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Yesterday's rally continued this morning on an even stronger pace, but a
Financial Times article this afternoon stopped the rally in its tracks. SPX had
run as high as $1196, but pulled back over $20 in the last hour of trading to
close at $1175, salvaging an increase of $12 on the day. RUT gained $15 to
close at $680. Rumors, news, quotes, interviews and speculation on how the
European debt crisis will be handled or mishandled are driving this market.
Even our own politicians fumbling around has been pushed to the back burner.
Placing directional trades in this environment is very difficult.
The Case Shiller Housing Price Index dropped 4% in July and the consumer
confidence index remains essentially flat at record low levels. Traders
obviously were not alarmed by this weak data, since the markets were moving
strongly higher before and after these reports were publicized.
SPX has been trading in the range from $1120 to $1220. Today’s run took the
index near the high end of the range before pulling back. Looking back over the
past couple of months, it has taken about 5 to 6 sessions to trade from one end
of the range to the other. It will be interesting to see if this upward trend
has now ended after three days or whether it will continue upward in an attempt to break through
resistance at $1220.
My Oct condor on RUT continues with only the 500/510 put spreads. I almost
pulled the trigger to sell some call spreads this afternoon, but decided to
wait – then the market collapsed. I may have missed my opportunity, at least
for this week. But one thing is clear in this market. Trading delta neutral is
much easier than trying to predict the next move of this skittish market.
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The markets opened weakly this morning but rallied strongly later in the day based on favorable news from Europe that plans were being formulated to handle the Greek debt crisis; however, no official press releases have confirmed that report. On the other hand, from a technical viewpoint, the major indexes had been testing the bottom of this trading range for the past three trading sessions. So, a bounce upward back into the trading range isn't too surprising. SPX gained $27 to close at $1163. RUT closed at $666, up $13. Trading volume dropped with 3.5 billion shares of the S&P 500 stocks trading today; volume also dropped on the NYSE with a 26% drop, but traded flat on NASDAQ.
New home sales for August came in at 295k, down slightly from the previous month's 302k. The Case Schiller Home Price Index comes out tomorrow and will be another measure of the state of the ailing real estate market.
My Oct iron condor position on RUT only consists of the 500/510 put spreads. As RUT strengthens, I will re-establish my OTM call spreads to complete the condor position.
The fear and anxiety in the markets has certainly not disappeared. So, don't let today's rally make you complacent. Between the Euro debt crisis, fears of a global recession and our own Washington debt
squabbles, this market can turn on a dime at a moment's notice.
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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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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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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?
