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The major market indices continue to trade sideways, and volatility is quite low. SPX closed today at $2391, up less than three dollars. The volatility index for the S&P 500 index, VIX, closed at 10.5% today, near the lows for this year. SPX has been trading in the range of $2320 and $2400 since mid-February. Powerful market forces are arrayed on either side of this market. The bulls are citing a more business-friendly administration, a reduction in regulations and prospects of tax reform. The bears cite several months of stellar market advances, high price/earnings ratios, and an aging bull market. It doesn't seem as though any negative news affects the market. Every dip is quickly bought, but the market can't seem to quite make the break-out to new highs either.
For the last couple of months, I have been loading my portfolio with iron condor positions on the S&P 500 index (SPX), The Russell 2000 index (RUT) and the NASDAQ 100 index (NDX). Today, I sold the NDX May 5375/5400 and 5800/5825 iron condor for a credit of $195 per contract. Yesterday, I sold the NDX June 5200/5225 and 5825/5850 iron condor for $506 per contract. The disadvantage of selling iron condors in this environment is the low implied volatility, which lowers the option premiums. On the other hand, that low volatility is one more sign of the sideways, treading water nature of this market, and that favors these trades.
Don't neglect trade management. Entering this positions and then going on vacation is a prescription for disaster. Be sure you have a clear plan for risk management, e.g., if SPX breaks down through $2300, I will buy one $2300 put for every ten condors. Establish a series of these rules and trade what the market gives you each day. Don't try to predict its movement tomorrow.
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We are well into earnings season. IBM was weighing heavily on the Dow Jones Industrial Average today after disappointing analysts during their earnings announcement yesterday. But the heavier weight on the markets is the diminishing euphoria that pushed the markets higher after the election last year. The realities of politics and the difficulty of delivering on campaign promises is throwing cold water on this market.
The Standard and Poors 500 Index (SPX) closed down four dollars today at $2338, but the Russell 2000 Index (RUT) closed five dollars higher at $1367. Volatility rose a bit with the VIX rising a half point to 14.9%.
Trading volume in the S&P 500 stocks ran at 1.9 billion shares today. Trading volume has run below the 50 day moving average (dma) since March 20th. Below average trading volume tells us that the large institutional players aren't panicking and selling, but it also tells you that those same players aren't going "all in" either.
Pull up the price chart for SPX. Draw trend lines at $2320 and $2400. SPX has traded sideways within this channel since mid-February. This sideways trading channel is even more obvious in RUT, and has been in place since early December.
So what should we be trading today?
In spite of the overall market averages trending sideways, there are a few high fliers that deserve a bullish trade. Consider BABA, CMG and ISRG for straight forward bullish trades: long stock, covered calls, diagonal call spreads, etc.
Non-directional options trading strategies are perfect for this type of sideways market. Consider "at the money" calendar spreads, butterfly spreads, and iron condor spreads on the major market indices (SPX, RUT, and NDX).
Good trading.
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Market analysts have been nervous since last Tuesday's meltdown. The "sky is falling" gurus have been preaching correction to anyone who would listen. But the balance of last week's trading was somewhat reassuring - sideways beats going farther down. But the doomsday gurus appeared to be getting their wish this weekend as the futures plunged. The SPX futures this morning were downright ugly and SPX opened at $2329 and traded down as far as $2322 before finding support. Then a steady grind higher began that lasted virtually all day, hitting its high for the day at $2345 just a few minutes before the close at $2342, down two dollars on the day. The 50 day moving average (dma) stands at $2332, so technical analysts will observe that support at the 50 dma held, even though it briefly dipped below support intraday. The other positive piece of data was found in today's trading volume in the S&P 500 companies: 1.9 billion shares with the 50 dma at 2.1 billion shares. The final positive indicator came in VIX, the volatility of the S&P 500. VIX spiked to over 15% this morning, but immediately began its retreat, closing at 12.5% for the day. The trends in volatility and trading volume show that traders didn't panic.
