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The major market averages all traded up substantially again today. With all of the talk about tapering and Bernanke's replacement, who would have guessed two strong trading days in succession before the FOMC announcement? It is just one more example of how difficult it is to predict market direction. The cynic in me thinks all of those guests on CNBC take a strong, confident position with the idea that if they are correct, they can use that for marketing material for the next several months. If they're wrong, they just need to come out with a new prediction. But I digress...
SPX gained $7 to close at $1705, roughly $5 off its high for the year. RUT continued to outperform SPX, hitting a new all-time high at $1066, up $10. The VIX increased about two tenths of a point to 14.5%, probably the result of institutions hedging their portfolios in front of the FOMC announcement tomorrow. Trading volume fell off a bit from yesterday with 1.8 billion shares of the S&P 500 stocks changing hands. Trading volume on the NYSE dropped 11% and decreased 2% on NASDAQ.
The principal economic data reported today was the CPI, which came in basically flat at +0.1% for August. The NAHB Housing Market Index came in flat for September.
So now we turn to the FOMC announcement tomorrow afternoon. Who knows how the traders will react tomorrow afternoon? From all of the commentary on CNBC, it appears that the most common expectation is for the Fed to announce the beginning of tapering tomorrow. I find the bullishness of the past few days to be surprising in that light. It wasn't long ago that the market dropped 6% on just the possibility of tapering sometime later this year. Have we now talked ourselves into thinking everything is OK? One possibility for tomorrow is the classic, "sell the news". Or will the markets sell off if Bernanke says the economy still needs Fed stimulus? We'll see. Watch your exposure; it could be very volatile.
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The markets rallied today, on a day that should have been a bit subdued as we look forward to the FOMC meeting Tuesday and Wednesday. The general consensus was that it was a relief rally due to Larry Summers withdrawing his name for nomination as the next FOMC chairman. That seems like an over-reaction to me, but I suppose the street prefers the more predictable Fed under the leadership of Yellin, since she would be expected to smoothly transition from Bernanke's policies. In the meantime, Obama emphasized his intransigence in negotiating over the debt ceiling and spending, so the FOMC chair is the least of our problems in Washington.
SPX gained $10 to close at $1698 and RUT gained $2 to close at $1056. On a percentage basis, RUT's gain was much less than that of its big brother, SPX. Does that signal a slowing of the markets, or is it just noise? The candlestick on RUT today appears to be a shooting star, as RUT traded as high as $1065 before pulling back to close at $1056. The shooting star may signal the top of a bullish trend, but it requires confirmation; it is often a false signal.
Trading volume increased today with 1.98 billion shares of the S&P 500 trading. Trading on the NYSE increased 15% and trading on NASDAQ increased 5%.
The Empire Manufacturing Survey decreased to 6.3 for September, down from the previous 8.2. Industrial production increased slightly to +0.4% from flat last month. Capacity utilization also bumped up slightly to 77.8% from 77.6%.
My September iron condor on RUT continues to cruise along toward its maximum gain with a current P/L of +$2,557 with delta = -$1 and theta = +$6. I would expect tomorrow to be a slow day in the markets as we anticipate the Fed announcement Wednesday - but that is what I expected for today...
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The major market indexes traded higher today, but on lower volume. SPX gained $5 to close at $1689 but RUT closed unchanged at $1055. RUT's price behavior together with decreased trading volume suggests a slowing of this rally as traders look forward to the FOMC meeting next week. Trading in the S&P 500 stocks decreased to 2.0 billion shares while trading on the NYSE declined 12%. Trading volume on NASDAQ dropped 6%. As concern about Syria falls off, we may start to see increased taper anxiety in advance of the FOMC announcement and Bernanke news conference.
No substantial economic data were reported today. The big news was Apple's large drop in stock price to roughly where it was before Carl Icahn's famous tweet. In fact, Icahn said today on CNBC that he was buying more shares at this lower price. It will be interesting to see where this story goes.
My September iron condor on RUT stands near its maximum gain with a net P/L of $2,420 or +14% and a position delta of -$7 (nearly perfectly delta neutral) and position theta = +$49. The temptation at this point to close for much of the potential gain, but if you are trading larger numbers of contracts, the trading commission costs become an inhibiting factor. Allowing spreads to expire worthless is attractive as long as you don't allow that to draw you into taking too much risk. So we will watch these spreads closely between now and expiration next week and close if the market starts to threaten either side.
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The markets opened modestly higher this morning but quickly weakened and traded lower. SPX hit a high of $1690, matching yesterday's high, but then closed very close to its low of the day ($1682) at $1683, down $6. RUT lost $7 to close at $1049. Volatility rose a bit with VIX closing at 14.3%, up a half point. Trading volume was flat to down with 2.0 billion shares of the S&P 500 stocks trading (flat from yesterday). Trading on the NYSE dropped 2% and trading volume declined 3% on NASDAQ.
This week's unemployment data showed some additional improvement with initial unemployment claims of 292k, down 31k from last week. Continuing unemployment claims declined 73k to 2871k. Maybe that is what drove the initial spurt in the markets at the open this morning. But that bullishness didn't last.
My September iron condor on RUT stands at a P/L = +$2,360 or +13.5% with position delta = +$5 and position theta = +$85. Both spreads are over two standard deviations OTM; the maximum gain for the 20 contract position is $2,560 or 14.7%.
Retail sales, PPI and consumer sentiment all report tomorrow - will those reports move the market? I doubt it. I think the FOMC announcement next Wednesday is the market's focus at this point.
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Positive economic data out of China and cooling of the rhetoric about Syria gave the market reasons to trade higher today. SPX gained $12 to close at $1684. RUT traded upward as well, closing at $1056 for a $10 gain. VIX dropped a little over one point to close at 14.5%. And these gains occurred on higher trading volume with 2.2 billion shares of the S&P 500 stocks trading; trading increased 15% on the NYSE and increased 8% on NASDAQ. Strong increases on higher trading volume are good signs for the bulls.
SPX gapped open upward this morning and sliced through resistance at $1680. Yesterday's trading broke out above the 50 dma, and today's trading left the 50 dma in the dust. If one draws a trend line on SPX from mid-November of last year to the present, touching all of the pullbacks except the low on June 24, then we won't be back on that bullish trend until around $1710 on SPX. If SPX peaks and pulls back before reaching $1710, beware of the head and shoulders reversal pattern that will result.
This is a light week for economic data. Not much happens tomorrow and then Thursday brings the unemployment claims. Friday is the heaviest day this week with retail sales, the PPI and the University of Michigan Consumer Sentiment report. Now that we have Syria out of the way, the news will probably start to focus on the debt ceiling and spending arguments. Allow me one observation on the debt ceiling debate: if my son were spending more than he earned and he hit the credit limit on his credit card, the solution wouldn't be to raise the credit limit on his card.
As you consider any new trades based on this bullish euphoria, remember that the FOMC meeting and announcement are next week. September 18 is likely to be a volatile trading day.
My Sept RUT condor position continues to be very strong with P/L of +$2,360 (+14%) with position delta = -$4 and position theta = +$59. Even with RUT's recent strong push upward, the Sept 1120/1130 calls are over two standard deviations OTM.
The higher price volatility of the past few months has many traders feeling a bit paranoid. I see the very bullish signs on the charts, but I still fear some surprise coming out of left field. I will go see my shrink, lie down on the couch and talk about my childhood. Or maybe it would be cheaper to have a glass of wine with dinner and go to bed early. We'll see if those bulls can hold this position.
