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The markets opened upward early this morning, seemingly in response to the extreme downturn on Friday. But within minutes the traders began selling off strongly. Then the markets recovered slowly through the rest of the day and all of the major indexes closed modestly higher on the day. RUT closed up $3 at $613 while the SPX closed at $1071, up $6 on the day. Trading volume fell off markedly; it decreased by 34% on the NYSE and 18% on NASDAQ. Trading in the S&P 500 stocks dropped to about 3.5 billion shares from almost 5 billion shares traded Friday. Volatility dropped today with the VIX closing at less than 26%.
IBM announced earnings after the close and beat its earnings estimates handily, but came in about 2% under estimates for revenues; in after hours trading IBM is trading down about $5/share - is this a signal for tomorrow's market? This market is in an extremely defensive posture - it sells first and asks questions later.
Our Aug RUT iron condor is developing nicely with a P/L of -$1050, position delta = -$10 and position theta = +$118. If you draw trend lines on the SPX chart since late April, we have a channel from about $1000 to $1100 where the SPX bounced off of $1100 last week and may now make its way down to the lower part of this channel around $1020-$1030 over the next several sessions; the disappointment in IBM's revenues may be the impetus for a move in that direction tomorrow. But we will continue to manage our condor on the basis of the market's current move, not what we predict for its future direction.
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The bears came on strong today and never looked back. All of the major indexes dropped and closed at or near their lows for the day. It appeared as though the Michigan Consumer Sentiment Survey was the final straw after some weak economic data earlier in the week; the sentiment survey dropped to 66.5 from 76.0 last month. Financial stocks also led the charge downward, based on pessimistic outlooks after passage of the financial regulation bill. And it didn't help that Google missed earnings, adding to the tech weakness started by Apple Computer and the iPhone antenna problems. RUT dropped over $24 to close at $610 and SPX closed at $1065, down $32. Today's sell-off renewed speculation about a double dip in the economy. Trading volume was up today, rising 34% on the NYSE and up 11% on NASDAQ. The S&P 500 stocks traded 4.8 billion shares, rising above the 50 dma.
Interestingly, the VIX (volatility index) closed the day at 26%, lower than one would expect for such a dismal day in the market. The computation of the VIX is based on the market prices of the near term ATM SPX options, whose prices in turn are driven by demand. For the VIX to remain under 30% today seems to suggest that option buyers were not as panicked as one might have expected. So what happens Monday? Was this drop a bit over done?
On the other hand, given recent economic and sentiment data, looking for a bearish trend in the markets moving forward certainly isn't unreasonable. In fact, as I look at the SPX chart, the move downward since the end of April appears too extreme to explain away as a correction within a bullish trend. So I would be cautious about any bullish trading positions. But as delta neutral traders, we just trade what the market gives us today - we don't attempt to predict tomorrow's move. Today's move was actually helpful for my Aug iron condor on RUT; I removed my call hedges first thing this morning as the bloodbath began. The P/L of the position is now -$1,650, delta = -$12 and theta = +$114. So delta remains small with a large positive theta - a strong position.
Have a good weekend.
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SPX closed just above its 50 dma at $1095 yesterday, so all eyes were watching to see if it could hold that key support level today. In the early going, it looked like it wasn't going to hold, but then SPX rallied as high as $1099 before pulling all the way back to $1088. But the bulls came to the rescue and drove SPX to close unchanged at $1095. RUT traded in similar fashion, but was unable to recover all of its losses, closing at $640, down $3. Trading volume dropped today by 7% on the NYSE and dropped 6% on NASDAQ. Trading in the S&P 500 stocks dropped from yesterday to about 3.7 billion shares, well below the 50 dma.
The price charts of RUT and SPX are displaying the harami candlestick pattern (or an "inside day" on a bar chart). Haramis suggest a possible reversal of direction - after a strong up day yesterday, we have a doji candlestick today, suggesting market indecision, and possibly a market turning point. But in these markets, I'm not sure any of my indicators have much value. It seems as though the market is just thrashing back and forth from one extreme to the other. Recent events have made me cautious.
When the market ran up this morning after testing support, I added to the hedges on my Aug iron condor. The P/L now stands at -$2,780 with position delta = -$23 and theta = +$76. Since RUT pulled back, I now am probably hedged more than necessary. BUT, adjusting early and too much is always preferable to adjusting too late. So now we watch to see who will win this bull/bear tug of war.
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The markets traded back and forth today on a variety of economic news, but ended up largely unchanged after the dust settled. RUT initially dropped to $627 this morning and then traded sideways through most of the day. Similarly, SPX dropped to $1080 this morning, but all of the major indexes recovered late in the day. RUT didn't fully recover, closing at $635, down $6, but the SPX closed at $1096, up $1. This is the third day SPX has closed above its 50 day moving average (dma), but it appears unable to break through $1100. RUT has now closed three days above its 200 dma and appears to have strong resistance at $645. Trading volume was modest and mixed. Trading was up 5% on the NYSE, down 9% on NASDAQ, and 3.9 billion shares of the S&P 500 stocks exchanged hands, up slightly from yesterday but well below the 50 dma. All of this suggests great market indecision. Neither the bulls nor the bears have made their case stick.
New unemployment claims fell by 29k to 429k, but continuing unemployment claims rose by 247k to 4.68 million. I can't understand why these two numbers don't move in concert; I read about seasonal adjustments and the like, but the logic escapes me. Feel free to enlighten me. The market appeared to be particularly discouraged by the Philadelphia Fed Index dropping to 5.1 from 8.0 last month; similarly the NY Fed Empire Manufacturing index fell from over 19 to 5. But buyers entered the market in the last thirty minutes and recovered much of the day's losses - maybe some traders heard that the SEC and GS have reached a settlement? That was announced by CNBC after the market closed, but no official announcement is out yet.
GOOG is being punished in after hours trading after missing earnings this afternoon. This makes my Aug 470/480 call spreads questionable; I previously thought that was a pretty conservative position. But the conference call and some time to reflect and analyze the data may make a difference in tomorrow's trading. My Aug iron condor on RUT remains very solid with position delta of -$22 and theta = +$84 - an excellent theta/delta ratio, especially since I have long call hedges in place that reduce the position theta.
The market appears to be teetering at a balance point with neither the bulls or the bears able to maintain control. Today's poor economic data was fuel for the bears, but they couldn't hold the intraday lows. It is difficult to predict who is going to win this tug of war, so delta neutral strategies are an excellent choice here.
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Stocks traded strongly upward today as the earnings reports and guidance from Alcoa and CSX encouraged traders about the strength of the U.S. economy. SPX traded up and hit its 50 day moving average (dma) at $1095 mid-day and pulled back; later in the afternoon, SPX broke through the 50 dma but pulled back and closed right at the 50 dma, $1095, up $17 on the day. RUT ran even more strongly to the upside and closed up $21 at $643. Trading volume rose today, increasing 28% on the NYSE, and 2% on NASDAQ. Trading in the S&P 500 stocks rose to four billion shares, but still well below the 50 dma. INTC reported its highest earnings in ten years after the close. Barring no negative surprises in the conference call, that may continue to fuel this rally tomorrow. Many institutional traders watch the 50 dma and the 200 dma as key levels of support and resistance. SPX broke through the 50 dma briefly today before being pulled back. That $1095 level will be crucial to watch tomorrow for a signal of whether this uptrend can continue.
I added a partial adjustment to my Aug iron condor today with a Sept $680 call. This position now stands at a P/L of -$2,895, delta = -$61 and theta = +$94. The hedge reduced our delta risk, but also reduced our positive theta. If this market run continues tomorrow, I will be adding additional hedges.
