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Friday's price action suggested that we might have found the bottom, but today's market convinced us of the foolishness of that thinking. SPX plunged $80 to close at $1119; Russell (RUT) gave up 8% of its value in one day: down $64 to $651. We used to think of market corrections to be of the order of 8%; we lost that much just today. The markets paused in the afternoon as President Obama spoke, but then the market averages turned over and headed lower, closing at the lows of the day. Obama still doesn't get it; he continues to talk of tax increases and blames those stubborn Republicans for everything. After traders heard that, they knew nothing is going to change in Washington any time soon and they resumed the panic selling. Trading volume was huge with 7.3 billion shares of the S&P 500 changing hands. Volume was up 10% on the NYSE and up 6% on NASDAQ. In fact, trading volume has consistently increased every day since last Monday. Volatility is also on the rise; the VIX closed at 48% today. VIX has doubled since August 1.
There were no economic data reports today, but even if there had been, they would have been overshadowed by the Standard and Poors downgrade of the U.S. debt. S&P officially announced its downgrade Friday after the market closed. They previewed their rating rationale with the White House, whose analysts discovered a two trillion dollar mistake in their calculations. But that didn't phase S&P; they corrected their numbers and issued the downgrade as planned. It is difficult to imagine an organization contemplating such an historic move as removing our AAA bond rating, and the analysis and calculations move through the organization with a huge error in the calculations. And when the error was discovered and acknowledged, they move forward anyway - sounds like my favorite Dilbert cartoon. And don't forget: these are the people who told you that buying those mortgage backed securities were perfectly safe.
As you might expect, I have been scrambling to protect my August and September iron condor positions. I have hedged both positions with long puts and then closed my put spreads and rolled them down. Then I opened new call spreads to effectively re-position my condors. Now the Aug position consists of the 610/620 put spreads and the 750/760 call spreads with position delta = -$47 and theta = +$136. The Sept position consists of the 610/620 put spreads and the 780/790
call spreads with position delta = -$58 and theta = +$175. Both positions are in red ink for now, but have the potential to still make a reasonable profit before expiration. In fact, the Sept position has the potential to make as much as $6k on 20 contracts simply because the put hedges have appreciated so much the last few days.
The FOMC meets tomorrow, so all eyes and ears will be tuned to whatever comes out of that meeting. In the meantime, either hedge your positions or sit safely on the sideline. It's crazy out there.
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The jobs report this morning prompted a positive market opening, but it didn't last long before bears were selling strongly and market observers were spooked. For the last two days, the price action has taken the indexes into "uncharted territory" - yes, analysts were pulling up various old support levels and so on. My point is that most of the support levels we traders were focused on were simply passed by without even a pause. It left many traders mentally disoriented. SPX opened and ran up to $1218 before plunging to $1168. Then SPX started recovering in the early afternoon and closed essentially at its open at $1199, down less than a dollar on the day. RUT was much more bearish, closing down $12 to $715.
The non-farm payroll report cited a gain of 117k jobs, up significantly from last month's anemic rise of 46 thousand jobs. This came as a surprise to most analysts and boosted the market, but only momentarily. The unemployment rate dropped a bit to 9.1% from 9.2% - I'm not sure if the underlying data are accurate enough to make that difference meaningful, but at least it is in the right direction. Next week, we have the FOMC meeting and traders will be even more attentive than usual, given this week's carnage in the markets. Traders will also be watching European bank and finance ministers this weekend, searching for reassurance that the European debt problems don't cascade into global financial issues.
I rolled my Aug 670/680 put spreads down to 650/660. That reduces the profit potential for the Aug position, but we still have the potential for a reasonable gain. The hedge for the Sept put spreads is holding that position's P/L in check very well. So our potential gains in the Sept position are still largely intact.
This has been a crazy week in the markets. Let's all collectively relax and enjoy the weekend. I'm going to start with a nice dinner with family and friends.
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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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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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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.
