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Markets traded mostly sideways today with most traders focused on the nonfarm payroll report tomorrow morning. Initial unemployment claims reported essentially flat week to week at 445k and continuing claims decreased by 48k to 4.5 million. However retail sales appear to be making solid gains and that news
appeared to offset the lack of improvement in the unemployment claims
data. RUT lost $1 to close at $684 while SPX lost $2 to close at $1158. Trading volume declined across the board with 3.2 billion shares of the S&P 500 stocks changing hands. Trading on the NYSE dropped 5% and it declined 12% on NASDAQ. The dollar recovered somewhat today and that pressured gold prices. With bond yields at record lows, there is a lot of money on the sidelines considering whether it is safe to buy stocks. It is impossible to predict what piece of news, or more importantly, the interpretation of that news, will push this market one way or the other. Alcoa's earnings announcement certainly wasn't very encouraging with a 21% drop in earnings; however, they beat analyst expectations, so that may be a positive boost for stocks tomorrow.
The situation with my Oct and Nov iron condors on RUT is largely unchanged. Both are underwater and susceptible to a strong move upward. Both positions are hedged and we'll see what the jobs report does to the markets tomorrow.
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The markets cooled today after seeing the loss of 39 thousand jobs in the ADP payroll report for September. Economists were expecting an increase of 18k. This has exacerbated concerns about Friday's nonfarm payrolls report; the consensus prediction from the experts is for an increase in unemployment to 9.7% and some are speculating it may go higher. Tomorrow's unemployment claims report may push the market somewhat but most traders will be waiting for Friday's jobs report before taking on additional long positions. Markets opened downward this morning and traded sideways throughout the day with only modest net changes in the market indexes. SPX closed down less than a dollar at $1160 while RUT lost $4 to close at $685. Trading volume decreased across the board with a decline to the 50 dma at 3.4 billion shares for trading in the S&P 500 stocks; similarly, trading was down 18% on the NYSE and down 5% on NASDAQ. Gold hit record highs today, reflecting continued concerns about governments debasing their currencies both to stimulate exports but also to solve their sovereign debt problems.
My iron condors for Oct and Nov are both underwater and hedged appropriately. The Oct condor's position delta = -$40 and theta = +$173, representing a reasonable net level of risk. November's Greeks are delta = -$32 and theta = +$54. Both theta/delta ratios are good to fair, especially in light of the hedge options in both positions. A strong market move upward is the danger to both positions; uncertainty concerning Friday's jobs report will likely contain any market advances tomorrow, but on Friday? But, as delta neutral traders, we have hedged our positions; if the market moves up strongly, that will likely lock in a net loss for our October condor, but the hedges should contain that loss.
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The stock markets opened weak and traded down all morning, then meandered sideways for the afternoon. However, trading volume was weak, suggesting the institutions are sitting on the sidelines with no serious selling ongoing. Trading in the S&P 500 stocks dropped to 3.1 billion shares while trading on the NYSE dropped 12%; to a lesser degree, trading on NASDAQ was down 2%. SPX traded down to $1132, near its recent support level at $1131 before bouncing back to close at $1137, down $9. RUT behaved similarly, trading down as low as $666, near its peak back in late July before the drop in August; RUT closed down $10 at $669. The SPX support level of $1131 is worth watching closely because the next levels of strong support are quite a bit lower at $1100 and $1040.
Factory orders for August fell 0.5%; this may have set the negative mood on the street today. But pending home sales surprised analysts by increasing 4.3%; analysts were expecting 1%.
I took today's weakness in RUT as an opportunity to attempt to salvage my Oct iron condor on RUT. I had closed the 690/700 calls and rolled to 720/730 last week. I was able to close the 720/730 spreads for a $1,020 profit and roll down to 700/710 today. That position now stands at a P/L of -$2,063, delta = -$70 and theta = +$337. The Nov condor stands at a P/L of -$600, delta = -$50 and theta = +$92. Both positions have strong theta/delta ratios but the Oct position theta is really starting to come on strong as we enter the last ten days before expiration.
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Expectations of additional quantitative easing by the Fed drove the U.S. dollar to an eight month low and fueled a broadly based market surge on strong volume. SPX ran up $24 to close at $1161 while RUT ran up $20 to close at $689. Trading volume in the S&P 500 stocks hit 4 billion shares, only matched recently on the September option expiration Friday over two weeks ago. Trading volume was also up 26% on the NYSE and up 17% on NASDAQ. The ISM Services Index reported out at 53.2 for September, up from last month's 51.5. The VIX has been in the range of 21% to 24% for the past several weeks and pulled back to 22% today.
I hedged both of my iron condors today, but the Oct position is in serious trouble with delta = -$38 and theta = +$109. Trying to salvage a gain in this position yesterday may be my undoing. This bull market is threatening to bulldoze over my 700/710 call spreads. The November condor is hedged by December $740 calls and has a position delta of -$32 and theta = +$57.
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Several positive economic reports appeared to give the market a upward edge today, but the trading was choppy and mostly sideways. SPX closed up $5 at $1146 and RUT closed at $679, up $3. Trading volume was generally down from yesterday with 3.6 billion shares of the S&P 500 stocks trading today, but this is still above the 50 dma. Trading volume was down 8% on the NYSE and down 20% on NASDAQ. Personal income rose 0.5% and the final revision of the Michigan Consumer Sentiment report came in higher at 68.2 (66.6 last month). Construction spending for August was up 0.4%, a big improvement from July when it was down 1.4%.The ISM manufacturing index dropped from 56.3 to 54.4 for September.
SPX remains in a tight trading range from $1131 to $1150 and has been unable to hold a close outside that range. My Oct iron condor continues to improve its position with the passage of time; now it stands at -$2,723, delta = -$47 and theta = +$229. Both spreads are greater than one standard deviation OTM. The Nov condor has a P/L of -$1,360, delta = -$70 and theta = +$88.
My decision to roll my calls and puts in the Oct condor earlier this week bears some scrutiny. At this point, one might argue that this market is range bound and that a breakout downward may be more likely than a breakout upward. I was being conservative by closing and rolling the spreads; now that I have closed the November hedge calls, the best this position can do is a modest loss. But remaining in the previous position was exposing me to an upward breakout and a larger loss; the Nov hedges help contain the losses, but it isn't a perfect hedge. Trading the iron condor, like any trading strategy, is subject to your personal judgment. We may well make different decisions about when and how to hedge the position. The key is to be sure you are using a consistent system of risk management.
