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The Speaker of the House had only pessimistic remarks this morning about the negotiations on avoiding the fiscal cliff. That appeared to pull the markets back a bit after a positive open. Then Bernanke took the floor and announced additional easing from the Fed, plus surprising everyone by tying the low interest rates to unemployment rates. The markets appeared to jump a little after the FOMC announcement, but then traded off after Bernanke's press conference. SPX ended the day at $1428, up $1 and RUT lost $6 to close at $829. The VIX remains at 16%, basically a "middle of the road" number - not panic, but not complacency either. Trading volume was down a bit with 2.7 billion shares of the S&P 500 trading. Trading volume increased 5% on the NYSE but dropped 6% on NASDAQ.
SPX traded as high as $1439 before selling off in late afternoon trade. Maybe the $1430 resistance level from early September and early November will be hard to break. There is no denying the bullish trend on the chart since mid-November. The markets appear to have been assuming a deal was forthcoming on the fiscal cliff. Today's sell-off after returning to the pre-election highs may signal a loss of confidence that a deal will be done after all.
My December iron condor position stands at a loss of 15% with delta = -$162 and theta = +$318. the delta of the 850 calls retreated to 15, but those spreads remain uncomfortably close to the fire. Trading in this volatile market is taking its toll on everyone. Several of my friends have taken off for the holidays. They needed a breather.
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For the past four trading sessions, volume in the S&P 500 stocks has been declining while the market has been trading higher - not much higher, but higher none the less. SPX closed at $1419, up less than a dollar while RUT increased $4 to close at $826. My guess is that this reflects the markets' presumption that a deal of tax increases and spending cuts will be reached to avoid the so-called fiscal cliff. I'm not so sure. Obama has certainly made it clear he is willing to go over the cliff if Republicans don't agree to "tax the rich". But Obama has also been very clear about deferring any talk of spending cuts into next year. So what has changed? Isn't this the same impasse that has been going on for years and years? Eventually the Republicans cave in and the debt keeps rising. But the market doesn't trade on politics; it trades on economic realities. And that reality doesn't look very promising no matter which of our favorite characters win this public power struggle. The Challenger Job Cuts report told us last week that employers announced plans to cut 57k jobs in November. That tells me that businesses see this economy weakening and don't expect the fiscal cliff debates to help them, so they are not waiting; they are preparing for hard times now.
The current SPX price is very near the high reached this year in April. RUT is still trading about $20 below that April high. Let's assume a deal is reached in Washington. The markets will spike upward, but how long before traders realize that the economy is still in trouble? My point in all of this is to be very conservative in your fiscal positioning. Many talking heads are telling you what stocks to buy to rally after the deal is reached, but beware. It may be short-lived. Whether you are buying blue chip, dividend paying stocks, or selling iron condor spreads, keep your stops tight and lighten up your positions. Whenever in doubt, take the safer course.
My December iron condor position on RUT currently stands at a 14% loss with position delta = -$124 and position theta = +$263. That large theta is whittling down the loss as time passes. Assuming we don't have to close the 850/860 calls (the delta of the 850 calls = 13), this position will close for a 5% loss. Not a cool way to end the year, but that's the trading game. The key is to minimize the loss so I can continue to trade next year.
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SPX is trading back and forth across that strong support/resistance level at $1410. Out of the last nine days of trading, SPX has been just above $1410 three times and just below six times. SPX traded over a wide range today, $1398 to $1416, and closed at $1409, up $2. RUT dropped $2 to close at $821. Trading volume surged upward to 3.1 billion shares of the S&P 500 stocks today. Trading on the NYSE was up 19%, but trading on NASDAQ was only up 1% - that NASDAQ number seems odd given today's huge downward move in AAPL. VIX dropped almost a full point to close at 16.5%.
ADP reported 118k new jobs, down from last month's 157k. This may be a bleak forecast of Friday's jobs report. The ISM services index was basically unchanged at 54.2 and factory orders dropped to an increase of 0.8% in October after rising 4.5% in September.
From my take on the various news reports, it seems we are starting to accept this fiscal cliff scenario as more and more likely. Now we are starting to see reports assuring us that it won't be so bad. The White House is insisting on raising taxes on the wealthy and offers vague promises for spending cuts sometime in the future. As we add 4 billion dollars to the national debt each day, Nero fiddles. The great irony is that Obama's tax increase will do nothing to solve our fiscal problems; it only makes the envious feel better.
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Even a surprisingly good jobs report wasn't enough to cause this market to break out. The non-farm payroll report surprised analysts with 146k new jobs and reported unemployment dropping to 7.7%. But the labor department calculates this rate unlike any normal person. The unemployment rate dropped because they decided that over 500k people dropped out of the labor force and therefore don't count as unemployed. The so-called U-6 rate of unemployment includes those who have given up looking for work and is over 14%. I guess they don't think we can handle those numbers. The markets opened upward this morning on the basis of this surprising jobs number, but the euphoria was short-lived. Then concerns about the fiscal problems facing this country took center stage. SPX traded as high as $1420 before dropping back to close at $1418, up $4. RUT closed unchanged at $822.Trading volume contracted with 2.3 billion shares of the S&P 500 stocks trading. Trading on the NYSE dropped 2% while trading volume on NASDAQ decreased 6%.
The University of Michigan consumer sentiment survey also poured cold water on the market with a reading of 74.5 for November, down substantially from 82.7 in October.
The intraday high on SPX is near the April highs. SPX is trading in a narrow channel from about $1405 to $1420. Today's close is just above the 50 dma at $1417, so we have resistance coming from both the 50 dma and the highs from earlier this year. Looking the other way, we have support at the 200 dma at $1386. That level was tested last week, but SPX bounced back upward.
For the past several days, RUT has been trading along its 50 dma (at $817 today), but intraday trading in RUT today didn't reach down to the 50 dma. RUT, like SPX, is trading sideways in a pretty narrow range.
My Dec iron condor on RUT remains underwater by about 15% with position delta = -$90 and position theta = +$204.
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SPX closed at $1407, down $2. This is slightly below the $1410 support level. It is probably too early to declare that support level broken, but it is something to watch at tomorrow's open. RUT traded as low as $816 but recovered to close at $822, up $1 on the day. Trading volume was flat to slightly up with 2.5 billion shares of the S&P 500 trading, up slightly from yesterday but still under the 50 dma. Trading on the NYSE was up 1% and volume was up 7% on NASDAQ. VIX moved up a half point to close at 17%.
There was no significant economic news today, but it probably would not have mattered anyway. Everyone in the market is focused on the fiscal cliff posturing. As far as I can tell, the negotiations have yet to start.
My Dec iron condor stands at a net loss of $3,960 with position delta = -$94 and position theta = +$214. Tomorrow's ADP report may give us a preview of Friday's jobs report, but, absent an extreme surprise, I doubt that it will move the markets much. So grab your popcorn and watch the political fiscal cliff show. But remember: this is like professional wrestling, don't take it too seriously.
