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And I actually asked if we had hit bottom yesterday! Yesterday seemed like a big move, but it was nothing! Today's markets set records with a huge drop on huge volume. SPX lost $60 to close at $1200 while the RUT closed at $727 for a loss of $46. Trading volume hit record highs for this year with 5.4 billion shares of the S&P 500 stocks trading; volume was up 32% on the NYSE and was up 26% on NASDAQ. The day began with a flat unemployment claims report; initial claims were essentially flat at 400k (down from 401k last week). Continuing claims were up ten thousand at 3.7 million. European economic concerns appeared to be ruling the day, although it didn't appear that we had any really new news to drive this sell-off. To me, that was the most puzzling aspect of this trading day. The concerns one would have listed several weeks ago have not changed. Even more surprising, gold even sold off a bit, so it didn't appear that traders were moving from equities into that safe haven. Similarly, the bond markets didn't see flocks of buyers either. Traders appear to be simply moving to cash. Normally, we expect the stock market to be a measure of expectations for corporate earnings; so far in this earnings season, companies have been generally beating their estimates and painting reasonably favorable futures. But that doesn't seem to be enough.
Everyone is now focused on tomorrow's jobs report. Even before this huge sell-off, no one was expecting a large number. At this point, it isn't clear that even a positive surprise in the jobs report would turn this market around. On the other hand, when you see such a huge move downward, there is often a reflexive bounce the following day as traders buy the bargains. But there was no sign of that happening as the trading closed today; in fact, the selling accelerated into the close. My RUT 670/680 put spreads are being squeezed; if this sell-off continues, I will be closing and rolling spreads. Everyone will be glued to the futures as the jobs report hits the wires tomorrow morning.
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The futures were positive this morning and the market opened upward, but within just a few minutes, the carnage began. SPX dropped to $1235 before rebounding and then slowly gained in late afternoon trade to close up $6 at $1260. RUT followed a similar pattern, closing up $6 at $773. Trading volume was huge at 4.2 billion shares of the S&P 500 stocks. The last time we saw volumes this high was at the lows hit in mid-March this year. Trading volume was up 11% on the NYSE today; trading was up 9% on NASDAQ. Every major market index closed with a gain today.
The economic data reported today was mixed. ADP's private employment report cited 114k new jobs, but the report of new layoffs from Challenger, Gray and Christmas rose for the third month in succession, with an increase of 59% for July compared to July, 2010. The July ISM Services Index declined a bit to 52.7 for July (53.3 in June), while factory orders declined 0.8% in June. The bottom line for all of this data is either evidence of a double dip or, at best, continued weakness in the economy.
The VIX spurted up to over 25% this morning, but declined to close at 23.4%. There isn't much to report on my condor positions. Both the Aug and Sept condors consist of only the 670/680 put spreads, which appear safe enough now, but that wasn't obvious as RUT appeared to be in free fall this morning, hitting $750 before rebounding. Now we wait to see if we have simply matched the mid-March lows, or are lower lows in store?
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Traders were encouraged by news of a debt ceiling deal this morning and stocks traded up strongly. But then it seemed that reality came crashing down on everyone - the ISM manufacturing index came in at 50.9 for July, down significantly from last month's 55.3, reminding us that the economy continues to struggle. In addition, many analysts finally tumbled to the prospect that America's debt rating was likely to be downgraded since the debt ceiling deal didn't really address the long term debt problem. SPX ran as high as $1307 before collapsing to a low of $1275, and then gradually rebuilding as the day went on. SPX closed at $1287, down $12 on the day. RUT lost $4 to close at $793. SPX closed above the 200 dma at $1285, but just barely. Trading volume was down from Friday's elevated levels, but remained high with 3.3 billion shares of the S&P 500 trading today; trading volume was down 4% on the NYSE and was down 3% on NASDAQ.
