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The market's mood was cautious before the opening today due to concerns about the debt crisis in the Euro zone. The dollar index increased 1.3% today, the largest increase in a single day since December. The durable goods orders report this morning indicated 0.5% growth; 0.6% was expected. The better news was a upward revision of January's number to 3.9% from 3%. New home sales decreased in February by 2.2%; analysts were expecting a 1.9% increase. The economic data probably weighed somewhat on the market, but the strong increase in the dollar's strength was hard to ignore. Even so, the markets held up pretty well, once again showing the underlying strength of this market. RUT traded down almost $7 and closed at $684. The SPX lost a little more than $6 to close at $1168. Trading volume was up less than 5% on the NYSE and essentially flat on the NASDAQ; the S&P 500 continued to trade below its 50 day moving average. Today's price action on both the RUT and SPX charts displayed the classic "inside day" on the bar charts or the Harami for the candlestick devotees. These patterns are often seen at points of a trend slowing and consolidating, or perhaps even a market reversal. Time will tell.
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Today's trading repeated a common pattern of late: every dip in the market appears to be seen as a buying opportunity for the bulls. RUT and SPX both set new 52 week highs today. RUT traded down a little this morning and then slowly rose in the afternoon and spurted to the finish in the last half hour of trading. RUT closed up over $7 at $690. SPX traded in a similar pattern and closed at $1174, up over $8. The late afternoon surge appeared to be triggered by a weakening in the dollar as the euro rebounded. The weak trade in the morning may have reflected the drop in existing home sales from January to February and a drop in the FHFA Home Price Index of 0.6% - not great news of recovery, but no severe contraction either. But even in the face of that data, the market didn't trade down much; RUT dropped less than $2 after the announcement. All in all, the market appears to be firmly on a bullish trend. Trading volume on the NYSE and NASDAQ were flat while the S&P 500 continued to trade below its 50 day moving average.
At this rate, I may have to adjust my April condor again, or just close the call spread side of the position. The $720 calls are now at a delta of 13. I'm certainly in no hurry to establish my May condor in the midst of this strong trend.
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The markets pulled back today and the talking heads attributed it to the Euro's weakness due to concerns about Greece causing a strengthening in the dollar and therefore weakening the stock markets. However, as most of us have observed over the past several months, the inverse relationship between the dollar and the markets is anything but consistent. Those of you in our webinar last evening will recall our discussion of the declining volume in the S&P 500 over the past five sessions as new highs were being made - clearly a bearish sign. But I don't think this amounts to anything more than some profit taking after a huge bull run. Trading volume was markedly up today, probably due to quadruple witching expiration - contracts for index options, stock options, single
stock futures, and index futures all expired today. RUT closed at $674, down a little less than $8 and the SPX gave up almost $6 to close at $1160.
My April iron condor was assisted by this move down today, the delta for this position now stands at -$19, pretty close to delta neutral, while theta is +$85. Someone in the Trading Group webinar asked why we didn't roll up the put spreads that are over two standard deviations OTM to move this position into profitable territory. My answer was that I was concerned about a pullback after such a huge run upward, especially in light of the recent declining trading volumes. We will be watching for signs of stabilization before rolling up those put spreads.
I was also asked last evening if the trouble with my March and April iron condor positions suggests that this strategy "doesn't work anymore". Trading the iron condor, or any delta neutral strategy, is a probabilistic strategy. Occasional losses are expected; the key success factor is a system of risk management that minimizes the losses so that the more frequently occurring gains are not wiped out. My loss of $2,850 in March is approximately what I gained in February ($2,794); my blog trading account is still up 36%. This trading strategy is like being in the insurance business; we will have claims (losses). As long as the claims don't wipe out the premiums collected on all of those policies, our insurance company will remain profitable. As long as our system of risk management minimizes our losses in the "bad" months when the market takes off in one direction or the other, our account will continue to have net gains.
However, if you started your insurance company a month or two before Hurricane Katrina hit, you might be discouraged and wonder if you were in the right business. Those of you who just decided to try trading the iron condor in March are in the same predicament. Hang in there. Use this time to reassess the risk management of your trading system. Keep fine tuning your system; continue to learn and improve. It is a feasible business.
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With the recent strong move upward in the markets, many analysts have been looking for a pull back, so Friday's market action was not a surprise and the fact that the S&P futures were in negative territory before the open this morning appeared consistent with a follow through on Friday's action. Many analysts also thought passage of the health care bill would take the markets lower. The markets indeed did open lower this morning but almost immediately turned upward and steadily increased in choppy trade all day. This is very bullish market action. As soon as the bears started the sell off, the bulls saw it as a buying opportunity and jumped in. So the bullish case for the markets is still dominating traders' thinking. Trading volume was down as compared to the high volumes from the quadruple witching Friday. Trading volume for the S&P 500 was back below the 50 day moving average, close to where it was on Thursday. It seems odd to me that many of these large upward market moves are being accomplished with low trading volume. RUT traded down to what is shaping up as a solid support level at $668 - $670 before trading up to close at $683, a rise of $9. SPX traded down to $1153, just above support at $1150 and then traded up to close at $1166, a rise of $6. The VIX closed just under 17%. My April condor continues to present pretty good Greeks at a position delta of -$68 with +$115 of theta. I will probably establish the May position late this week or early next week.
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Trading in the markets was very choppy today, but with no net change by the end of the day. Trading volume was down 6-10% on the major exchanges. The CPI came in unchanged this morning, good news for those concerned about the Fed's easy money policy stimulating a round of inflation. One could argue that minimal inflation coupled with low interest rates should be a strong stimulus for business and consequently, the markets. From that perspective, this strong market move upward isn't surprising, but the record high unemployment numbers and Fed red ink gives one pause. The initial jobless claims number came down by 1% to 457k while the number of continuing claims rose a few thousand to 4.579 million. But this number does not include workers who have exhausted the "normal" unemployment benefits and moved into the extended unemployment benefits category. The VIX closed at 16.6%, its lowest level since May of 2008. RUT closed down less than $2 at $682 while the SPX closed unchanged at $1166.
Today's pause in the market's ascent was refreshing for my April iron condor position that now stands at a P/L of -$2,685, delta = -$75 and theta = +$120. The $720 calls have a delta of 13, so this position is relatively unstressed at this point; a couple of weeks of consolidation would be helpful after the damage inflicted by this recent rocket launch of the markets.
