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The markets opened this morning and continued yesterday's rally after Bernanke promised another couple of years of cheap money, but the enthusiasm quickly faded. Markets turned down late morning and spent the balance of the day in the red. SPX lost $8 to close at $1318 and RUT lost $3 to close at $793. Since the first of the year, the averages have made strong gains, so much so that many technical indicators have been flashing overbought. This has left many analysts predicting a correction while the markets pushed higher. There are many factors at play here, pushing the markets in conflicting directions. Late January after a strong bullish run is often a positive time for the markets due to institutions wanting to show clients they are long the bull market and haven't been left behind. And, Bernanke's promise of easy money certainly helps. And the overall market averages are cheap by most any historical measure. But then we have the prospect of a Greek default and the rest of the European sovereign debt crisis weighing us down. And we may have a large number of traders who are anxious to lock in some of the gains they have enjoyed so far this year, especially after the beating most institutions and hedge funds took last year. And we have the historical pattern of a decline in late January after the so-called Santa Claus rally. The bottom line is that it is awfully hard to predict the end result of this confluence of forces.
Trading volume actually increased a bit today with 3.5 billion shares of the S&P 500 trading; volume increased 4% on both the NYSE and NASDAQ. The VIX increased about a third of a percentage point today, closing at 18.6%. But intraday, the VIX actually dipped below 17%. It doesn't appear that the large institutional traders are too concerned about a correction. Should I be reassured or worried by that measure?
Today's dose of economic data wasn't terrible, but it wasn't inspiring either. Initial unemployment claims reported out at 377k, up from last week's 356k. Durable goods orders rose 3.0% in December, but they rose 4.3% in November. And new home sales declined from November's 314k to 307k in December. So our economy seems to be just plugging along with minimal progress, but not sinking further either.
My February RUT iron condor at 590/600 and 840/850 stands at a P/L of +$2,080 with position delta = -$72 and position theta = +$97 on 20 contracts. It will be interesting to see how the balance of January plays out.
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As the markets have continued this slow steady climb into 2012, many analysts keep looking for a correction, but the markets just keep rising. Bernanke then throws the markets a huge surprise today by announcing that the Fed will maintain these record low interest rates through 2014 - wow! This is unprecedented. Fed watchers were shocked the last time the FOMC announced a specific time period for interest rates remaining low - why extend that by two more years? Now the question you have to ask is: what does the Fed see down the road that required such a surprising announcement? Do they see more danger from Europe's sovereign debt crisis than the markets have priced into stocks? Do they see a new recession here in the states or just continued slow to minimal economic growth?
SPX began the day in red ink, but broke out to the upside in the early afternoon, closing at $1326, up $11. RUT gained $7 to close at $796. VIX dropped almost another percentage point to 18.3% and spiked down as low as 17.2% intraday. Trading volume jumped up today with 3.4 billion shares of the S&P 500 stocks trading; trading volume rose 16% on the NYSE and rose 20% on NASDAQ. When the Fed gives you free money, you have no choice but to buy.
My Feb RUT condor stands at a P/L of +$1,780 with delta = -$86 and theta = +$102. The 840/850 call spreads remain at about one standard deviation OTM, so no adjustment is necessary - yet.
It appears that we are in one of those classic situations where everyone believes a correction is in order and that the problems in Europe have to contain our market's advance. The market usually finds a way to confound the majority viewpoint...
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The markets continued their strong bullish run this morning, but continued chatter about the negotiations surrounding Greek bonds, and more importantly, the lack of progress, appeared to wear down traders. So the markets plunged into red ink around noon and spent the rest of the day trying to climb out of that hole. SPX tacked on less than a dollar to close at $1316 while RUT closed down $2 at $783. The price action on both SPX and RUT were of the classic doji candlestick variety - the mark of indecision. This candlestick often foretells a market reversal, but not necessarily always. At a minimum, it suggests that bullish sentiment and bearish sentiment are roughly balanced at this point. The markets have had a strong run so far this year, so a little pause might be in order. The doji may not indicate a reversal as much as a pause.
The VIX increased less than half a percentage point on this minor pullback, closing at 18.7%. Other than the news out of Europe, there was no significant economic news today. In fact, we won't have any significant economic reports until Wednesday with FOMC and pending home sales.
Trading volume was down today with the S&P 500 trading right at the 50 dma of 2.9 billion shares. Volume declined 20% on the NYSE and declined 14% on NASDAQ.
My February iron condor on RUT stands at a P/L of $2,460 with position delta = -$47 and position theta = +$73. Most of the gains in this position are coming from the put spreads, although the 840/850 call spreads could be closed for a small profit now. But the delta of the short 840 calls is less than 7, so those spreads are quite safe for now. My perception is that a strong earnings season has motivated much of the bullish run this month. Will the market's attention return to Europe after the announcements begin to wane?
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The continuing Greek negotiations to restructure their debt don't appear to be nearing a resolution and this weighed on traders at the open this morning. But markets traded stronger through the day and much of the losses were recovered by the close. SPX didn't quite recover all of its losses, closing at $1315, down $1. But RUT bounced around 11 am ET and drove to a positive finish at $788, up $5. This divergence in SPX and RUT would be considered bullish by most analysts. The mid-cap stocks typically lead bullish recoveries. Trading volume remains weak with 2.8 billion shares of the S&P 500 trading; this is just below the 50 dma. Trading volume declined 2% on the NYSE and dropped 3% on NASDAQ.
No economic reports were released today. The VIX rose a bit but remains relatively low at 18.9%.
My Feb iron condor on RUT stands at a P/L of +$2,220 with delta = -$60 and theta = +$89.
I took a flyer today and bought the AAPL Feb 460/470 call spread in anticipation of AAPL's earnings announcement this evening. And AAPL didn't disappoint; all of their results exceeded expectations. It was a risky trade, but home runs are fun when you get them.
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The markets took a breather today. SPX gained $1 to close at $1315 while RUT closed at $785, up $2. To my surprise, VIX fell almost two percentage points to close at 18.3%. Wow! The markets have really forgotten about the European debt issues. I can't get over how quickly this market posture has changed, and with little or nothing substantially different in Europe. Trading volume was mixed with a slight decrease in the S&P 500 trading down to 3.3 billion shares; trading on the NYSE rose 13% and trading on NASDAQ declined 1%.
The only economic news of the day was existing home sales for December, which were up to 4.61 million from the previous 4.39M.
RUT settled at $780.62 and SPX settled at $1313.93 for January. That officially completed my second January iron condor with a 7% gain as the 670/680 put spreads expired worthless. The Feb RUT condor stands at a P/L of +$2,460 with delta = -$51 and theta = +$57. Thus far, the Flying With The Condor™stands at a gain of 5% for 2012, as compared to a gain of 4.5% on SPX, so we are managing to stay ahead of the broad market so far this year (these results only include closed positions).
Well, I have to go clear out some snow; we are in the middle of winter storm here. Have a pleasant weekend.
