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This market is playing out like one of those novels you read on the beach this summer - many interesting characters and just when you think the bad guy has left the story, he surprises you with his resurrection. In our novel the European debt crisis returns to the stage, this time focusing on Spain's debt issues. This derailed the mini rally we had going in the S&P 500 for the past few sessions. SPX gave up $14 to close at $1363 on 3.0 billion shares, a pretty hefty increase in volume, but it was expiration Friday. RUT closed at $792, down $11. Trading volume on the NYSE was up 16% and volume on the NASDAQ was up 3%.
SPX broke a significant resistance level at $1375 yesterday, but was unable to hold that today, pulling back into the sideways trading range. Corporate earnings are holding up reasonably well during this earnings cycle, but growth in both earnings and revenue is slowing. In addition, companies are being very cautious with their future guidance. I continue to think this market is caught in between some powerful forces. On the one hand, governments around the world are printing money to shore up their economies, plus global corporations have trimmed their balance sheets significantly the past couple or three years, so earnings are holding up in spite of signs of economic softening, if not outright recession. And then of course, we have the looming fiscal cliff here in the states with the inmates in charge of the asylum in Washington. In short, I think these forces are opposite in nature, but roughly balanced. Thus, we have brief rallies and then, just as the shorts have covered, the market heads back down. I'm not sure what will change in that picture for the balance of the year.
My July iron condor position expires worthless this weekend; RUT settled at $795.27 (SPX settled at $1370.28). My Aug iron condor position stands at a net gain of $1,800 with position delta = -$33 and position theta = +$65. What a difference a day makes! With the expiration of the July position, our Flying With The Condor™ service stands at a year to date gain of 35%. By comparison, the S&P 500 is only up 8% for the year. That comparison will make me enjoy my weekend a bit more. Have a great weekend. Savor all the many beautiful things that surround you.
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The markets rallied pretty strongly today. SPX tacked on $9 to close at $1373 while RUT gained $6 to close at $805. Volume ticked up modestly with 2.7 billion shares of the S&P 500 trading; trading volume on the NYSE edged up 4% and trading volume on NASDAQ was up 2%. The VIX moved down to 16.2%. I don't have a precise tally, but it seems to me that the earnings reports thus far in this cycle have not been compelling; most, if not all, of the guidance has been pessimistic or at least cautious. Bernanke's recent testimony underscored the weakness of the economy. So why is the market trading upward? It seems the only possible answer is the expectation that the Fed will begin a new round of quantitative easing and boost the economy and the markets. How many days will pass without Fed action before the markets trade back downward?
SPX hit $1375 today before pulling back to close at $1373. $1375 is where the market stalled in early July. Can it break that resistance level this time? I still believe we have too many headwinds to move this economy and the markets forward. Even if the Fed rides to the rescue once again, how much effect will it have? On the other hand, most corporations have become very lean and efficient the past few years, so earnings may not be growing, but they aren't collapsing either. My expectation is to see the market trade largely sideways between these relative positives and negatives. But the boys and their computers will inject a lot of chop and volatility into the picture, so be careful. It is going to be a rough ride.
My July iron condor continues to coast into expiration. The Aug positions stands at a P/L of +$240 with delta = -$91 and theta = +$112. The 850/860 call spreads remain about one standard deviation OTM, so no adjustment is required as yet. But the position is showing the effects of the recent rally.
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Bernanke is scheduled to testify before Congress tomorrow and it appeared that traders were waiting on some news of another round of quantitative easing. The markets opened lower this morning and basically traded sideways all day with lower volume. SPX closed down $3 at $1354 and RUT lost $4 to close at $797. Trading volume dropped with 2.1 billion shares of the S&P 500 trading today (the 50 dma = 2.8B). Trading volume decreased 9% on the NYSE, but increased 5% on NASDAQ. Earnings numbers and guidance thus far have not been overly optimistic. When you couple that with some of the recent weak economic data such as the jobs and retail sales reports, we get weak sideways trading on lower volume.
The VIX ended the day at 17.1%, so that suggests that traders aren't too fearful. But clearly, they aren't buying with both fists either.
My July iron condor on RUT essentially stands at its maximum 16% gain at this point with both spreads far OTM and expected to expire worthless this weekend. The Aug position stands at a P/L of +$580 with delta = -$73 and theta = +$95. Traders will be watching for any clues that Bernanke is going to initiate another round of quantitative easing, so we are probably in for some intraday volatility tomorrow and the next day as Bernanke testifies before Congress.
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Throughout history, man has tried to predict the future by reading tea leaves and all sorts of things. But today, we traders are sophisticated; we read Bernanke. Traders listened to every word of his testimony before Congress today and interpreted every gesture and expression. Consequently, the markets swung back and forth dramatically - must have been fun for the day traders. SPX closed at $1364, up $10 after trading as low as $1345 and as high as $1365. RUT closed up $3 at $799.
Bernanke's gloomy view of the economy fueled speculation of another round of quantitative easing, so the markets ultimately traded up today. Bernanke is still on the hill tomorrow, so we may be in for more of this volatility, but it is unlikely he will surprise the markets with anything new tomorrow. My favorite take-away from today was Senator Schumer telling Bernanke to "get to work" to solve these economic problems; isn't this Senate the body that has failed to propose a budget for three years now? And we pay these people?
Trading volume popped up with 2.6 billion shares of the S&P 500 trading; trading volume on the NYSE was up 17% and volume on NASDAQ was up 23%. The VIX traded below 17%, closing at 16.5%. Industrial production increased 0.4% in June and capacity utilization inched up to 78.9% in June, but I don't think traders noticed these reports; all eyes were on Bernanke, hoping for a Fed bailout.
My July iron condor continues to cruise toward expiration with both spreads several standard deviations OTM. The Aug iron condor on RUT at 650/660 and 850/860 stands at a P/L of +$520 with position delta = -$71 and position theta = +$103. As the delta indicates, we are getting some mild pressure on the call spreads, but we are still far from triggering an adjustment. The Bernanke watch continues...
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After six successive downward trading sessions, the markets finally had a positive day. SPX opened at $1335 and traded steadily upward all day. In fact, today's trading was the least choppy that I have seen in quite a while. SPX closed at $1357, up $22 and RUT closed up $11 at $801. The VIX dropped almost two points to close the day at 16.7%. That's pretty low and suggests relatively low levels of fear in the market. I am a little surprised we have put the European debt scare behind us so quickly. But today's rally occurred on much lower volume. Only 2.3 billion shares of the S&P 500 traded today; trading on the NYSE declined 17% and trading volume on NASDAQ dropped 22%.
China's GDP announcement this morning encouraged traders; it came in at an annualized rate of 7.6% for the first quarter and that was a bit better than analysts expected. The PPI came in at +0.1% for June and the University of Michigan customer sentiment survey came in at 72.0 for July, down a bit from last month's 73.2.
Those data points don't seem like the impetus for a $22 rally on SPX, but it is what it is.
I applied the Two Sigma Rule to my July RUT iron condor positions today and both spreads passed and will remain open. But the calls are just outside two standard deviations so I will watch them closely. We may close them next week. The July position stands at a net gain of $2,720 with delta = -$7 and theta = +$23. The August iron condor on RUT stands at a P/L of +$180 with delta = -$80 and theta = +$91. As evidenced from the delta/theta ratio, the call spreads are a little tight at about one standard deviation OTM. A possible adjustment may be in the works if the market continues upward as bullishly as it did today.
Assuming the July spreads expire worthless next weekend, our Flying With The Condor™ service will be up 35% for this year, as compared to the S&P 500 index, which is currently up 8% for the year.
