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Markets traded down from the open today; it was almost as though everyone was betting on a negative reaction to the FOMC announcement. SPX traded as low as $1775 within a few minutes of the open this morning; it traded down to $1770 right after the Fed announcement, danced around a bit for the next two hours and closed at $1774, down $19 on the day. RUT followed a similar pattern, losing $16 to close at $1122. One bearish thought: SPX lost 1% on the day, whereas RUT lost 1.4%. RUT normally leads the market higher in bull markets and lower in bearish markets. On the other hand, VIX popped up 1.6 points to 17.4%, well below the high of 18.1% on Friday's strong sell-off. But that could change quickly tomorrow.
Trading volume increased today with 2.9 billion shares of the S&P 500 stocks. Trading on the NYSE increased 24% and increased 11% on NASDAQ.
The FOMC announced that they intend to continue the reduction of quantitative easing by another ten billion dollars per month in February. I was surprised that the market didn't sell off more than it did on that announcement, but perhaps that is a positive signal. Is the market consensus that it can survive just fine without the Fed's support?
SPX is now down 4.1% from its recent highs. While that is in line with the corrections we saw in 2013, many analysts are predicting a much more severe correction, e.g., down 8% to the 200 dma at $1704. A corresponding drop to the 200 dma on RUT at $1055 would represent an 11% correction. An 8% correction on RUT leads to $1087.
The RUT Feb 1210/1220 call spreads are all that is left of my Feb iron condor at this point. That position stands at a net gain of $860 on 20 contracts or +6% (on the original capital at risk) with a maximum potential gain of $1,160 or +8%. If I have the opportunity, I will re-establish put spreads to boost the returns.
My own take is that this market is very nervous and therefore dangerous. Be very cautious, especially about any bullish trades. I am tempted to play GOOG's earnings announcement tomorrow, but that will be a very speculative trade. It may be best to sit on the sidelines for a few days.
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The markets appeared to stabilize today, but I am not coming out of the bomb shelter just yet. Tomorrow's FOMC announcement may cause some fireworks or it could be a dud. It is impossible to predict the Fed, much less the market's reaction. SPX gained $11 to close at $1793 and RUT also gained $11 to close at $1138. Volatility continued its decline with the VIX decreasing by 1.6 points to 15.8%. The VIX decline is significant because it suggests that the big institutional traders are not too concerned about tomorrow's announcement tipping us over the cliff. SPX and RUT are in parallel positions, both trading between the November highs as support and the December highs as resistance. It would seem surprising if this is all of the correction, but I don't think we can be too confident until after the Fed announcement.
Trading volume dropped off today with 2.4 billion shares of the S&P 500 trading. Trading on the NYSE dropped 22% and trading volume on NASDAQ declined 15%.
Durable goods orders declined 4.3% in December, down from November's positive 2.6% gain. The Case Schiller Housing Price Index for November was about flat with the previous month at 13.7% for November. The consumer confidence report from the Conference Board came in at 80.7 for January, up from 77.5 in December.
Grab your popcorn and wait for the FOMC announcement tomorrow at 2 pm ET.
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Pundits of every stripe have been predicting correction for several weeks, if not months. So the market action yesterday and today shouldn't have been too surprising. The S&P 500 Index (SPX) has now lost 61 points since January 15th, constituting a pullback of 3.3%. And most of that was accomplished over just two days! Technical analysts will tell us that a market correction can't really be called a correction unless it exceeds 7%, so we aren't there yet, but we are nearly half way. In 2013, we had several pull backs of the 4-5% variety, and the brave souls who bought the dips were well rewarded. I have already drawn the 4% and 5% lines on my SPX chart at $1776 and $1758, respectively. Maybe I should add $1721 (7%). My analysis of this market boils down to three principal alternatives:
1) Just another 4-5% pull back, or
2) An authentic correction of 7-10%, or
3) The beginning of a full fledged bear market.
