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It appeared on Friday as though the bottom of this correction was in. SPX displayed a classic hammer candlestick on Thursday and then traded strongly higher on Friday. The S&P futures were positive this morning and the markets opened higher. Everything seemed to be lining up. But then those pesky bears came back, pulling SPX down to close at $1965 for a loss of three dollars. RUT traded even more weakly with a loss of $10 to close at $1095. SPX tried to break out above its 50 dma at $1975 and traded as high as $1978 before being pulled back down. Volatility popped back up about one point to 15.5% on the VIX. Trading volume fell off from last week with 1.8 billion shares of the S&P 500 stocks trading; this is below the 50 dma at 1.9 billion shares. Trading volume dropped 8% on the NYSE, but rose 5% on NASDAQ.
There was no significant economic news to drive the market one way or the other. Maybe the markets needed some additional positive news after the jobs report to continue the buying.
This sideways to slightly lower sideways churn is good for my iron condor trades. My October position only consists of the SPX 2080/2090 call spreads, which are essentially worthless now with less than two weeks to go. Assuming they expire worthless, the October position closes for a gain of 8.8%. The November SPX position was entered earlier than I do normally, and consists of the 1810/1820 put spreads and the 2090/2100 call spreads. Both spreads are far OTM and the position currently stands at a P/L of +$1,140 on 20 contracts or +7%. Position delta on 20 contracts is delta = +$5 and theta = +$57. The position is delta neutral and theta will continue to build.
We will see the minutes from the last FOMC meeting on Wednesday; that could move the market. Trading sideways into the earnings announcement cycle may be the best alternative for this overbought market. It allows the various indicators, such as the average P/E of the S&P 500, to move closer to long term averages without a dramatic market correction or crash. In any case, this market is dangerous; keep a close eye on it.
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SPX lost another $26 today, closing at $1946. SPX has now broken a couple of key support levels. Is the low of the August correction at $1910 the next support level? SPX set a closing high at $2011 on September 18th. Today's close is a correction of 3.2% from that high. That doesn't seem like much of a pull back, but consider RUT - a completely different story. RUT closed down $16 at $1085 today. RUT passed the low set back in August yesterday and matched the low set in May today. The closing low on May 15th was $1096 and the intraday low was $1083. RUT's intraday low today was $1083 - precisely the same as on May 15th. Is that just a weird coincidence or is $1083 a strong support level for some reason? RUT's recent high was $1179 on September 2nd. Today's close represents an 8% drop from that high and a 10.2% drop from RUT's July 3rd high at $1208. It is safe to say that we are in correction mode; the current question is how far will it pull back? Will SPX continue to hold up relatively well?
Volatility has risen the past couple of days with the VIX hitting an intraday high today at 17.6% and closing at 16.7%. For the record, the intraday highs on VIX in the April/May and August corrections were 17.9% and 17.6%, respectively. The February correction was more severe with VIX hitting 21.5%.
Trading volume picked up a little bit today, but today's increases are off relatively large numbers from yesterday. Traders may not be flooding through the exits just yet, but the selling pressure is significant. Trading in the S&P 500 stocks came in at 2.5 billion shares (the 50 dma = 1.9B); trading on the NYSE was up 2% and trading volume rose 14% on NASDAQ.
ADP's private employment report came out with an increase of 213 thousand jobs. The ISM manufacturing survey reported 56.6 for September, down from last month, but still a good number. Construction spending dropped off by 0.8% in August, down from July's +1.2% increase.
How low can it go?
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Once again, we are treated to extreme price volatility in this market. I have often pointed out the large numbers of reversals over the past couple of years in my newsletter - down $50 over a few trading sessions and then right back up $50 within a few days. SPX lost $46 on Monday and Tuesday, and then regained $15 of those losses yesterday. But today SPX gave up $32 to close at $1966 - what a wild ride. Are we having fun yet?