I took the opportunity to close the 900/910 call spreads of my Sept RUT condor, confirming a nice gain on the upper side of that position. The 670/680 put spreads remain almost two standard deviations OTM. Ironically, I also have the 670/680 put spreads remaining in the August condor position, but those spreads are about three standard deviations OTM. Unless the U.S. declares bankruptcy, the Aug and Sept condors should close with gains of 14% and 13%, respectively.
With the focus turning to the debt rating agencies, Standard and Poors and Moody's, this market malaise isn't likely to end soon.
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SPX opened this morning just above the 200 dma, but that was short-lived. As the day wore on, the selling intensified. Traders appear to be spooked by the prospects of a debt rating downgrade and the old news of a weak economy and continued high unemployment. All of the major market indexes logged large losses. SPX closed at $1254 for a loss of $33. And RUT lost $26 to close at $767. SPX is now in the area of $1250 to $1260 where the downturns in March and June both landed before turning upward. Trading volume was again up significantly with four billion shares of the S&P 500 trading. Trading was up 13% on the NYSE and was also up 7% on NASDAQ.
The one anomaly on the day was VIX. VIX opened at 24.2% and closed at 24.8% - unusual for a day where the major indexes lost so much value. This suggests that large institutions aren't aggressively buying protection in this market and that seems surprising.
My Aug and Sept iron condors on RUT have only their put spreads in play now; both call spreads have been closed. The put spreads are at 670/680. Earlier today I would have considered those to be in a safe position, but today's market drop has me wondering. It is interesting that the debt limit deal that everyone seemed convinced a week ago was so crucial now appears to be irrelevant. Tomorrow should be interesting. If the broad market indexes continue downward tomorrow, we will have broken the lows set in the last two corrections. Then we will have to seriously consider the prospect that the bull market has ended and a new bear market trend has begun.
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The markets continued their sideways to downward dance today. And the debt ceiling was all anyone at CNBC could talk about - more Chicken Little drama. Ironically, the concern appears to boil down to whether our debt will be downgraded by S&P and/or Moody's (lest we forget, the same people who said all of that sub-prime mortgage debt was just fine). Most sane observers who haven't drank the kool-aid agree that a default on the debt is very unlikely. The irony derives from the fact that it is highly unlikely that the eventual compromise in Congress will do anything substantive to actually decrease our debt or even decrease the rising rate of debt creation. So the downgrade is probably coming, and it appears that the experts aren't too sure about what that means. Many speculate about rising interest rates, but considerable uncertainty persists. And, of course, the equity markets don't like uncertainty. We "fix" uncertainty by discounting the prices.
The first quarter GDP growth was revised downward to 1.3% from 1.7% and second quarter GDP grew 1.3%. This revived talk of a double dip in the economy; that spooked traders as much or more than the debt ceiling debate. The Chicago PMI report dropped a bit to 58.8 for July (61.1 in June). So traders didn't have much good news today, and it showed in the markets. SPX closed at $1292, down $8 and RUT dropped $2 to close at $797. SPX was seriously down at the open, but bounced off the 200 dma and recovered to be in positive territory briefly before selling off in the afternoon. Trading volume was up again with 3.5 billion shares of the S&P 500 trading. Trading volume was up 15% on the NYSE and up 10% on NASDAQ. The VIX closed at 25.3%, up again today. It is interesting to note that the 200 dma held when the market corrected in mid June. Will it serve as support again? The 200 day moving average of the SPX stands at $1285. It is worthwhile to keep an eye on that line in the sand.
My puts remain from the Aug iron condor on RUT, and so far, are OK with a delta of 5 on the short $680 puts. The Sept condor now sits perfectly delta neutral at delta = +$7 and theta = +$75. But the rising IV has taken its toll, forcing the P/L back to break-even. But remember: the ultimate profitability has not changed; if we are forced to close the put spreads prematurely, the increased IV will hurt us, but if we stay in the position to expiration, our full profit is still feasible.
So your assignment for the weekend is clear: postpone any more market worries until Monday morning and enjoy your family and friends. Remember what is truly important.
