All of the talk of attacking Syria this week has the markets on edge. The markets were not exactly healthy anyway, so this additional dose of uncertainty hit hard. SPX closed down $5 at $1633. The essence of a bearish trend is lower highs and lower lows and SPX has been setting lower highs and lower lows ever since August 5. Although the trading this week seems to be establishing support at $1630, the next well defined support level is around $1605 and then at the June low around $1572. But RUT traded even weaker than SPX today, opening at its 50 dma, and trading lower by $16 to close at $1011. Unlike SPX, RUT set a new low today. Next stop is support at $1000, the peak from late May.
The RUT chart raises my concerns because it shows that traders are scared to carry their riskier high beta stocks into the long weekend. For this reason, I closed the put spreads on several of my condor positions today. If we attack Syria this weekend and/or something equally disconcerting occurs, we could have a market facing us Tuesday morning with extreme pent up selling pressure from global markets trading off on Monday. That could be ugly.
Volatility popped up to nearly 18% today, but settled to 17% at the close. This leaves us in the typical correction area of the VIX. We hit a high of about 17.5% in April as SPX pulled back about 3% to the 50 dma. The pull back in June was more severe at about 6%, and VIX hit a high of almost 21% at the low on June 24th. Today’s close on SPX at $1633 represents a 4.5% correction from the high on August 2nd.
The combination of a more severe pullback in RUT than SPX today together with the increase in the VIX caused me to take corrective action in advance of the long weekend. Maybe the Hindenburg Omen was correct. I closed the 930/940 put spreads in my September iron condor on RUT today. Assuming the Sep 1120/1130 call spreads expire worthless, this locks in a gain of 9.2% for the September position. I decided I would enjoy this long weekend more without thinking about those put spreads.
Enjoy your Labor Day weekend. For those of you in the north, grill a hot dog - time is getting short.