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Some of you may have read or heard analysts beginning to discuss what many call the Goldilocks view of the current markets: we should be bullish because 1) rising taxes and reduced spending will stimulate growth in the economy, 2) the Fed will continue their quantitative easing programs but no inflation will result, and 3) the government can easily afford the higher interest rates that are coming after our debt is downgraded. In other words, the bullish trend is a fantasy, a Goldilocks story. The markets have been trading higher since mid-November (running over my December condor in the process), but some analysts are questioning whether the euphoria has been over done or is misplaced entirely. I am inclined to agree with this point of view, but it is dangerous to get in front of this train.
SPX gave back most of yesterday's gains, closing down $11 at $1436 while RUT traded flat at $848. Perhaps a little more ominously, VIX moved up almost two points to 17.4%. Trading volume dropped off from yesterday with 2.7 billion shares of the S&P 500 stocks trading; volume fell 9.8% on the NYSE and decreased 4% on NASDAQ.
Housing starts for November came in at 861k, down from 888k in October, but building permits jumped to 899k from the previous month's 868k. So the thesis of a slow real estate recovery appears to be supported by this data. Probably the emphasis should be on the word, slow. And, if the tax reform discussions include dropping the mortgage interest deduction, that may push real estate back off the cliff again. Many of my friends hold mortgages simply for the tax deduction and my younger friends would not be as attracted to buying a house without that tax advantage. A lot of construction and finance industry jobs are dependent on a healthy real estate market.
I closed the call spreads in my December condor today, taking the largest loss of my trading career - ouch! But, at the expense of my pride, and so you can learn from my mistakes, here goes. My Dec condor on RUT started at 880/890 and 710/720. When the market plunged after the elections, I was at the point of hedging my put spreads. But the move downward and all of the fiscal cliff drama spooked me, so I repositioned my condor: I rolled the calls down to 830/840 and the puts down to 690/700. That looked good for a few days, but then the market turned and roared upward. I rolled the 830/840 calls to 850/860 and eventually closed them for a big loss. But note the moral of the story: if I had simply left the original condor alone and hedged the put spreads just as I always do (my normal rules), that condor would be standing at a gain of about 17-19%. So the lessons are: 1) develop your trading system of rules, 2) follow the rules with discipline, and 3) put your emotions aside.
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Traders apparently believe all is well in D.C. and are beginning to take strong bullish positions. It surprised me today when we didn't see some profit taking this afternoon. SPX closed at $1447, up $16 and near its high of $1448. RUT gained $13 to close at $848. Trading volume spiked upward with 3.2 billion shares of the S&P 500 trading. Trading volume on the NYSE was up 20% and volume was up 5% on NASDAQ. VIX dropped almost a point to 15.6%. There was minimal economic news today, so this rally is presumably based on a deal to solve the fiscal cliff. Optimism that is well seems surprising to me, but you can't argue with the tape. I was waiting for the sell-off this afternoon to unload my December call spreads, but it never materialized, so I am facing the prospects of a serious loss here. We'll see what tomorrow brings.
As I self-analyze my position, I think I have violated my own rules about not predicting the markets, i.e., trading non-directionally. The debt and spending situation for our government is out of control, and I have yet to see any proposals being discussed in Washington that begin to address these problems in a meaningful way, e.g., raising taxes on everyone at $250k and up only funds the government for a couple of weeks or less. So I think I have been predicting lower markets without explicitly making the prediction. I will pay the price for that oversight.
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Markets continued sideways or downward as all eyes are focused on Washington, looking for a deal to avoid the so-called fiscal cliff at the first of the year. There wasn't much news today, except the obligatory "sky is falling" articles. SPX lost $6 to close at $1414 while RUT closed unchanged at $824. Volatility inched up a half point with the VIX at 17%.
There was some economic news today, although it was over-shadowed by the fiscal cliff vigil. The Consumer Price Index (CPI) dropped 0.3% in November and industrial production increased 1.1%. Capacity utilization increased from 77.7% to 78.4%. So all of this data was modestly positive. It seems to support the same old conclusion: the economy is recovering, but at a historically record low rate.
My Dec iron condor stands at a P/L of -$1,760 or -8% with delta = -$55 and theta = +$212. The call spreads remain a little over one standard deviation OTM and the put spreads are almost three standard deviations OTM. I decided to leave the call spreads open over the weekend to benefit from additional time decay. The risk is that a fiscal cliff deal is reached and the market spurts upward, but we have a pretty good safety buffer at this point, so I think it is a high probability move.
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Traders became more bullish today on news that Boehner was meeting with Obama and had offered to raise taxes on those making more than one million dollars per year. In my opinion, the notable news was the absence of any concessions from Obama. If we trust his press secretary, it appears the President is not yet in negotiation mode. So traders may take this market back down tomorrow; who knows? It is a rough market to be trading.
SPX ran up $17 to close at $1430 and RUT tacked on $11 to close at $835. Trading volume moved up modestly with 2.5 billion shares of the S&P 500 stocks trading; this is an increase from Friday, but remains below the 50 dma. Trading volume increased 8% on the NYSE and volume increased 6% on NASDAQ.
The only economic news (hard data as opposed to fiscal cliff watching) was the Empire Manufacturing Survey; it came in at -8.1 for December, a little worse than the previous -5.2. That isn't the right direction!
My Dec iron condor stands at a P/L of -$2,600 with delta = -$174 and theta = +$643. Today's move up pushed it further in the hole, but the theta decay is getting huge so each day makes a big difference. So we wait until tomorrow to tune back into the Fiscal Cliff soap opera. I have a prediction: a deal will be struck; it will include real tax increases but nebulous promises about cutting spending in the future.
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The mood on Wall Street darkened further as traders considered the Fed's announcement in more detail. Several months ago I was surprised by the Fed's willingness to promise low interest rates for a specific period of time. At that time, I wondered: what if inflation rears its head during that time period? Now Bernanke has tied that promise of lower rates to unemployment below 6.5%. The more I think about the Fed's posture, the more I worry. I preferred the days when the FOMC was basically a "black box" that just issued interest rate announcements periodically.
Of course, the news reports from D.C. are not helping the mood on the street. Now I'm beginning to see articles about why going over the cliff is either 1) no big deal, or 2) will be painful, but good for us. I actually think there is some truth in the latter position; perhaps the fiscal cliff does what no politician has the courage to tackle. The fact that we are seeing those articles shows how we are collectively beginning to think that no agreement will be reached. There is probably a betting line in Vegas; I wonder what the odds are of an agreement?
SPX lost $9 to close at $1419, right at the support level set by the April highs. RUT dropped $5 to close at $824. Trading volume backed off with 2.4 billion shares of the S&P 500 stocks trading. Trading volume on the NYSE declined 3%, but increased 6% on NASDAQ. Volatility rose almost a point with VIX ending the day at 16.6%.
My Dec condor now stands at a net loss of 9% with delta = -$75 and theta = +$234. RUT's pull back and this position's large theta are whittling down this position's loss to something more reasonable.
