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It appears that the markets have simply replaced a higher sideways trading range with a lower sideways trading range. For several months, SPX wandered between $2040 and $2130, and now it appears that the new trading range is $1900 to $2000. Before the correction, one could argue that the S&P 500 was becoming overpriced with price to earnings and price to dividends ratios near historical highs. Those ratios remain slightly above historical averages, but maybe this correction was a healthy adjustment. And the longer we tread water, the more in-line those ratios will become. The markets opened higher this morning, but then declined to lows around noon. But then the bulls revived themselves and recovered most of the early losses. SPX closed at $1939, down $4, while RUT lost $3 to close at $1140. Trading volume declined across the board with 1.9 billion shares of the S&P 500 trading. Trading volume declined 17% on the NYSE and declined 21% on NASDAQ.
There weren't any significant economic data reported today, and that may have contributed to the lackluster trading day.
On the Friday before the flash crash on Monday, 8/24, I closed the October position we had on RUT for an 11% loss. That took the year to date gains on the Flying With The Condor™ service to +34%. I recently opened a new October iron condor on RUT positioned at 950/960, 1040/1050 and 1240/1250 (the put spreads are split over the 950/960 and 1040/1050 strikes). This position now stands at a net gain of $76 per contract or +9%. Our November iron condor on RUT at 960/970 and 1280/1290 stands at a net gain of $63 per contract or +7%. If we were to close both positions today, we would stand at a net gain of 40% for the year; maybe we should just go lie on the beach for the rest of the year. No, that sounds like retirement in the rocking chair - too boring.
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My conclusion drawn from all of the traders and finance professionals I have dealt with over the past couple of weeks was that the Fed wasn't going to raise interest rates and that was good. They feared a rate hike would tank the market. The Fed didn't raise interest rates and now it is stating to look like the market will trade lower on that news - but it is early to draw that conclusion. The market will have to continue to digest the FOMC announcement and other economic data. But today's market didn't look good. SPX lost $32 to close at $1958 while RUT closed down $17 at $1163. Volatility rose almost two points, with the VIX closing at 22.8%. Trading volume on this expiration Friday was high as usual, so that wasn't the reinforcing sign to the bearish day as it might normally have been. Trading in the S&P 500 companies rose to 3.8 billion shares, well above the 50 dma at 2.4B. Trading volume popped up 56% on the NYSE and increased 60% on NASDAQ.
There wasn't any significant economic date released today, so today's market action may be primarily attributed to the market trying to decide what the FOMC announcement means for the future of the U. S. markets.
I just came back from the All Stars Options Conference held in the NYSE. This is a first class conference - highly recommended. While waiting to get in the building one morning, I noticed a statue and plaque across the street. I stood on the steps of Federal Hall where George Washington took the oath of office for the presidency in 1789. Federal Hall was built as a city hall by the British in 1703 and it was the home of the first U.S. Congress and Supreme Court. The NYSE also has a rich history. They have the letter on display written by Thomas Edison to the exchange offering his ticker tape quotation machine, one of the first treasury bonds issued after the revolutionary war and many other interesting displays - cool place to visit.
Have a great weekend.
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Waiting on the Fed. I don't recall any time in my long history of trading that I have heard that phrase more often. On the other hand, I can't think of another time in history when the Fed was so intertwined in our markets. But that is the reality; we are anxiously awaiting the FOMC announcement to see if the Fed has decided to start the slow tick higher of interest rates. Then the question will be the market's reaction. Everyone has an opinion, but those pronouncements are really just guesses. Higher interest rates normally slow down the economy since it effectively increases the cost of capital. But a quarter or half point increase from here doesn't seem like it would hinder much in the economy. One could argue that an interest rate hike has been priced into this market for some time, so it shouldn't have a devastating effect. One could even reason that a rate hike would be taken as an endorsement of the state of the economy and the market would trade higher. Who knows? So we wait on the Fed.
SPX closed down $8 at $1953 today and RUT lost $4 to close at $1153. Volatility increased a bit with the VIX closing one point higher at 24.2%.
Trading volume fell way off with only 1.8 billion shares of the S&P 500 stocks trading; the 50 dma is 2.4B. Trading volume on the NYSE dropped 5% and volume fell 13% on NASDAQ.
Today's low volume, sideways to lower trading will probably be typical until Thursday afternoon. Even then it will be at least 24 hours before we see the full effect on the stock market. Sometimes traders have to read the announcement and sleep on it before they are convicted of a course of action. If you are on the sidelines, don't jump too quickly on Thursday. In fact, I don't plan to make a move until Friday or possibly even Monday.
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The FOMC met yesterday and today and issued their announcement this afternoon. They opted to leave interest rates "as is" and cited concerns about a global economic slowdown as well as continuing low inflation. Four committee members predicted that there will be no interest rate hike this year. The sentence in the announcement on "global slowdown" surprised analysts, who felt the FOMC should only be looking at the U.S. economy. However, our economy is clearly much more intertwined with other economies in the world than it used to be; in that sense, I found the squabble on CNBC on this point a little silly. It was also one more example of the decline in common respect and manners. Is it no longer considered polite to allow someone to express their idea without another person interrupting and speaking over them? The greater human intellect cannot grow when the loudest and rudest person is allowed to dominate the discussion.
Markets have been trading higher this week leading up to the announcement, but declined immediately after the announcement this afternoon. Then the markets spurted higher, only to trade off in the last hour to close at losses on the day. SPX closed down $5 at $1990. But RUT gained $5 to close at $1181. RUT had traded higher than SPX earlier in the day, so the pullback going into the close left RUT with a net gain on the day. Volatility chopped around quite a bit today, but closed about two tenths of a point lower at 21.1%.
Initial unemployment claims came in 11k lower at 264k and continuing claims declined 26k to 2.24 million. Housing starts for August dropped to an annualized rate of 1126k from July's 1161k. However, building permits rose 40k in August to 1170k. The Philadelphia Fed survey declined markedly for September, down to -6.0 from August's +8.3.
The lingering question that seems to be on everyone's mind is whether the low we hit August 25th is the end of the correction or whether it will turn and fall further yet. The price chart pattern on the indexes has been trending pretty steadily higher. The close today on SPX is right at the high hit a few days after the crash. If SPX closes above that $1990 mark a couple of times, I would feel more confident that the storm was behind us. I think the markets are bit confused about the Fed message today. It may take a few days to see a resulting trend establish itself.
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The markets opened positively this morning, but started weakening in the early afternoon and ended the day in negative territory. SPX lost $27 to close at $1942 and RUT closed down $14 at $1148. The VIX rose over one point to 26.3%. Trading volume was flat to slightly higher with 2.3 billion shares of the S&P 500 stocks trading (down a bit from yesterday), but the NYSE trading volume rose 5% and trading on NASDAQ rose 4%.
The JOLTS job openings for July increased from 5.323 million to 5.753 million. There wasn't any other significant economic news. Apple's announcement of new iPhone and iPad models didn't seem to excite investors as Apple traded lower. Maybe it was just following the overall market. Oil prices pulled back and that may have contributed to market weakness. It is hard to say. This is a nervous market; it doesn't take much to move it.
