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This market has been seeking direction for several weeks, but today it appeared the bulls were firmly in charge. But time will tell. SPX tacked on $18 to close at $1897, a new all-time closing high. RUT also traded strongly, up $26 to close at $1134. Both indexes gapped open this morning, a very bullish sign. But trading volume was down today with 1.8 billion shares of the S&P 500 stocks trading (the 50 dma is 2.2B). Trading declined 5% on the NYSE and decreased 6% on NASDAQ. Volatility continued its slow decline, with the VIX closing at 12.2%, down seven tenths of a point.
The price action on all of the major indexes was very bullish, but the lack of confirming volume is a concern. On the other hand, the declining VIX tells us that traders are not concerned about an imminent correction.
These levels of the VIX are back to where we were in late December and early January.
We have watched the RUT and NASDAQ composite trade much weaker than SPX for several weeks, but that trend shifted today. RUT gained 2.3% today from Friday's close; NASDAQ gapped open this morning and gained 1.8% from Friday's close, but SPX only gained 1.0%. This is at least one data point suggesting the rotation from small caps and high tech to the blue chips may be nearing its end. The alternative explanation for recent market behavior was to suggest the small caps were leading the market into a severe correction. One data point doesn't make a trend, but today's market action is at least hopeful.
My iron condor positions are faring well. The May position on RUT stands at a net gain of 12% with delta = +$6 and theta = +$256 on 20 contracts. With just a few days to go, this position is delta neutral with both spreads over two standard deviations OTM. The RUT Jun iron condor stands at a net gain of 14% with delta = +$10 and theta = +$87 on 20 contracts. The position theta is much smaller because we still have 38 days to go until expiration. Time decay isn't ramping up too much as yet.
Watch for the bears to try to regain control in the morning.
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This week's market reminded me of a drunk walking down the sidewalk,
lurching back and forth, but managing to stay on the sidewalk. The bulls
and bears each thought they had control at one point this week, but neither camp could manage to hold onto it.
Today SPX closed up $3 at $1878 and RUT gained $10 to close at $1107.
Volatility contracted a bit with the VIX losing a half point to close at
12.9%. Trading volume declined with 1.9 billion shares of the S&P
500 trading. Trading declined 11% on the NYSE and dropped 18% on NASDAQ.
The
50 dma continues to serve as support for SPX; it bounced off the 50 dma
again today. But RUT is trading much weaker; it broke the 200 dma
decisively on Tuesday and appears to be using the low from early
February as its support level. RUT bounced off $1092 to begin its upward climb this afternoon, closing at its highs for the day. SPX has now spent three weeks trading in the narrow range of $1865 to $1885, while RUT has trended lower. Comparing the recent behavior of these indexes shows us how traders have been rotating out of the riskier small cap stocks into the blue chips. Some analysts interpret this as the leading edge of a major correction, but so far that has failed to materialize. SPX has held very steady while the NASDAQ composite and RUT have trended downward.
My
May iron condor on RUT is in pretty good shape with a net gain of 5%;
theta for this position is now up to $274 per day, so it will rapidly
appreciate, assuming the big crash doesn't make a showing. My Jun
position is in even better shape at +8%; we were able to position our
June put spreads down at 1040/1050 and that has relieved much of the
pressure this week as RUT broke its 200 dma.
Enjoy your weekend.
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Wow! I keep thinking I will become accustomed to this new level of price volatility we have now been seeing in the markets for many months. Once again today, I was on the verge of major surgery on several positions and then the market does an about face. SPX traded as low as $1860 before turning higher to close for a ten point gain at $1878. RUT behaved similarly, but traded down even more strongly to $1093 before recovering to close a dollar higher at $1109. The VIX rose a bit, but ended the day about a half point lower at 13.4%.
Trading volume spurted higher today with 2.4 billion shares of the S&P 500 trading. Volume rose 12% on the NYSE and increased 33% on NASDAQ. So we had a strong bounce back from the intraday lows on higher volume - a good bullish sign.
