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SPX opened this morning and immediately tested the lows
yesterday by hitting a low of $1121 before rebounding and then trading sideways
all day. SPX closed at $1136 for a gain of $7. RUT gained $9 to close at $652.
Thus far, it appears the bottom of this trading range on SPX from about $1120
to $1220 is holding. But the market is fragile. More bad news from Europe or
Washington could send it lower. Trading volume was reasonably high, but dropped
off from yesterday’s high levels. 4.1 billion shares of the S&P 500 traded
today, still well above the 50 dma. Trading volume dropped 28% and trading on
NASDAQ dropped 32%.
At this point, it is clear that we are in a trading range, and have been in
this range for several weeks. Technical analysts tell us that the longer one is
in a trading range, the stronger the eventual break-out. The news or data item
that tips the markets one way or the other will likely be from the European
debt crisis, Washington’s deadlock, or some clear economic data signaling the
next recession. Soon, we will have earnings announcements to add to the
excitement.
My Oct condor remains unchanged with the 500/510 put spreads on RUT. Hopefully,
good news comes out of Europe this weekend. But try not to worry about that
until Monday. Enjoy the weekend.
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Traders focused on the FOMC statement I highlighted yesterday, "Moreover,
there are significant downside risks to the economic outlook, including strains
in global financial markets." Thus, the day began with heavy selling
and the selling just intensified as the day went on. The only glimmer of hope
came at the end of the day as SPX bounced off the August lows after breaking
through those lows a few minutes earlier. SPX closed at $1130, down $37 and RUT
lost $21 to close at $643. Traders are debating whether the principal driver
for the bears is the fear of a recession or fear of a debt problem in Europe
spreading globally.
Trading volume spiked upward again today with 5.6 billion shares of the S&P
500 stocks changing hands; trading volume increased 39% on the NYSE and
increased 35% on NASDAQ. In August, SPX hit closing lows around $1120 and
intraday lows around $1100. During the last hour of trading today, SPX broke
through to $1114, before bouncing back to close at $1130. I will be watching
the opening closely tomorrow morning with those levels in mind.
Initial unemployment claims came in at 423k, down nine thousand from last week.
Continuing unemployment claims dropped 28k to 3.727 million. Leading indicators
dropped to 0.3% for August from the previous month’s 0.6% value. So our
economic indicators and corporate earnings data appear to be continuing roughly
sideways to slightly positive. But the fears of a double dip are so widespread,
it has almost become a foregone conclusion.
My Oct iron condor on RUT only consists of the 500/510 put spreads at this time
and they are still quite safe in spite of this downturn. The worst case
scenario will be a small loss for October, but the game is far from over.
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The markets traded up strongly today, but the bears pulled the market back during the last hour of trading. SPX traded up to $1220, a strong resistance level, and pulled back to close at a small $2 loss at $1202. RUT traded down $12 to close at $690. Trading volume was flat to down with 2.9 billion shares of the S&P 500, down from yesterday and below the 50 dma. Trading volume on the NYSE and the NASDAQ was up 1%.
Traders are focused on the FOMC statement due out tomorrow afternoon. In my opinion, there is an unrealistic expectation for the Fed to somehow pull the market out of this hole. Much discussion has focused on the expected "twist" program, but very few economists have an expectation that this would have much effect on the economy or the markets. Thus, my expectation is for the FOMC to disappoint the markets tomorrow. It is unclear whether this is priced in or not - perhaps today's sell-off was the anticipation of the announcement? In any case, it is hard to build a bullish case for this market.
My Oct iron condor at 500/510 and 770/780 stands at a P/L = -$1444 with delta = -$46 and theta = +$111. Now we return to Fed watching.
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The markets chopped back and forth all morning anticipating this
afternoon's FOMC announcement. When the announcement finally hit the wires, the
markets dropped a bit and the standard analysis was that traders were
disappointed with the Fed's Operation Twist. But operation twist was
telegraphed plainly to the markets over the past few weeks; I think that news
was “baked into” the market’s pricing. So the market sold off on the news (buy
the rumor; sell the news).
I think the first reaction of analysts was to study all of the details
concerning Operation Twist, but then they stumbled onto some unusual Fed
language: “Moreover, there are significant
downside risks to the economic outlook, including strains in global financial
markets.” In my
experience, the Fed has always used very obtuse and measured language that
keeps everyone guessing the real meaning. But “significant downside risks” is
pretty plain and strong language. That may be what led to the flurry of selling
in the last hour of trading today.
SPX lost $35 to close at $1167 while RUT closed at $665, down $25. Trading
volume spiked upward with 3.9 billion shares of the S&P 500 stocks trading
today, well over the 50 dma. Trading volume was also up on the NYSE and NASDAQ, with increases of 32%
and 13%, respectively. Today’s big drop took the major market averages back
near the middle of the trading range we have been in for the past six weeks or
so. Will we retest the lows of early August?
I took this opportunity to close the Oct 770/780 calls in my RUT Oct iron
condor, leaving the 500/510 put spreads in play. I have been forced to hedge
the call spreads several times over the past few weeks, so when I had an
opportunity to close those spreads for a profit, I took it. Presumably, I will
have an opportunity to reposition those call spreads farther OTM later this
month. At that time, I will also roll the put spreads upward and confirm most
of those gains.
So now we watch for clues: Retesting the lows? Breaking through to a full fledged bear market? Bouncing back and staying in this trading range?
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Traders apparently were expecting better news from Europe over the weekend. S&P futures tanked last evening and the negativity continued into today's markets. SPX traded down as low as $1188 before recovering some of the losses to close at $1204, down $12 on the day. RUT also lost $12 to close at $702. No significant economic data was released today. Obama revealed his plan to create jobs and that certainly didn't help today's markets. It was the same old "soak the rich and keep on spending" message. Traders saw this as a signal that the political camps are digging in for a prolonged fight. Nothing significant is likely to come out of Congress until after the 2012 elections. If this analysis is correct, this sideways, choppy market is likely to continue. The exception might occur if the infamous double dip actually came to pass. Signs of a renewed recession will push the markets to new lows. But the bullish case is supported by the unusual situation we have today where stock yields are better than bond yields - that is pushing money into equities out of bonds. But the headline risk from Europe may instead push those monies to the safety of cash (short term treasuries).
I removed the call hedges on my Oct condor this morning; this is the third time I have been whipsawed into and out of these hedges. My maximum profit on this position has been seriously eroded. I may have an opportunity to reposition this condor and improve the potential; we'll see. The position now stands at a P/L of -$3164, delta = -$80 and theta = +$130. The two-day FOMC meeting starts tomorrow. I don't expect anything to come out of that meeting that will affect this market one way or the other.
