- Details
- Written by Dr. Duke
- Category: Dr. Duke's Blog
- Hits: 2032
That is the question being debated today. Yesterday's huge decline spooked traders, especially after the S&P 500 index broke through support at $1600 and plunged in afternoon trade. My read, for what it's worth, is that traders have been working in an unfamiliar environment for the past several years. They know the FOMC is and has been supporting the market, but that is a new and unprecedented factor to consider in their trading strategies and analysis of the markets. This is uncharted territory. Add on this incredible rally since mid-December and traders start to get nervous about losing those big gains. Hence, we have everyone overly focused on Bernanke and the FOMC this week. I would argue nothing new was said, but once a few traders started pulling their gains off the table, it started a panic run for the exits. In a strange environment where I have little or no experience to draw upon, I can reasonably conclude that a safe course of action is to go to cash and do it early.
The futures were positive this morning, but weakened as the market open drew closer. Trading was choppy all day. SPX managed a small gain of $4 to close at $1592 and RUT gained $3 to close at $964. SPX managed to get close to resistance this afternoon, trading as high as $1599. The VIX dropped 1.6 percentage points today, closing at 18.9% after running as high as 20.9% (yesterday's VIX was over 21% at one point). This drop in VIX was reassuring and serves as at least one data point suggesting the worst is over. I am inclined toward the view that we will see a choppy sideways market for the rest of the summer. The basic economic data have not been stellar, but they are slowly improving. And Bernanke has made it clear that stimulus will be withdrawn only as stronger employment data are reported. So the sky isn't falling.
Trading volume was huge today, due to quadruple witching: the simultaneous expiration of stock index futures, stock index options, stock options, and single stock futures. These four product expirations occur together once each quarter. Over 4.1 billion shares of the S&P 500 stocks traded today; trading on the NYSE increased 46% and volume increased 35% on NASDAQ. The negative trading earlier this week probably also contributed to the volume spike today as people bailed out of positions this morning.
My June iron condor on RUT at 890/900 and 1030/1040 will expire worthless tomorrow for a gain of 5.2%. RUT's settlement price is $964.44. I hedged the call side once and rolled the call spreads higher twice and rolled the put spreads higher once during this position's life, so we did well to salvage a small gain. My July condor stands at a net gain of $1,260 or +7.5% with position delta = $32 and position theta = +$74 on 20 contracts. For those of you trading SPX, it settled at $1599.93, an unusually large move from yesterday's close at $1588.19. The average differences between Thursday's close and settlement last year were $5.95 on SPX and $4.46 on RUT. So far this year, those differences are $4.69 and $2.42, respectively. I would not recommend carrying short index option spreads into expiration that were anywhere near that close to the index price, but there is the data, for your consideration - different stokes for different folks.
Enjoy the weekend.
- Details
- Written by Dr. Duke
- Category: Dr. Duke's Blog
- Hits: 2085
All eyes were focused on the Fed today. The official policy statement was essentially the same as last month: the economic recovery continues slowly, interest rates will remain low and the bond buying programs will continue. Bernanke attempted to communicate the Fed's "game plan" in his news conference, but reporters were naively looking for more specificity. To my mind, Bernanke communicated as well as possible given the unknown future circumstances: QE may begin to be reduced late this year and could end as early as mid-2014, but that depends on the measures of a healthy economic recovery, most notably a lower unemployment rate. Interest rates will remain low until inflation becomes a concern and that could be as late as 2015. What do Liesman and the rest of the CNBC bunch want? Do they seriously think the Fed can lay out a definitive time line without knowing where various economic indicators might be later this year? I might expect freshman college students to be this naive, but not mature adults. Perhaps this is indicative of the general trend in our country to want Big Brother to take care of us and eliminate all risk and uncertainty.
SPX traded down after the Fed announcement, closing down $23 at $1629. RUT lost $13 to close at $987. VIX dropped and then rose, ending the day unchanged at 16.6%.
My June position stands at a net gain of $821 or +4% with position delta = -$11 and position theta = +$266. The July position stands at a net gain of $1,240 or +7% with position delta = -$11 and position theta = +$121. I will be watching the charts closely tomorrow to see if the markets trade lower or just start to chop sideways a bit. It often takes a couple of days for traders to absorb the implications of the Fed announcement.
- Details
- Written by Dr. Duke
- Category: Dr. Duke's Blog
- Hits: 2369
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.
- Details
- Written by Dr. Duke
- Category: Dr. Duke's Blog
- Hits: 2177
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.
- Details
- Written by Dr. Duke
- Category: Dr. Duke's Blog
- Hits: 2126
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.