The charts are interesting. RUT continues to trade much weaker than SPX. RUT had been treating the 200 dma as support until yesterday when it decisively broke that support level, closing at its low for the day - a very bearish chart. Today's price action was interesting on two fronts: 1) the intraday low was right at the low of the February correction, and 2) today's candlestick is the classic hammer, suggesting a strong support level defined by the end of the lower shadow. This candlestick suggests that the bottom has been found to this latest pull back. The NASDAQ composite was trading similarly, hitting an intraday low about $20 above the long term support level around $4000, but bouncing higher to close at $4068. This recent weakness was almost exclusively driven by RUT and NASDAQ; SPX has held up relatively well. Today, SPX broke the 50 dma at $1865 before bouncing back higher to close at $1878, whereas RUT broke its 200 dma yesterday and remains below that level today even after a strong bounce back higher.
Fortunately, both of my iron condor positions remain profitable after all of these market gyrations.
Sorry I missed my blogs for the past two days. My schedule has been exceptionally busy. My wife is recovering from retinal surgery and that has added a few responsibilities to my list. But the worst of that is behind us. She received an excellent check up today.
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I was leading a private coaching session this morning and missed the first couple of hours of market activity. Then I checked the indexes on my phone and saw nothing but green. Cool. That hammer candlestick on RUT yesterday was prophetic. But all of that changed over the course of the afternoon. SPX traded as high as $1889 but then declined to $1870 before recovering somewhat to close down $3 at $1876. RUT traded in a similar pattern, but weaker than SPX, to close at $1097, down $11. Volatility remained flat with the VIX unchanged at 13.4%. Trading volume fell off from yesterday with 2.1 billion shares of the S&P 500 trading; volume declined 8% on the NYSE and dropped off only 1% on NASDAQ.
So the same story we have been watching for several weeks continued today: SPX is trading sideways in a tight range just above the 50 dma, while RUT flirts with its 200 dma. It appears the rotation out of high tech and small caps into safer blue chips is continuing. The fact that SPX has held up so well seems to counter any predictions of a market crash scenario. The low levels of VIX reinforce SPX's relative stability. But RUT and the NASDAQ composite remain weak.
Is this the sideways to weak trend we will have to live with this summer? Is this the "Sell in May" trend?
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The jobs report came in with 288 thousand jobs and the unemployment rate dropped to 6.3%. The market popped on the news; SPX jumped very close to all-time highs at $1891 within the first 45 minutes of trading. But then we looked closer at the numbers, and the market pulled back.
SPX closed down $3 at $1881, but RUT gained $3 to close at $1129 (RUT is still trying to dig out of its hole). The VIX contracted a bit more to 12.9%. Trading volume also dropped with 1.9 billion shares of the S&P 500 stocks trading. Trading volume fell 6% on the NYSE and dropped 10% on NASDAQ. The underlying reason for the declining unemployment rate is what has driven it lower for the past several years - the Labor Force Participation Rate continues to fall. With this report, it hit a 36 year low at 62.8%. The true unemployment rate continues steady at about 11%.
So why didn't the markets collapse as so many have been predicting for so long? First of all, corporate America has figured out how to cut people and other costs and continue to make money in the midst of this recession. And let's stop kidding ourselves; this is a recession. Millions of people are not only out of work, they have given up looking for work. Food stamps recipients are at all time highs. Secondly, the Fed is still supporting this market through quantitative easing and extremely low interest rates. This provides a floor for the market, but it doesn't give traders much reason to be very bullish.
My May iron condor on RUT at 1060/1070 and 1210/1220 stands at +3% with delta = +$49 and theta = +$149 on 20 contracts. Now that we are down to the last two weeks, theta will start to really kick in for this position. We would be even more profitable if not for repeatedly hedging our put spreads. My June iron condor on RUT at 1040/1050 and 1220/1230 is already at +5% with delta = +$9 and theta = +$75 on 20 contracts. This position is nearly perfectly delta neutral.
Enjoy your weekend. Unfortunately, we are still dealing with 40 and 50 degree weather here in Chicago. And I received my property tax bill today; remind me. Why do I live here? Inertia?
