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I didn't expect any sustained trend in the markets until we get past the FOMC announcement next week, but this week's trading has been steadily downward. The S&P 500 has lost 2% of its value in the past three days. SPX closed today at $2048, down $16 and RUT lost $14 to close at $1146. The VIX moved up two points to close at 19.6%. RUT broke through its 50 dma yesterday and SPX broke its 50 dma today. RUT found support at $1140 in October and November, so I am watching to see if that level holds once again. The analogous support level on the SPX chart is $2020. SPX traded over a wide range today, trading as high as $2080 by about 10:30 am ET, but then trending downward until early afternoon.
There wasn't any significant economic data reported today. Oil prices, fears of a global recession, and anticipated interest rate hikes seem to dominate traders' concerns. Bernanke was surprised by the market's swift reaction when he mentioned raising interest rates a couple of years ago. I still find it a bit surprising if a 25 basis point interest rate hike will send this market over the cliff. At a minimum, we can expect some significant market volatility next week. But when I look at the market's price action since last Thursday, I have to wonder, "more volatility?"
I think it will be prudent to look closely at your positions and decide whether you want to carry them into the FOMC announcement.
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Worldwide markets declined today with concerns that lower commodity prices were signaling weakening economies around the world. When coupled with news of a slowing economy in China, a bleak picture emerged. SPX closed down $13 at $2064 and RUT lost $5 to close at $1159. Trading volume in the S&P 500 rose slightly from yesterday to 2.6 billion shares. Trading increased 5% on the NYSE, but decreased 2% on NASDAQ. Volatility spiked higher with the VIX closing up nearly two points to 17.6%.
SPX dropped as far as $2052 this morning but then recovered and chopped sideways into the close. It appeared as though SPX found support at its 50 dma at $2049. RUT didn't decline as much as SPX, so one could take that as a positive sign. But RUT definitively broke through its 50 dma and didn't recover that level in today's trading.
Traders are still obsessed with the Fed announcement next week, although the consensus appears to be that they will start to raise interest rates at this meeting. Is this recent market weakness a result of that expectation?
In summary, the market is limping along weakly, but the bulls are still buying the dips. It seems unlikely that a strong trend in either direction will materialize until after the Fed announcement next week.
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Monday's market was flat; Tuesday's market rallied, and Wednesday's market gave back all of yesterday's gains. SPX lost $23 to close at $2080 and RUT lost $12 to close at $1192. Volatility contracted with the VIX closing at 15.9%, down 1.2 points.
ADP's private employment report came in at +217k for November. the FOMC's beige book, the minutes from the last meeting, were released this afternoon and seemed to be generally upbeat about the country's economic growth. Janet Yellen spoke today and reiterated that theme of modest, but positive progress and anticipated we would see inflation make its way closer to the Fed's target of 2% in coming months. Her comments about future inflation rates were curious since both the CPI and PPI have been steadily tracking near zero for a long time. In summary, the beige book and Yellen's remarks lead analysts to expect an interest rate hike to come out of the FOMC meeting December 15-16.
It seems as though the market contracts every time Yellen or other members of the FOMC say anything that could possibly be interpreted as leading to an interest rate hike. Would a quarter point change make any significant difference? I doubt it. And interest rate hikes in the past have generally been met with bullish markets, not bearish markets. But one could correctly argue that this low interest situation is unlike anything in this country's economic history. It will be interesting to see the eventual outcome of this drama.
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Let's recap: SPX drops $30 on Thursday; SPX gains $42 on Friday and then drops $15 today. If we were at the carnival, we might be feeling a bit nauseous. SPX closed at $2077, down $15 and RUT traded down even stronger, closing at $1164, down $19. As one would expect, volatility rose a bit with the VIX closing up a point at 15.8%. Trading volume in the S&P 500 companies was down at 2.5 billion shares, down from Friday, but still above the 50 dma. Trading declined 7% on the NYSE, but increased 2% on NASDAQ.
We didn't have any significant economic data released today.
RUT has been trading more bearishly than the SPX for the past several months. It corrected more strongly in August and broke that support level in late September, whereas SPX did not reach the support level created by the August flash crash. SPX bounced back strongly in October and appeared to threaten the previous all-time highs from the summer months, but RUT remained well off of the previous highs. That trend continued today with RUT dropping 1.6% while SPX only declined 0.6%. RUT found support at its 50 dma today but SPX remains more than $30 above its 50 dma. The small cap stocks, typical of the Russell 2000 Index, tend to lead the markets higher in bull markets and lower in bear markets. RUT's recent bearishness may be a warning sign.
The wrestling match with my December iron condor on RUT is nearing its end this week (assuming we close Friday in advance of expiration week). After four different adjustments, the position stands roughly at break-even today, and looks likely to be closed for a small gain on the order of 2-3% this week. The January position on SPX at 1850/1860 and 2210/2220 stands at a net gain of 9%. The Flying With The Condor™ service will end the year with a track record of something on the order of +43-45%.
Unfortunately, this price volatility is likely to continue until the FOMC meeting and announcement next week, and perhaps for some time after that announcement as the market sorts out the effects of an interest rate hike (assuming that is in the works). Analysts have been steadily downgrading earnings estimates for the S&P 500 companies for the fourth quarter, down 3.4% in the first two months of the quarter. This is one more headwind for the market as we move forward. A resumption of the strong bullishness of 2013-2014 appears less and less likely.
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The market has bounced back strongly today. I hedged my Dec position Friday "just in case", so this bounce causes me to look over my shoulder once again. Do you ever feel the market is just watching you trade and is determined to move the other way? Just because I am paranoid doesn't mean the market isn't really after me...
SPX closed at $2053, up $30. RUT closed up $10 at $1156. I am in Chicago for some meetings, so I don't yet have all of the trading volume data, but preliminary numbers look to be down about 10% from Friday. Volatility pulled back about two points with the VIX closing at 18%.
We are still well positioned with our December iron condor on SPX, but we have gobbled up a lot of our potential gains with multiple adjustments.
Some of you may have noticed my web site was down last night. The hackers found me once again. But we are back up and believe we have plugged the holes. This is just a cost of doing business on the internet. Tune in tomorrow to see if this market is really bouncing or just toying with us.
