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The markets gapped down at the open today and then traded down even further before strengthening and trading steadily up the rest of the day. Moody's analysts downgraded Greece's debt after a larger than expected fiscal deficit was reported. That news appeared to set the gloomy start to today's trading. Earnings reports were generally positive and economic news was modestly positive. Initial unemployment claims dropped to 456k from 480k while continuing unemployment claims dropped by 40k to 4.646 million. These certainly aren't large changes, but they are in the right direction. The Producer Price Index increased 0.7%, a little more than expected and this prompted talk of looming inflation. Existing home sales increased to 5.35 million in March (up from 5.01 million), and the FHFA home price index dropped 0.2%, an improvement over last month's 0.8% drop.
SPX gapped lower at the open and traded as low as $1190 before the bulls came to the table and traded it back to close at $1209, an increase of a little less than $3. RUT traded in a similar fashion, trading as low as $716 before climbing to a close of $734, up $8 on the day. Trading volume was modestly up on all of the exchanges: up 7% on NYSE and 6% on NASDAQ. The S&P 500 traded over 5 billion shares, up from yesterday and well above the 50 day moving average. The underlying bullish strength of this market is demonstrated almost every day as negative news takes the markets lower, but the bulls always see the intraday lows as a motive to buy. It would be unwise to bet against this market.
And in keeping with that sentiment, I have continued to adjust and hedge my May iron condor on RUT to avoid the oncoming train. Today's upward move on RUT pushed the greeks of our position into a riskier neighborhood, with the current loss increased to -$1020, delta = -$44 and theta = +$75. Our hedges are containing the losses of the position, but we are being forced to roll our remaining call spreads upward. The bulls are maintaining the charge for now. I am not going to try to predict when this trend will slow or reverse.
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Trading was choppy and mostly sideways in the markets today. But the Russell 2000 Index pulled away in the last two hours of trading to post a modest gain for the day, leaving the other indexes mostly flat. Trading volume was up 7% on the NYSE, but jumped 29% on NASDAQ due to AAPL's strong earnings announcement plus Visa's acquisition of Cybersource. About five billion shares of the S&P 500 traded today, up from yesterday and still above the 50 day moving average. The SPX dropped below $1200 for a brief time today but rebounded to erase the earlier losses and close at $1206, up less than a dollar for the day. RUT touched down as low as $720 but rebounded to close up almost $5 at $726.
My May RUT condor stands at a P/L of -$720 with a position delta of -$7 and theta = +$76. My call spreads are split between 750/760 and 770/780. While the 750/760 spreads are under considerable pressure, the other call spreads plus a couple of June 750 calls are holding this position at a reasonable level of risk. The bullish strength of this market continues unabated (today's evidence was SPX being bought up shortly after touching 1200), but the slope of the curve is diminishing. I am beginning to be a little concerned about the bullish headlines and magazine covers. When everyone is convinced the market is going up, is often just before the correction. Don't forget the free webinar tomorrow evening.
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Conflicting forces resulted in a choppy sideways market today. Weakness in the Euro due to Greece, et al. pushed the dollar upward and that pushed the stock markets downward. But financial issues were being bought early today because many traders felt they were oversold yesterday in the wake of the Goldman news. Then it was reported that the SEC voted 3 to 2 to proceed with the case against Goldman (GS); that encouraged buyers of GS and the financials in general. The mixed vote was considered indicative of a weak case against GS. I believe it also lends evidence to the view that the GS case may be politically motivated to support financial regulatory reform in the congress. RUT traded as low as $702 before closing at $711, down $3. The SPX traded similarly until about 2 pm ET, when some strong buying erased earlier losses and pushed SPX up to a net gain of $5 to close at $1198.
My May RUT condor stands reasonably well balanced at this point (surprisingly after all of the swings back and forth) with 10 contracts of calls at 750/760, 10 contracts of calls at 770/780 and 20 contracts of puts at 650/660. The P/L is -$1,260, with position delta of -$15 and theta = +$112. Tomorrow's markets will be driven by IBM's earnings report this evening and reports from GS, KO, and JNJ in the morning. Expectations are generally positive so even a minor disappointment could drive the market down. But today's strong finish supports the bullish bias that appears to be prevalent.
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The bulls continue to drive this market higher. Today's move upward was unusual in that it was in the face of a modestly stronger dollar. The VIX dropped almost 10% to close at 15.7%. Trading volume dropped about 10% on the NYSE and was flat on NASDAQ. Trading volume for the S&P 500 dropped again today to about 4.5 billion shares, but that is still above the 50 day moving average. RUT closed at $722, a gain of a little over $10; SPX gained almost $10 to close at $1207. Today's moves put RUT and SPX back in the upper range of their Bollinger Bands; they have been consistently above the midpoint of the band since March 1 - quite a run.
My May condor position required some further tweaking today to keep it in a good position: P/L = -$950, delta = +$13, and theta = +$84. That strong ratio of theta to delta is important. You can think of theta as your profit engine, working to generate cash each day. But the delta value represents our price risk when the index moves against us. Thus, we want a small delta and large theta, ideally in a ratio of two to one or larger.
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When Thomas Paine said, "These are the times that try men's souls", he wasn't thinking about markets, but that is certainly an appropriate quote for delta neutral traders over the past 18 months. Only two days ago, the markets took off with a roar and ran over everything in their way. Today they gave back much of those gains. Google's earnings announcement unnerved some investors with concern over future investments and Eric Schmidt's absence on the conference call. Based on that alone, I expected some softness this morning. But then the SEC charged Goldman Sachs with fraud and the market collapsed; everyone was running to lock in the profits from this incredible run-up of the past 45 days. RUT dropped nearly $10 to close at $715 while the SPX closed at $1192, down nearly $20. Trading volume is always higher than average on expiration Friday but today's trading was off the charts. The S&P 500 traded over seven billion shares today!
Ironically, I adjusted my May condor on RUT yesterday by rolling half of my 750/760 calls to 770/780 and closing all of my 590/600 puts and rolling them to 650/660. I left my June $750 calls in place as a hedge against a continued move upward. Imagine my surprise today. But it is better to have adjusted early than too late. The position greeks are solid with delta = +$13 and theta = +$82. The risk/reward chart suggests the P/L for this position will be essentially unchanged up to around $730 on RUT, so it is well hedged for a continued move upward. But do I need a hedge for the upside? The RUT hit a low of $710 today and then traders came to the table and bid it back up, so I think the basic bullish case for the market is intact. Bulls are still buying the pullbacks.
