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Yesterday, I titled my blog, "Is It Safe To Come Out Now?", and today I answer myself (I talk to myself all the time). One could blame today's weakness on the terrorist attacks in Canada. But some analysts were expecting a continuation of the bearish down trend or were at least expecting a test of the support levels before heading higher. Today's drop satisfies both groups. SPX opened and traded higher this morning until the terrorist news hit the wires. SPX closed the day down $14 at $1927. RUT traded down $16 to $1097. The VIX lost about two and a half points yesterday, but gained almost two points back today. It remains a nervous market. Trading volume was flat to slightly down with 2.4 billion shares of the S&P 500 stocks trading. Trading on the NYSE dropped 1% and trading volume on NASDAQ was unchanged.
The Consumer Price Index (CPI) reported a slight increase of 0.1% for September, up from the 0.2% decline in August.
Both the SPX and RUT traded higher this morning before the terrorist attack news hit, so I am less concerned about this pull back. RUT's price action formed a bearish engulfing candlestick, known as an outside day in bar charts. By itself, that is a bearish reversal signal, but requires confirmation.
The bottom line is this: this recent market weakness is purely technical in nature. The markets became a bit frothy and now that is being corrected. The economic data and the earnings announcements thus far are not painting a bearish picture. I continue to think that traders are very nervous because of the Fed involvement in the markets; it is unprecedented and therefore makes traders nervous. It is hard to predict the future when you have no history with which to judge the present situation. That Fed presence and its unwinding, coupled with institutions sitting on gains from the last two years, make for an itchy trigger finger.
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The bulls were clearly in charge today, with the S&P 500 Index gaining $37 to close at $1941.28. To make it even more positive, SPX opened $5 higher this morning at $1909 from yesterday's close at $1904. We call this a gap up, and it is generally regarded as very bullish. Trading volume was also higher today with 2.5 billion shares of the S&P 500 stocks trading. Trading volume rose 14% on the NYSE, but was only up a modest 2% on NASDAQ. Unlike recent months, RUT has also jumped on this bull's bandwagon, gaining $18 to close at $1113. Volatility contracted again today with the VIX losing two and a half points to close at 16.1%. So all signs are indicating a return to the bull market trend. What a turnaround from last Wednesday!
Today was another light day for economic data. Existing home sales came in at an annualized rate of 5.17 million for September, up from last month's 5.05M. The Consumer Price Index (CPI) reports tomorrow, but that normally isn't a market moving event.
As I wrote yesterday, traders expect prices to retest a support level after bouncing, so I have been concerned that the markets might take another plunge before resuming the bullish trend. The markets have simply headed straight up since last Wednesday - a remarkable run. Maybe we have seen the end of this correction. However, I remain on alert. I still smell the singed hair from last week. My hedges worked, but that was still scary.
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The S&P futures were up double digits in positive territory as I checked them first thing this morning - almost the opposite of Wednesday morning. SPX tacked on $24 to close at $1887, but RUT lost $4 to close at $1082. Hmmm... That worries me a bit. RUT started this bounce back earlier this week. Maybe we aren't out of the woods just yet. Take a look back at the fall of 2011 on your favorite charting service (I like StockCharts.com). SPX hit bottom on August 8th with a close of $1119; for the next 3 days, SPX traded up and down, repeatedly testing that support level. Then it rose and one might have concluded all was well. But it retested support with a close at $1124 on August 19th. And, then a month later on September 22nd, it closed at $1130. On October 3rd, SPX dipped down and closed at $1099 before it finally began its climb higher. Wednesday's plunge was scary, and we are all anxious to say the boogyman is gone, but he may be awaiting a sequel - remember Michael in Halloween? My point is simply this; don't let your guard down.
Volatility backed off by over three points with the VIX closing at 22%, but that is still a relatively high number. Trading volume also fell off a bit with 2.9 billion shares of the S&P 500 stocks trading today - again, volume pulled back, but it is still well above average. Trading volume dropped 12% on the NYSE and decreased 14% on NASDAQ.
Housing starts came in at annualized rates of 1017k for September and building permits matched that with 1018k. The University of Michigan consumer sentiment survey reported at 86.4 for October, up a bit from last month's 84.6.
I am glad to see this week end, and I doubt that I am alone. Enjoy your weekend and rejuvenate. This correction may have some life left in it. But there is no need worrying about that until Monday.
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SPX has now traded higher for three consecutive days following the severe downdraft last Wednesday. SPX closed today at $1904, up $17. RUT also traded higher, gaining $13 to close at $1095. VIX is now back down to 18.6%, losing over three points today. But I remain nervous. This market has been trading nervously for the past two years. Look back at the number of sudden drops over a week of trading sessions, only to be followed by a recovery straight up over just a few days. At least we had the fiscal cliff concerns in January of last year. I'm not sure what is causing this market to be so nervous. But the fact of the matter is that it doesn't take much to start a selling spree. So I am cautious.
Trading volume fell off from expiration Friday, but that decline is also evidence of some calming after last week's panic. Trading in the S&P 500 stocks dropped to 2.1 billion shares. Trading declined 26% on the NYSE and dropped 24% on NASDAQ.
My November iron condor on SPX is back to break-even and will continue to move into the black as volatility contracts. Those puts are now $80 OTM, but I still worry. One of the things that concerns me is a retest of support. Normally, when a stock or index declines and then appears to bounce back higher, it trades back down and tests that support level before trading higher. But it is true that the SPX hasn't displayed that behavior with the rapid pull backs of the past couple of years. So maybe it will just trade higher and not look back. One thing's for sure - this isn't a time to take my eye off the ball.
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The S&P futures were down about $30 when I first looked at them this morning. SPX opened at $1874, which was surprisingly only a couple of dollars lower than yesterday's close, but then the wild ride began. SPX dropped about $36 in the next few minutes, appeared to recover but then began a slow decline to its low for the day at $1821 around 1:30 pm ET. The buying dominated the rest of the day's trading with SPX closing at $1862, down $15. It is surprising to see that SPX only lost $15 when all of the dust settled. RUT actually closed with a gain of $11 at $1072. RUT's chart seems to suggest it is forming a bottom around $1050; you have to go back to the pull back in October of 2013 to match that price. RUT's weakness led this market down. Is RUT leading the bounce?
As expected in a market like we had today, VIX spiked up over 31%, but settled down to close at 26.2%. Trading volume shot through the roof with over four billion shares of the S&P 500 trading today. Trading volume rose 25% on the NYSE and rose 24% on NASDAQ. Is this a sign of the classic "capitulation"?
The minutes from the last FOMC meeting were released this afternoon. Maybe that led to the buying we saw after 2 pm ET. Retail sales declined 0.3% in September , a big change from the 0.6% increase in August. PPI was flat last month and reported a decline of 0.1% for September. The Empire manufacturing survey came in at 6.2 for October, a dramatic shift downward from last month's 27.5 - this almost looks like a data error.
At the bottom of the market this afternoon, my put hedges were doing their job and my SPX Nov condor position was at break-even. But we have some spurious prices posted at the close for SPX, so don't be surprised if your broker statement looks a bit weird. My Nov SPX condor is positioned at 1810/1820 and 2090/2100. The SPX Nov 2090 calls were posted with a closing ask price of $9.60. So my call spread is being shown as losing $370 per contract! That short call is $228 OTM!!
What a day!
