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Some positive economic news out of China boosted Asian markets and that appeared to spread across the globe. It probably also helped that reports from Washington suggest that a compromise solution to avoid a government shutdown is in the works so the debt and spending debate participants can have more time to craft a solution. I think Fed tapering is effectively priced into the markets with all of the debate over the past couple of months, so I don't think that is a significant risk issue at this time. But that leaves Syria. Is Obama willing to forge ahead without support from Congress or the American people? That risk remains, but may be diminished somewhat. SPX spurted ahead $17, broke through its 50 dma at $1667 and closed at $1672. RUT also traded strongly higher, tacking on $17 to close at $1046. RUT opened right at its 50 dma at $1033 and never looked back.
The cautionary note on the day was that volatility remained pretty high in spite of these bullish advances. VIX only decreased about two tenths of point to 15.6%. Everyone isn't totally relaxed and comfortable in trader-land even with a one percent gain on the day.
My iron condor position on RUT for September stands at a net gain of $2,200 or +13% with position delta = +$10 and position theta = +$73. This position is nearly perfectly delta neutral with ten days to go to expiration.
I think the big question, in view of VIX remaining relatively high, is pretty simple: will today's advances hold tomorrow? Maybe Apple's new iPhones will cause an uncontrolled exuberance in the markets, but I doubt it.
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SPX opened higher this morning in spite of a weak jobs report, probably thinking that bolstered the case for tapering (now the market seems ready for tapering). But it quickly reversed and dropped $20 to the low of the day at $1641, based on Putin's comments about supporting Syria. Then it regained its previous highs by noon and traded higher in the early afternoon. But then all of this exuberance appeared to weigh on the markets so it gave it all back with SPX closing flat at $1655. RUT followed suit but managed to close up one dollar at $1030. Volatility also ran higher before settling to close with no change with VIX at 15.8%. All of this occurred with higher trading volume, up to 2.0 billion shares of the S&P 500. Trading volume increased 9% on the NYSE and increased 11% on NASDAQ.
The jobs report came out with 169 thousand new jobs and unemployment dropped a tenth of a percent to 7.3%. But the unemployment drop was principally due to a lowered labor force participation rate. Many analysts viewed the report as mediocre, but probably adequate for the FOMC to justify a beginning to tapering the stimulus programs. Others believe Bernanke will wish to begin tapering before his term runs out, but that doesn't make sense to me. If Bernanke believes stimulus is needed until unemployment drops below 6.5%, then why would he remove stimulus and risk a recession? If he doesn't think stimulus is required with unemployment at 7.3%, why did he specify 6.5% as the target (repeatedly)?
I re-established my Sept condor position with the 940/950 put spreads and that position now stands at a net P/L of +$1,760 or +10% with delta = +$25 and theta =+$99.
Have a great weekend.
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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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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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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.