Tomorrow's opening will be crucial to see if the market follows through on today's reversal, but the preponderance of the evidence seems to point to the bulls retaining control of this market.
The Russell 200 Index (RUT) displayed a similar trading pattern to SPX, opening weak, hitting a low at $1335, but then recovering at close at $1357, up three dollars on the day. This close for RUT places it squarely within the sideways trading channel of the past four months.
Looking forward this week, the only significant economic data scheduled to report is the final estimate of fourth quarter GDP on Thursday. Unless there is a big revision downward, that report isn't likely to move the market; we already know last year's growth was anemic. Maybe the risk to the bulls is in the political realm, but predicting Washington political moves makes predicting market tops and bottoms look easy.
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SPX closed today at $2359, down four dollars, after bouncing off the 50 dma at $2341. This mirrors last Monday, when the 50 dma provided support for SPX. I am paying close attention to the 50 dma as my trigger for adjusting and closing positions. The Russell 2000 Index behaved even more bearishly today, breaking down through the 50 dma, and closing down $16 at $1370. But the NASDAQ Composite is still holding up rather well, closing today at $5895, down $17, but near the top of its recent trading range.
SPX and RUT are solidly in sideways trading patterns, but seem to have enough bullish support to hold the line when the bears mount a charge to the downside. My concern is what event might finally rattle the bulls. This rally was built on expectations of a better economy under the new administration, but Washington gridlock appears to remain the norm. When the bulls lose faith, it could get ugly.
Will the jobs report this Friday be the seminal event?
In the meantime, classic delta-neutral trades are a good fit for this market.
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The markets are up over 14% since the election, and that's a huge run in anyone's book. So it isn't surprising that concern has been growing that this rally has run too far, too quickly. We begin to think that there must be a correction lurking around the corner. Yesterday's strong decline across all of the major market indices brought out the "sky is falling" folks. SPX did decline $29 or 1.2%, so it wasn't a trivial down day. More troubling to me was the fact that the sell-off strengthened into the market close. There was no market rally to end an otherwise dismal day and give traders hope.
But today was a different day for traders. SPX opened at $2348, and closed at $2348, up $4 on the day. The small cap stocks, as represented by the Russell 2000 Index, didn't fare quite as well, but today's trading didn't extend yesterday's losses. RUT was essentially unchanged at $1346, down less than a dollar.
Both SPX and RUT have been trading in a sideways channel for about three weeks. Today's little mini-rally almost pulled SPX back to its support level at $2355. RUT was more successful, essentially closing at the support level held for the last few weeks.
Was today just a temporary pause before we go over the cliff? That is hard to answer with much certainty, but let's consider the evidence:
The trailing 12 month price to earning ratio for the S&P 500 is at record levels. We have to go back to 2009 to find higher numbers.
The CBOE SKEW ratio measures the demand for far out of the money put options. The thinking is that the large institutional traders will see the storm coming and buy protection. SKEW did reach very high levels this past Friday, at 153, higher than the first quarter correction of 2016 or the correction in the fall of 2014. But SKEW declined to 136 today, still moderately high, but not quite as scary.
I follow the volatility index for the S&P 500 (the ticker symbol is VIX). Normally we see VIX tracking steadily higher in the days just before a correction, but VIX has been pretty quiet. Even during the scary decline yesterday, the high of VIX was 12.9%, and VIX closed at 12.8% today. These remain historically low levels of volatility. During the market decline preceding the election last year, VIX hit a high of 23%. The big players aren't panicking just yet.
Where does that leave us? I think today's price action shows that the bulls remain firmly in control of this market. Traders remain optimistic about the future of our economy. Don't get me wrong. We should be cautious, but it would be premature to move largely to cash. It does raise an interesting question. Do you have trailing stops entered to protect those gains you have enjoyed since the election?
