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After digesting the FOMC announcement, the markets opened very aggressively this morning. SPX gained $21, closing at a new record of $1707. RUT also set a new record high at $1060, up $15. Volatility dropped a half point to 13.0%. Trading volume dropped off a bit with 2.3 billion shares of the S&P 500 stocks trading. Trading on the NYSE dropped 5% and trading on NASDAQ declined 4%.
The ISM manufacturing index came in at 55.4 for July, a two year high, and up from June's 50.9. This added fuel to the bullish sentiment of this morning's market.
Many analysts were watching for the jobs report tomorrow as the next significant market moving event this week. So this extremely bullish day in advance of the announcement was a bit surprising. Assuming the ADP report earlier this week is an early indicator of a more positive jobs report tomorrow, perhaps this bullish trend continues tomorrow. But an alternative view is that we set market highs today and a strong jobs report makes the market reconsider the Fed beginning to withdraw their stimulus and results in a bit of a pull back - difficult to predict. All one can do is hedge your positions.
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The Chicago PMI came in at 52.3 in July, up from 51.6 in June. This was slightly better than analysts expected. ADP issued their private jobs number at 200 thousand jobs created in July; traders were encouraged that this positive number may be indicative of a good jobs report Friday. GDP for the second quarter came in at an annualized gain of +1.7%. This was up from the first quarter and beat analyst expectations.
The FOMC announcement was largely unchanged from the previous announcement with a couple of key changes. Perhaps most significantly, there was no discussion of ending the quantitative easing programs; anyone who was expecting a timetable is disappointed. The committee also changed their assessment of the economic recovery to a slightly more pessimistic posture with language of a "moderate recovery" changed to a "modest recovery". The FOMC is also starting to see some early signs of growing inflation but doesn't see that as an imminent threat (yet). Increasing inflation is probably the largest risk to the Fed's stimulus programs.
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Most of today, RUT traded more weakly than SPX. In other words, one is tempted to say that RUT led the markets downward, but that would be extreme. The major market averages are all holding to early support levels. This is only a sideways consolidation thus far. SPX closed at $1685 for a loss of $6. SPX is holding just above a strong support level from $1670 to $1680. RUT closed down $8 at $1041. There is a weak area of support on the RUT chart around $1040. If RUT breaks $1040, there aren't any solid support levels until around $1000, near the 50 dma at $1001. Trading volume declined with 1.9 billion shares of the S&P 500 stocks trading. Trading volume was flat on the NYSE and declined 14% on NASDAQ.
The only significant economic data came in with pending home sales, which declined 0.4% in June after a strong 5.8% gain in May. Price Schiller and consumer confidence come out tomorrow. The FOMC meeting also begins tomorrow, but their announcement will be released Wednesday afternoon.
I don't expect to see much market action until after the FOMC announcement on Wednesday. Then we have the jobs report Friday as the finale.
My Aug iron condor on RUT continues to bleed off time decay, improving the position's P/L day by day. Today's net P/L is -$3,160 or -15% with position delta = -$50 and position theta = +$183 on 20 contracts. So the theta/delta ratio is very positive. Absent an extreme market move, the Aug position will continue to improve.
After several months of positive real estate market data, we seem to be seeing cracks in the story lately. It will be interesting to see if the Price Schiller price data continue to support that positive outlook.
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The markets continue to trade in a tight range with neither the bulls or the bears in control. SPX chopped sideways most of the day, traded into negative territory in the afternoon, but recovered by the close to gain only one dollar, closing at $1686. RUT traded in a similar pattern, closing up $3 at $1044. The volatility index, VIX, closed unchanged at 13.4%. SPX is hammering out a support level at $1680 while RUT seems to be trading down to and bouncing off of support at $1040. Trading volume increased to 2.1 billion shares on the S&P 500 stocks, but remains below the 50 dma at 2.4B. Trading volume increased 16% on the NYSE and increased 21% on NASDAQ.
The Case Schiller Housing Price Index came in at an increase of 1% in May as compared to a 1.7% increase in April. Most analysts were expecting a slightly higher number but remain upbeat on real estate.
All eyes are on the FOMC announcement tomorrow afternoon. It is hard to predict how the market may respond.
MA reports earnings in the morning before the bell and I sold the AugWk1 570/575 and 625/630 iron condor in anticipation of the volatility crush after the announcement.
My Aug iron condor on RUT stands at a net P/L of -$3620 with delta = -$84 and theta = +$233. My short strikes are at 980 and 1080. As you can see from the Greeks, we are gaining quite a bit each day from time decay at this point in the trade.
Grab your popcorn and settle in for the FOMC Show tomorrow!
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The Standard and Poors 500 Index (SPX) paused its upward trek this week. The intraday price action on SPX both yesterday and today challenged $1680, but then bounced back upward. I think today's price action illustrates that the bullish foundation of this market is still very much intact. I think we are seeing the market pause as it looks forward to a key FOMC announcement next week.
But the FOMC announcement Wednesday afternoon is not the only possible source for market volatility next week. The Case Schiller Housing Price Index and the Chicago PMI are two influential and closely watch reports scheduled for next week. And we also have the second quarter GDP growth rate being reported as well as the granddaddy of market moving reports, the Non-Farm Payroll Report Friday. We may see a very volatile week in the markets.
During this strong bull market, the Russell 2000 Index (RUT) has traded even more bullishly than SPX. Market analysts see this as confirmation of the overall bullish trend, but today’s market action strikes me as a possible divergence. SPX opened down at $1687 and traded to a low at $1676. Then SPX steadily climbed all afternoon to close at $1692, recovering all of its losses and gaining one dollar on the day.
Based on the past few months, we might have expected RUT to post gains on a day like this, but it didn’t. RUT closed down at $1048 for a loss of $6. Is RUT signaling weakness ahead? Perhaps today’s divergence of RUT from SPX is just an aberration. But it is a signal worth keeping in mind. At a minimum, it underscores the need for caution going into next week.
My Aug iron condor on RUT is working off its deficit slowly with a net loss of $3,800 with position Greeks of delta = -$102 and theta = +$171.
Have a great weekend.