I haven't been shy about my conservative outlook. Government ineptitude and antagonism toward business are strangling private enterprise, so it isn't surprising that this is the slowest economic recovery in history. But the economy is muddling along in spite of all of the road blocks and hindrances. So the third alternative seems unlikely to me, especially with a Federal Reserve that is willing to do anything to prop up the markets. That leaves me expecting a pull back of some kind, but unsure of the magnitude. I think the current pull back could get uglier and move into the full correction mode, given some significant stimulus - something like the downgrade of our treasury debt that occurred in 2011. If we just continue to receive mediocre economic data, I am inclined toward the 4-5% pull back scenario. But that doesn't mean I am loading up on SPX calls. I remain cautious.
SPX closed at $1790, down $38. RUT closed at $1144 for a loss of $28. VIX spiked up to 18.4% - and didn't pull back toward the end of trading. Hmmm. As you might expect, trading volume spiked upward with 3.1 billion shares of the S&P 500 stocks exchanging hands. Trading jumped 15% on the NYSE and was up 16% on NASDAQ.
This week was almost devoid of economic data. But next week will offer many possible market moving events:
Monday: New Home Sales and AAPL earnings
Thursday: 4th Qtr GDP and GOOG earnings
Friday: Chicago PMI and University of Michigan Consumer Sentiment
I closed the 1110/1120 put spreads in my RUT Feb iron condor today. That leaves me with a current P/L of +3% and a maximum potential gain of +8%, assuming scenario three plays out and the call spreads expire worthless. That adjustment will allow me to enjoy my weekend. I hope you can as well.
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The markets opened slightly up this morning and everyone breathed a sign of relief. Then the bottom fell out. SPX fell from the high of $1796, achieved in the first hour of trading, to a low of $1773 a little after 12:30 ET. Then it recovered to an afternoon high of $1794 before selling off into the close at $1782, down $9 on the day. RUT lost $16, closing at $1128 after trading as low as $1121. The difference on the RUT chart is that it never bounced back up into positive territory. The sell-off into the close on both SPX and RUT is not a good sign. I would have thought today and tomorrow would have given us relatively flat days of trading in advance of the FOMC policy announcement on Wednesday. But a serious bout of selling dominated today's markets. Last week's declines are trickling through the markets and traders are taking their profits. The intraday highs this afternoon were taken as opportunities to take profits go to the sidelines. It remains to be seen whether the Fed's statements will calm the market or send it plunging further downward.
SPX bounced today almost precisely at the support level set by market highs in late October and early November ($1772). Today's close is just above the 4% correction level at $1776. The highs from late October on the RUT chart ($1123) just happen to coincide with a 5% correction. RUT's low today was $1121. So both SPX and RUT caught themselves in the downward slide this afternoon at the highs from October. This represents a larger pull back for RUT because it continued to set new all-time highs after SPX had stalled. That brings us to the key question: will a 5% correction be enough? I don't think we will receive an answer to that question anytime soon.
The only economic data reported today were new home sales for December, coming in at an annualized rate of 414k, down from November's 445k. The next significant economic news for this week comes Wednesday afternoon from the FOMC.
My Feb RUT iron condor only consists of the 1210/1220 call spreads for now (I will likely re-establish the put spreads when the smoke clears). So that position stands at a net gain of $760 on 20 contracts or +4%. If I do nothing and the call spreads expire worthless, the Feb position will close at a 6% gain - not bad for a month like this.
We return to the market correction watch tomorrow. $1772 is a key support level on SPX. If that fails to hold, the next obvious support on the chart is at $1729, near the 7% correction level.
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SPX challenged its resistance level at $1850, but pulled back to close at $1844, up $5 on the day. But RUT broke out to a new all-time high at $1176, up $7. Trading volume is down a bit from Friday, but remains above the 50 dma with 2.5 billion shares of the S&P 500 trading today. Trading volume dropped 12% on the NYSE and decreased 8% on NASDAQ. Volatility remains low with the VIX at 12.9%, although the VIX spiked up to 13.4% this morning and then pulled back.
OTM index put volume is increasing, suggesting some institutional hedging of their portfolios just in case the often predicted correction actually occurs. If the markets continue to trade sideways, we may successfully blow off some of the excess without a lot of damage. RUT's strong push higher today was certainly a sign of bullish strength.
Today was a light day for economic data, and the balance of the week doesn't have any significant reports scheduled, unless you count the weekly unemployment claims. But those weekly reports don't often move the market.
