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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 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?
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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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Earlier this week, I said I expected the markets to chop weakly sideways this week as we approach the jobs report Friday. But the market has just traded lower each day. Gloom has replaced euphoria. SPX closed down $22 today at $1609. This solidly broke support at $1635 and closed just above strong support at $1600 and near the 50 dma at $1604. A 5% pull back from the highs would take us to $1586. RUT's chart is similar. RUT broke support at $975 and closed at $968, down $14. The next strong support level is at $955 and the 50 dma = $954. As one might expect, the VIX jumped up over a point to 17.5% today. For comparison, VIX hit 17.5% in the minor pull back in April, touched 19% in February, and was just under 23% during the fiscal cliff debacle before the first of the year. Trading volume was flat with 2.6 billion shares of the S&P 500 stocks trading; trading volume on the NYSE increased 1% and trading on NASDAQ decreased 1%.
The ADP employment report came out this morning at 135k. That isn't a great number, but not terrible either, so I'm unsure why the market would tumble on that basis. If anything, I would have thought this was setting the stage for a mediocre jobs report Friday that would assure traders that the Fed will continue to support this market. The ISM service report increased to 53.7 for May from last month's 53.1. The issuance of the Beige Book from the FOMC was a non-event this afternoon.
I watch CNBC off and on throughout the day. It fascinates me how they can find guests to deliver the "I told you so" message no matter what the market does each day. They must have a prearranged cast of bulls and bears just waiting for the call.
My June iron condor at 890/900 and 1030/1040 stands at a P/L of -$760 with position delta = +$17 and position theta = +$158. This condor is now pretty close to delta neutral with the delta of the short call at 4 and the short put at 9. My July condor is positioned at 870/880 and 1060/1070 and is already in the black with a net gain of $400 and delta = +$15 and theta = +$68.
Tomorrow brings us the unemployment claims report, our last significant data point before the Non-Farm Payrolls report Friday morning, aka the jobs report.