RUT lost $18 to close at $1110. Interestingly, both RUT and SPX were down 1.6% today. That's unusual; RUT has been trading much weaker than SPX all year. SPX sliced through support at $1980 and also its 50 dma at $1976. On a strong sell-off like we had today, one would expect increased trading volume as everyone rushed for the exits, but that didn't happen. Trading in the S&P 500 stocks has been consistent at two billion shares every trading day this week, whether up or down. Trading on the NYSE was up today, but only a half of a percent. Trading volume increased 10% on NASDAQ.
Volatility rose over two points today to 15.6% on the VIX. RUT is now down over 4% year to date and is now below the August 1st low of the last correction.
Initial unemployment claims were reported this morning at 293k, up from last week's 281k. Continuing unemployment claims rose seven thousand to 2.44 million. But neither of these numbers looked likely to have started a sell-off in the markets. However, the durable goods orders report was a surprise, dropping 18% in August. This was in contrast to September's strong +22% growth. Perhaps that sparked the profit taking. Tomorrow brings another estimate of second quarter GDP (why can't we just get it right and report it once?). Will a good GDP number start another "buy the dip" run higher? We'll see.
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Are the markets at a tipping point and about to go over the edge? That seems to be the question on traders' minds. I haven't updated the calculations, but several weeks ago, I noted in one of my newsletters that the P/E ratio of the S&P 500 would be roughly back to the median of the historical range by simply trading sideways into October. So which is it to be? Will we correct and bring the market back in line painfully or simply wander sideways for a few weeks and blow off some steam in a more innocuous manner? If we look at the small caps, the answer appears to be that we are going over the cliff. Today RUT lost $16 to close at $1102 whereas SPX lost $6, closing at $1972. For the past few trading sessions, SPX appears to be setting up the area around 1965 to 1970 as a solid support level. But that could just be a temporary stop on the way lower. If we continue sideways for another week or so, we will be into the next earnings cycle, and then we could see the markets tip one way or the other, depending on the market's reaction to various earnings announcements - always hard to predict.
Today's market action occurred on huge volume, as the big funds made last minute changes to portfolios to "look their best" for the third quarter statements. Over 2.3 billion shares of the S&P 500 stocks traded today; volume was up 26% on the NYSE and was up 21% on NASDAQ.
Volatility rose less than a half of a point with the VIX closing at 16.3%.
The Case Schiller home price survey posted a 6.7% gain for July, down form June's +8.1%. The Chicago PMI dropped a bit in September with a 60.5 reading, down from 64.3 in August. The consumer sentiment survey from the Conference Board was up huge in August at 93.4, but came back to earth in September with a reading of 86.0. The consumer sentiment surveys from the University of Michigan appear to have less scatter in their data.
So the broad blue chip market is holding up well, but small caps continue to fall off. That is a concern. I don't regret my decision to close the put spreads in my October condors. RUT is now trading lower than it did at the bottom of the early August correction, and is over $50 below its 50 and 200 dma. But SPX is now solidly below its 50 dma, so RUT's weakness may finally be contagious. I think it pays to be conservative at this point. If in doubt, close or hedge.
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The markets opened this morning and decided to test us with SPX breaking support at $1980 in the first hour of trading. But then the "buy the dip" crowd took over and away it went. SPX closed up $16 at $1998 and even RUT was up with a close at $1129, gaining $10. Volatility dropped off by more than it spiked up yesterday with VIX closing at 13.5%, down 1.4 points today. Trading volume was pretty flat with two billion shares of the S&P 500 trading today. Trading rose 6% on the NYSE and dropped 4% on NASDAQ.
So what are we to think about this market? Is the bull still alive or not? There are certainly many signs of slowing; many measures of value and sentiment seem to be nearing extremes. The percentage of NYSE stocks that are above their 200 dma dropped to 53% today. This is a lower percentage than either the August or the February corrections. SPX is being carried higher by a decreasing number of stocks - this is what analysts are talking about who mutter about weak market internals.
New home sales reported at an annualized rate of 504k for August, up from 427k in July. Tomorrow brings the weekly unemployment claims.
Be careful out there.
