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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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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.
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The markets opened positively this morning on news that Standard and Poors had revised the outlook for our treasury debt from negative to stable. Then the major indexes dipped but stayed in the black most of the morning. But the bulls couldn't make the gains stick. The major indexes chopped sideways most of the day and SPX closed at $1643, down $1 for the day. By contrast, RUT gained $5 to close at $993. Seeing small caps outperform the blue chips is encouraging, but the negative sign was volatility rising to 15.4%; it only rose about a third of a point, but that is clearly the wrong direction if indeed we are firmly back on the bullish track. Trading volume fell off significantly with only 2.1 billion shares of the S&P 500 stocks trading today. Trading volume on the NYSE was down 15% and volume on NASDAQ dropped 6%.
We may not have the incredibly bullish market trend of the past few months, but I have been impressed with this market's resilience in the face of all challenges. It seems as though the closest thing to a correction this market can sustain is a minor pull back or just some sideways consolidation. But it remains a nervous market, so be careful.
My June iron condor position on RUT stands roughly at break even with position delta of -$47 and position theta of +$209. At this point, it appears likely that my Two Sigma Rule will close the call spreads of this position on Friday; currently the delta of those short 1030 calls = 6, so it is reasonably safe at this point. The July condor stands at a net gain of $880 or +5% with delta = -$26 and theta = +$85. This position is essentially delta neutral with the delta of each short option at 7-8.
There wasn't any significant economic data reported today (outside of the S&P announcement). Later in the week, we will check up on inflation with the CPI and PPI numbers. The consumer sentiment numbers, industrial production and capacity utilization reports come out Friday. Barring any surprises in this data, I don't see any market-moving events upcoming - but those are always the famous last words before the surprise. Stay alert.
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The Bank of Japan disappointed traders by failing to augment its stimulus programs, so markets around the world sold off. Heaven help us when the Fed announces they are withdrawing! SPX opened and traded down as low as $1623 and then recovered nearly all the way to $1640 by noon, only to sell off and close near the lows of the day at $1626, down $17. RUT lost $11 to close at $981. As one might expect with these wild swings, VIX increased by nearly two points to close at 17.1%.
Trading volume increased with 2.4 billion shares of the S&P 500 stocks trading. Trading volume increased 17% on the NYSE, but only increased 1% on NASDAQ.
There was no economic data of any significance reported today.
My June iron condor stands at a net gain of +$180 or +1% with delta = -$9 and theta = +$163. The July position stands at a P/L of +$740 or +4% with delta = -$11 and theta = +$89. Today's increase in volatility pushed the P/L of these positions lower (iron condors are negative vega positions), but the health of these positions is nearly ideal (note the small deltas).
What surprises await us tomorrow?
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Everyone was focused on the jobs report this morning, and this was even more the case than usual because of the recent market weakness and the whole Fed tapering discussion. The Nonfarm Payrolls report came in with 175k jobs and unemployment increased slightly to 7.6%. Apparently this was weak enough to convince traders that the Fed won't be withdrawing anytime soon, so the buying resumed. SPX gained $21 to close at $1643 and RUT followed suit a little more weakly with a gain of $8 to close at $988. SPX gained almost $10 during the last hour of trading, so traders were gaining enthusiasm as the trading session came to a close. Trading volume dropped off with 2.4 billion shares of the S&P 500 stocks trading; volume fell 5% on the NYSE and decreased 8% on NASDAQ. Volatility dropped off significantly with the VIX closing down 1.5 points at 15.1%.
This week of trading underscored how nervous this market is, given the knowledge that the Fed is supporting the market and perhaps responsible for much or all of the bullish run. That results in traders running for the exits on the slightest rumor. The normal uncertainty associated with trading has been exaggerated. Plus, this is new territory; we aren't accustomed to accounting for Fed stimulus in our analysis of the markets.
However, don't let down your guard; we may not be out of the woods yet. Don't be surprised if the market "changes its mind" Monday.
My Jun iron condor on RUT now stands at breakeven with position delta = -$15 and position theta = +$146. The July condor stands at a P/L of +$800 (+5%) with position delta = -$18 and position theta = +$80.
Enjoy your weekend. It almost feels like spring here in Chicago with temperatures in the sixties. I just paid my property taxes this week: $4.40 per square foot. Do the math; I will be surprised if your taxes are higher. Why do I stay here?
