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The markets opened down this morning but quickly recovered and traded largely sideways to close essentially unchanged for the day. SPX closed unchanged at $1186 while RUT closed down $1 at $707. The action yesterday and today on SPX is interesting. Yesterday, the bulls tried to take SPX to new highs but were pulled back to $1186, while the bears attempted to pull the SPX down at the open today but the bulls pulled the index back up to close at $1186. Unless something significant occurs in the ongoing earnings report action, I expect the market to trade without serious direction until after the election and the FOMC report next week. The VIX jumped at the open to 20.5% on the downward market move, but didn't return as the markets recovered; it closed at 20.2%, suggesting some hedging by the large portfolio managers. Trading volume was flat to mixed with a 3% drop on the NYSE and a 10% increase on NASDAQ. Trading in the S&P 500 stocks was flat at 3.5 billion shares, right at the 50 dma.
The Case Schiller housing price index increased 1.7% in August, down from the 3.2% increase in July, but it is moving in the right direction. Consumer confidence rose to 50.2 in Oct from 48.6 last month, and the FHFA Home Price Index rose 0.4% in August. We are seeing several data points suggesting a modest recovery for real estate, or at least no further deterioration.
My condor positions are largely unchanged. The Nov condor remains hedged with Dec calls since the Nov $740 calls are still at a delta of 23; the position Greeks are good with delta = -$54 and theta = +$127. The Dec condor has a delta of -$22 and theta = +$77. Rolling up the put spreads is a temptation in both of these positions, but we may need that extra safety margin on the downside. My fear is that the Fed will disappoint the market next week, and that could get ugly. For now, I see more risk to the downside than the upside for my condors. But I am not supposed to be making predictions, am I?
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The markets were fueled this morning by a surprising 10% increase in the sales of existing homes for September. But the increase was short lived and most of the gains were lost as the markets pulled back and traded sideways most of the day. The SPX closed at $1186, up $3 after trading as high as $1196. RUT closed up $4 at $708. Trading volume was up from Friday; 3.6 billion shares of the S&P 500 stocks traded, just above the 50 dma at 3.5 billion shares. Trading was up 27% on the NYSE and up 4% on NASDAQ. SPX has been trading in the range of $1165 to $1185 for the last 2-3 weeks. Today's early rise in SPX brought out the bears to pull it back down into this trading range. Since much of the recent bullishness has been driven by expectations of the Fed initiating another round of quantitative easing, perhaps the markets will trade sideways until the next FOMC announcement November 3. And, of course, the election results constitute another potentially market moving event; so November 3 is shaping up to be a volatile day in the markets with election results in the morning and the Fed announcement in the afternoon.
My Nov condor on RUT continues to sit in the middle of the adjustment range on the call side with the delta of the Nov $740 calls at 25. This position is hedged with Dec $740 calls and has a position delta of -$57 and theta = +$77. The Dec iron condor on RUT stands at a P/L of -$120, delta = -$24 and theta = +$115. We may see the markets largely trade sideways until November 3. But we will trade our condors on the basis of what the market does today, not what we think it should do.
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That pull back was certainly short lived. The SPX closed up $12 at $1178; that was almost the mirror image of yesterday's market when it opened at $1179 and fell to $1166. Today's open was $1167. It would appear the bulls are back in charge and the QE II train is still running. The dollar lost ground today and that certainly helped stocks somewhat; and another batch of largely positive earnings reports was helpful as well. RUT behaved similarly, closing up $8 at $702 (yesterday's open was at $702). The Fed's Beige Book was almost the only significant economic news and the market just yawned. Trading volume was down from yesterday's highs but still at pretty high levels. 4.3 billion shares of the S&P 500 stocks traded; that is down from yesterday but still above the 50 dma. Trading volume declined 13% on the NYSE and dropped 9% on NASDAQ.
This market reversal caught my Nov condor without its hedge (closed yesterday). As Yogi would say, "it's like deja vu all over again." It seemed we were always getting whipsawed with our hedges in our October condor. I reapplied the Dec call hedges and reduced the position delta to a manageable -$35 and yet theta remains high at +$111.
So we wait to see if the euphoria over positive earnings and the prospect of further quantitative easing will continue to fuel this market. That doesn't seem reasonable to me, but we play what the market gives us, not what we believe should be happening.
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We have just solved some technical difficulties that prevented my entering my blog for the past two days.
So have a good weekend and I will hopefully be back here on Monday.
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The pull back many of us have been expecting for some time finally occurred today. Financial stocks led the downward trend and a strong dollar contributed as well. Earnings reports from AAPL and IBM were both rather positive, but were not sufficient to prevent a bout of profit taking. That tended to set a negative tone to the market at the opening this morning. Housing starts for September were up modestly to 610k from last month's 608k. Building permits dropped from last month's 571k to 539k in September. So neither the economic news or the earnings reports were clearly the cause for the market's tumble. Many indicators have been pointing to overbought for some time and it finally tipped over today. SPX lost $19 to close at $1166 while RUT closed at $694, down $16. Stocks traded higher in the last few minutes of trading, a positive sign for the day. Trading volume was up across the board with 4.7 billion shares of the S&P 500 stocks changing hands. Trading on the NYSE was up 32% and was up 28% on NASDAQ. So we had a big down day on increased volume - that may suggest more down days in front of us.
I sold the Dec calls hedging the Nov iron condor position this afternoon as the delta on my short Nov calls hit 16. This position now stands at a P/L of -$2,306 with delta = -$70, and theta = +$150. The cost of my "insurance" was $780, but this position still has the potential for a $2,574 profit. The hedge served its purpose by keeping us in the game now that the market has pulled back. Our theta/delta ratio is quite strong. If the market continues to pull back, this position will be even stronger. If the market appears to stabilize, I will initiate the Dec condor position this week.
