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Sorry I did not get to posting my blog yesterday. It was a crazy day and then I had my trading group webinar last evening. The economic news yesterday wasn't bad, although that wasn't obvious from the market's behavior. Initial unemployment claims declined to 444k from the previous 451k, and continuing unemployment claims dropped from 4.65M to 4.59M. But retail sales numbers came in weak. Concerns about Greece and the European Union were at the forefront of the traders' minds. It appeared this morning that the market might be stabilizing but now that isn't clear at all. If your stops closed out your put spread positions yesterday, be sure to keep your put hedges in place. That will minimize the losses. I will check back in after the market closes today.
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Global sovereign debt worries continued to drag the markets down today, but the trading was not nearly as one-sided as it was yesterday. Reports that Moody's is preparing to review Portugal's debt for a possible downgrade didn't help the mood on the street. The SPX broke through its 50 day moving average (dma) and traded as low as $1160 before recovering a bit to close at $1166, a loss of $8 on the day. RUT hit lows of $691 ($694 is its 50 dma) before closing at $699, for a loss of $8. Trading volume remained relatively high but didn't increase over yesterday's huge volume, with a 1% increase on the NYSE, flat on the NASDAQ, and flat on the S&P 500 stocks; however, the trading volume of the S&P 500 remained above 5.2 billion shares, well above its 50 dma.
The dollar opened the day very strong, up over 1%, primarily due to the weakened Euro; this placed additional pressure on the stock markets and easing of the dollar's strength late in the day probably accounted for the modest intraday recovery. The ISM Services Index reported out at 55.4 for April, unchanged from March. ADP reported 32k new private sector jobs were added to payrolls in April (19k were added in March). The unemployment numbers will be reported Friday, but most economists are predicting little or no improvement from the 9.7% level. Virtually all of the economic data is consistently pointing to a slow, modest recovery in progress.
My May RUT iron condor spread stands at a P/L of -$1,700 with a delta of +$56 and theta = +$150; so we still have a strong 3 to 1 theta/delta ratio and the short puts are right at one standard deviation OTM. The June iron condor stands at a P/L of -$860 with a delta of +$27 and theta = +$64. So the theta/delta ratio is still over 2 to 1 and the short puts are just inside one standard deviation OTM. So now we wait to see if the other shoe drops...
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Much of Friday's losses were recovered today, but trading volume was lower across the board. Trading volume fell 19% on the NYSE and 16% on the NASDAQ; trading of the S&P 500 stocks dropped below four billion shares and below the 50 day moving average. It appears that news of a bailout plan for Greece calmed fears in the markets but didn't result in unbridled bullishness either. The Greece bailout pushed the Euro lower which, in turn, boosted the dollar by 0.6%; surprisingly, the stock markets traded upward in the face of the stronger dollar. RUT ran up over $16 to close at $733 while the SPX closed at $1202, up over $15. These gains didn't quite erase Friday's damage, but it was close.
Economic news was modestly favorable; personal income increased 0.3% while personal expenditures increased 0.6%; construction spending in March increased 0.2%; the ISM Manufacturing Index increased to 60.4 in April, up from 59.6 in March. All signs are consistently pointing to economic recovery, but a very slow recovery; many economists are hesitant to be very optimistic as long as the unemployment figures remain so stubbornly high.
My May iron condor on RUT stands at a P/L of -$1,220, delta = -$42, and theta = +$184. The calls now stand at one standard deviation OTM while the put spreads are over two standard deviations OTM with 17 days to go. My June iron condor on RUT at 640/650 and 790/800 stands at a P/L of -$500, delta = -$42 and theta = +$77.
These certainly are volatile markets. RUT has traded up or down $15 or more (about 2%) during each of the last three trading sessions - wow! Tough times for delta neutral traders; stay on top of your positions; don't hesitate to make the adjustments when needed.
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Global sovereign debt problems overwhelmed all other news today to drive the markets lower with greater volume. Factory orders for March increased by 1.3%, beating expectations. Pending home sales for March rose 5.3%, greater than the predicted 5%. But this positive news was completely eclipsed by concerns that Greece's fiscal problems will spread through Europe and perhaps the world. RUT plummeted $23 to $710 while the SPX closed at $174, a decline of $29. Both indexes managed rallies into the close that made up for some of the losses. The key question is whether we should interpret that late buying as the markets having reached a support level or whether more losses are ahead for tomorrow. Trading volume was increased significantly across the board with a 27% increase on the NYSE, and a 29% increase on NASDAQ; the S&P 500 stocks traded about 5.2 billion shares. Yesterday's trading volume on the S&P 500 was the only session out of the last 15 trading sessions to be below the 50 day moving average. Normally, we would interpret greater than average trading volume as conviction for the resulting trend - but, in the last few trading sessions, we have had large moves with increased volume both up and down. However, we are setting lower lows, so maybe the long awaited correction has begun.
My May iron condor on RUT is in pretty good shape with a net P/L of -$1400, delta = +$22 and theta = +$157. However, the June iron condor will need adjustment if this market continues down tomorrow. It stands at -$1,100, delta = +$7 and theta = +$75. The position greeks are excellent, which allowed me to be patient with this position today, but we will require some adjustments for any further moves downward. This market continues to set volatility records; now RUT has traded with swings of over $15 for four consecutive sessions - very unusual.
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Today's economic news began with the preliminary GDP numbers for the first quarter of a 3.2% gain as compared with 5.6% in the fourth quarter. Personal consumption expenditures rose 3.6% from the fourth quarter's 1.6%. The Chicago Purchasing Managers Index (Chicago PMI) came in at 63.8, greater than the 60 that was expected; this is the highest PMI number since 2005. And the University of Michigan Consumer Confidence Index came in at 72.2, greater than the expected 71.0. All in all, it was pretty good economic news.
But the market tanked in response.
RUT lost $21 to close at $717 while the SPX closed at $1187, a loss of $20. Trading volume was mixed with a 6% increase on the NYSE and a 10% drop on NASDAQ. The S&P 500 stocks traded over 5 billion shares, an increase from yesterday and this represented the 14th day above the 50 day moving average. As you might expect, the VIX gained 20% to close at 22%. Gold hit a 2010 high at $1181. The modest trading volumes don't suggest widespread panic selling, plus the RUT and SPX both remained above key support levels set over the past few weeks.
Today's move took my May 650/660 770/780 iron condor on RUT to a delta neutral position with a P/L of -$1,160, delta = -$3 and theta = +$137. It will be interesting to see what happens Monday. I believe there is a high probability of much of this loss being retraced on Monday. At least some of the selling today was the result of taking cash off the table as the details of the Greece bailout are finalized this weekend. Barring any surprises over the weekend, buyers will likely return to the table Monday. But that is the beauty of my condor trade: I don't have to predict Monday's market direction (but it is fun to try).
