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The markets traded upward strongly today on increased volume. But reasoning why is tough. We are still in the midst of this Syria military action debate (during my lifetime, the "spin" of language has hit its stride - it is no longer "going to war" or "killing people"; it is "military action"). The question of tapering of Fed stimulus is still very much up in the air and that won't be resolved until September 18 (maybe). In the midst of all of this uncertainty, SPX tacked on $13 to close at $1653. It remains ten dollars below the 50 dma, so don't uncork the champagne just yet. RUT followed suit with a nine dollar increase to $1026. RUT's 50 dma is at $1029. Both charts seem to have hammered out solid support at $1630 and $1010, respectively. Is it reasonable to think of those levels as the lows if the Syria action is approved? Maybe, but rational reasoning may be dangerous in this market.
Trading volume bumped upward today with 2.3 billion shares of the S&P 500 stocks trading (2.1B is the 50 dma). Trading was down 10% on the NYSE but up 12% on NASDAQ. Volatility pulled back almost one full point to 15.9% (as measured by the VIX). Volatility remains relatively high, so don't take a nap.
There were no significant economic data reports today. Unemployment claims, the ADP private employment numbers, and the ISM Services index all report tomorrow, with the Nonfarm Payrolls Report, aka, the jobs report, to be released Friday morning before the market opens. We could see a big move in the markets Friday.
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The markets opened strongly upward this morning on expectations that any U.S. incursion into Syria appeared less likely with the Congress getting involved. But then the Speaker of the House backed Obama's plan and the markets tumbled. SPX spurted up to $1651 but was pulled back to close at $1640. However, this still maintained a gain of $7 on the day. RUT behaved similarly, trading up $5 to close at $1016. Trading volume in the S&P 500 stocks jumped up to 2.1 billion shares, just below the 50 dma. Trading volume increased 31% on the NYSE and increased 35% on NASDAQ. But these volume increases reflect the low pre-holiday trading volume more than anything else. VIX decreased about a third of a point to 16.7%, so volatility remains in the moderately high range of 16.5% to 17% where it has been over the past five trading sessions.
The ISM manufacturing index increased a bit to 55.7 in August, up from 55.4. Increased new factory orders were an encouraging aspect of this report if you studied the details. On the other hand, over fifteen billion dollars (about 1%) flowed out of exchange traded funds (ETFs) in August. This reflects the public's worry about this market going into the historically weak part of the year. Many are going to cash. All of the talk about Syria toward the end of the month probably exacerbated this trend.
My September iron condor on RUT only consists of the 1120/1130 call spreads at this point. It is tempting to sell new put spreads but we only have 16 days left until expiration, so it may be safer to sit on the sidelines with our gain.
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Second quarter GDP was revised to an annualized growth rate of 2.5% this morning and many cited that as the impetus for today's rally. Others pointed to signs that Obama is calming his sword rattling campaign with Syria. Any parent would know that you don't issue ultimatums you can't keep, but he couldn't resist sounding presidential.
I found the CNBC chatter today interesting; many of their hosts and guests are citing the GDP data as evidence that the Fed will begin tapering soon. Bernanke has been very clear that his critical data point for that decision is unemployment. And everyone is politely ignoring the change in how the government calculates the GDP data - a change widely regarded as delivering larger, more positive numbers. Unemployment is continuing its slow change for the better with initial unemployment claims decreasing by six thousand this week, but we are far from the 6.5% unemployment rate target Bernanke cited in May.
SPX gained $3 to close at $1638, but RUT ran ahead, gaining $10 and closing at $1027. SPX is still far from regaining the 50 dma and this chart remains technically very weak - the damage has been done. By contrast, RUT's close today confirmed its break out above the 50 dma. Can it hold that level? Trading volume began to fall off, perhaps in advance of the long weekend. Trading in the S&P 500 dropped to 1.6 billion shares; trading volume dropped 9% on the NYSE and likewise decreased 3% on NASDAQ.
The most telling data point today was the VIX, which rose three tenths of a point to 16.8%. Yes, the VIX rose as the market averages rose. Hmmm... Maybe traders are thinking the same thing I am. Maybe I need to buy some puts in advance of a long three day weekend.
My Sept condor stands at a net gain of 12% with position delta on 20 contracts of +$30 and position theta = +$73. Fortunately the Sept 930/940 put spreads are about two standard deviations OTM in these uncertain times.
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All of the talk of attacking Syria this week has the markets on edge. The markets were not exactly healthy anyway, so this additional dose of uncertainty hit hard. SPX closed down $5 at $1633. The essence of a bearish trend is lower highs and lower lows and SPX has been setting lower highs and lower lows ever since August 5. Although the trading this week seems to be establishing support at $1630, the next well defined support level is around $1605 and then at the June low around $1572. But RUT traded even weaker than SPX today, opening at its 50 dma, and trading lower by $16 to close at $1011. Unlike SPX, RUT set a new low today. Next stop is support at $1000, the peak from late May.
The RUT chart raises my concerns because it shows that traders are scared to carry their riskier high beta stocks into the long weekend. For this reason, I closed the put spreads on several of my condor positions today. If we attack Syria this weekend and/or something equally disconcerting occurs, we could have a market facing us Tuesday morning with extreme pent up selling pressure from global markets trading off on Monday. That could be ugly.
Volatility popped up to nearly 18% today, but settled to 17% at the close. This leaves us in the typical correction area of the VIX. We hit a high of about 17.5% in April as SPX pulled back about 3% to the 50 dma. The pull back in June was more severe at about 6%, and VIX hit a high of almost 21% at the low on June 24th. Today’s close on SPX at $1633 represents a 4.5% correction from the high on August 2nd.
The combination of a more severe pullback in RUT than SPX today together with the increase in the VIX caused me to take corrective action in advance of the long weekend. Maybe the Hindenburg Omen was correct. I closed the 930/940 put spreads in my September iron condor on RUT today. Assuming the Sep 1120/1130 call spreads expire worthless, this locks in a gain of 9.2% for the September position. I decided I would enjoy this long weekend more without thinking about those put spreads.
Enjoy your Labor Day weekend. For those of you in the north, grill a hot dog - time is getting short.
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After a pretty ugly day yesterday, the markets bounced back upward a bit today. SPX gained $4 to close at $1635 and RUT gained $3 to close at $1017. But one is left wondering why? The chart has been in a pretty consistent down trend since August 5, so was today just a bit of short covering before the next step lower? Or is the market beginning to hammer out a bottom?
Trading volume fell off with 1.8 billion shares of the S&P 500 stocks trading today. Trading fell 14% on the NYSE and decreased 16% on NASDAQ. Volatility remains relatively high at 16.5%, declining only a third of a point today. This tells me that the big institutional desks have not sounded the "all clear" just yet.
Pending home sales declined 1.3% in July, but real estate analysts all chimed in that this wasn't alarming given the recent increase in interest rates and assured us the real estate recovery is intact. That was the extent of economic data for today; GDP and unemployment claims come out tomorrow.
My Sept iron condor on RUT continues at a net gain of 10% with position delta = +$38 and position theta = +$78.
Now the questions remain: Is the potential conflict in Syria really the issue? Is the upcoming Washington debt/budget debate the issue? Is the question of Fed removing their stimulus the issue? I don't have the answers. But it is clear that caution is well advised given the seriousness of all of these issues facing the markets. With a three day weekend coming up, how will the institutional traders position themselves?
