over a week to go. The July position stands at a net gain of $620 or 4% with delta = +$5 and theta = +$84. So now we wait to see if SPX bounces off the 50 dma or heads lower. Perhaps the long awaited correction is here.
