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Several pieces of disappointing economic news and continued conflicts in Libya and Saudi Arabia combined to torpedo the markets today. The SPX dropped almost immediately after the open to the long-term support level around $1300 and traded sideways along there most of the day. SPX closed at $1295, down $25 for the day. RUT lost $22 to close at $800. Trading volume spiked up with 3.7 billion shares of the S&P 500 stocks changing hands; this is above the 50 dma at 3.5B. Trading on the NYSE was up 28% and was up 19% on NASDAQ. The next support level on SPX is at $1275, set on January 28, "Egyptian Friday". If we break through $1275, the next strong support level is down at $1227, the top set last November. From a charting perspective, RUT could easily fall to the area of $770 to $780 if it can't hold $800.
Crude oil dropped to just above $100 earlier today but closed near $103 based on some news from Saudi Arabia of clashes of protesters and police. China surprised everyone by posting a trade deficit, fueled by higher oil prices (imports) and weaker demand for exports. Moody's downgraded Spain's debt. And if that wasn't enough bad news, initial unemployment claims increased to 397k from last week's 371k, while continuing unemployment claims dropped by 20 thousand. So today's market weakness isn't too surprising and many market indicators have been suggesting a correction. We are now 3.6% off of the SPX high of $1343 in mid-February. A typical correction of 9% would take us to $1222, near that support level set in November - that would hurt. Or can we continue to churn sideways as we have for the past three weeks or so? It has been a volatile ride but SPX has stayed in the range of $1340 to $1295. If we open downward tomorrow, that would not be a good sign.
Today's increase in volatility pulled down the profitability of both of my condors (condors are negative vega positions). My Mar condor stands at a P/L of +$3,000 with delta = +$43 and theta = +$235. Surprisingly, both spreads in this position are now over two standard deviations OTM as we approach the last week of the trade - very unusual. The Apr position stands at a P/L of -$500 with delta = +$18 and theta = +$92.
So now we watch to see which way this market moves tomorrow: new lows or back into the consolidation range?
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Oil prices dropped about 1% today and oil inventories increased over 2.5 million barrels last week (only one million was expected), but this didn't tempt traders to start buying again. The SPX lost $2 to close at $1320 and RUT closed at $821, down $3. Trading volume was down except in the tech stocks as semiconductor stocks especially took a bath. 2.9 billion shares of the S&P 500 stocks traded today, well below the 50 dma. Volume was also down on the NYSE by 11%, but increased 9% on NASDAQ. Mortgage applications increased 16%; this is thought to primarily reflect investors buying properties, but it is a good sign nonetheless.
The markets appear to know where my iron condors are positioned and are doing their best to cooperate - very unusual behavior. My Mar RUT condor at 730/740 and 875/885 stands at a P/L of +$3,500 with a position delta of +$1 (yes, one dollar) and position theta of +$170. The put spreads are almost three standard deviations OTM and the call spreads are nearly two standard deviations OTM. The Apr RUT condor is also well positioned at 700/710 and 900/910 stands at a P/L of -$360, with position delta = -$19 and theta = +$104. The theta/delta ratios of both positions are excellent. I view my position delta as my principal measure of risk while the position theta is my measure of profit generation. In condor land, the traders are unusually happy today. Through most of 2010, they were in therapy.
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Oil continues to trade higher and traders continue to worry about the impact of these higher oil prices as they percolate through the economy. Trading opened in positive territory this morning but then stock prices started to slide lower all morning and hit lows in the early afternoon before recovering somewhat. SPX traded as low as $1304 and closed at $1310, down $11. RUT lost $13 to close at $812. Trading volume was flat or down as the S&P 500 stocks traded down to the 50 dma at 3.3 billion shares. Trading on the NYSE dropped 2% but trading volume increased on NASDAQ by 15% as many of the tech stocks sold off.
The broad markets, as measured by SPX, have been trading in a sideways consolidating range for the past several sessions; this has been good for my condor positions. My Mar iron condor on RUT stands at a P/L of +$3,220 with a position delta = +$14 and position theta = +$156. The Apr RUT condor stands at a P/L of -$140 with delta = -$2 and theta = +$87. GOOG broke through long term support at $600 today, so I closed some of my GOOG trades. As far as I can tell, this move downward is a general "market following" move, so if oil prices settle, GOOG should rebound. Many traders are reluctant to make any moves, bullish or bearish, on this market until they see how the so-called "day of rage" protests play out on Friday. Some had called for these protests to be moved to today, but that didn't appear to take hold. But traders may not relax until this week is behind us.
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The markets took off to the races today and essentially replaced yesterday's losses in a surprising turn-around. SPX gained $12 to close at $1322 while RUT also tacked on $12 to close at $825. But trading volume was flat to down from yesterday with the S&P 500 stocks trading right at the 50 dma of 3.4 billion shares. Trading was down 3% on the NYSE and down 16% on NASDAQ. With oil still trading near $105/bbl, this market rally was surprising. Investors Business Daily (IBD) reset their market posture to "Market in Correction" from "Uptrend Under Pressure". This move was based on yesterday's market losses, but it is significant because it reflects many weak technical internals for this market.
Of course, the tendencies for this market to trade up and then back down the past couple of weeks has been good news for my condors. The Mar position on RUT at 730/740 and 875/885 now stands at a P/L of +$3,340 with delta = -$15 and theta = +$192. Theta is really ramping up as we near expiration. The Apr condor on RUT at 700/710 and 900/910 stands at a P/L of -$300 with delta = -$27 and theta = +$99. This position is in good shape as evidenced by the strong theta/delta ratio and the small deltas of about 8 for each of the short options in the spreads.
So we wait to see what the markets will bring tomorrow. My opinion is that the overall bullish trend is still intact, although some extraordinary events in the Middle East or Libya could change that at any time. But barring that, I expect oil prices to stabilize and some of the fear to come back out of the markets. But it seems unlikely that the bullish trend will continue with the steepness of the advance we saw a couple of months ago.
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The jobs report came out this morning and was relatively good with an increase of 192k jobs and the unemployment rate fell to 8.9%. But apparently, yesterday's wild ride was predicated on an even better jobs report. Of course, oil rising to $104/bbl didn't help but many traders are starting to see the Middle East and Libyan situations as old news. However, the rumors are still flying and that contributed to the low points of trading today. By the end of the trading session, much of the earlier losses were recovered. SPX traded as low as $1313, but recovered to close at $1321 for a loss of $10. RUT fared better, losing $4 to close at $825. Trading volume was flat to slightly down with 3.6 billion shares of the S&P 500 stocks trading; trading on the NYSE was down 2% and down 6% on NASDAQ. That relatively low volume was a positive sign, given how far down the markets traded earlier today.
My Mar iron condor stands at a P/L of +$3,000 with a position delta of -$15 and theta = +$168. The spike up in IV today took a bit off of this position, but it is essentially delta neutral with 13 days to expiration. If the bull market resumes and RUT breaks its recent high at $838, I will close the 875/885 call spreads. Otherwise, the next decision point comes next Friday. My Apr iron condor at 700/710 and 900/910 on RUT is essentially at break-even with delta = -$26 and theta = +$78.
I believe many traders were lightening up positions today to lower their global event risk over the weekend. If that was the case, and nothing dramatic happens over the weekend, we may well see some buying on Monday. We'll see.
