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Yesterday's soft market became ugly this afternoon. It appeared that the more traders considered the Fed announcement, the more they decided to sell. SPX closed down $15 at $1583, but RUT really tanked with a drop of $23 to $924. Trading volume actually dropped from yesterday with 2.4 billion shares of the S&P 500 trading. Trading on the NYSE dropped 7% and volume on NASDAQ dropped 5%. Volatility rose one point to 14.5%, so traders weren't spooked; if we had seen a spike in volatility plus high trading volume, that would have been more worrisome.
There wasn't anything notable in the FOMC announcement: fed rates remain unchanged and QE will continue until either unemployment drops below 6.5% or inflation exceeds 2.5%. There was a change in language in that the Fed may "increase or reduce" the amount of quantitative easing as it sees necessary. Those who oppose the Fed's involvement thus far weren't happy with that phrase, but I doubt that affected the market. Maybe the economic data released earlier in the day was unsettling as traders look forward to the jobs report Friday. ADP reported an increase of 119k jobs but analysts expected 155k. The ISM index dropped from 51.3 to 50.7, not significant, but in the wrong direction. And construction spending contracted by 1.7% in March in contrast with February's 1.5% increase.
RUT sliced right through the 50 dma to return to the middle of the recent trading range, whereas the drop in SPX was much more modest, remaining high above the bottom of the trading range at $1540. All in all, I am less concerned since the volatility didn't spike and trading volume was relatively low - but I am glad I bought puts for my stock portfolio on Monday. Perhaps all of this market weakness is setting up for the jobs report Friday. If I am trying to remove risk from my portfolio, selling the small and mid-caps first makes sense, i.e., a larger drop in RUT.
Today's drop didn't affect my May iron condor position much; the P/L stands at a gain of $1,000 (+6%) with position delta = +$28 and position theta = +$90. I suspect we won't see much of a move either way tomorrow, as we anticipate the jobs report Friday.
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The disappointing Chicago PMI numbers gave traders pause this morning, but it didn't take long for the bulls to take charge once again, driving the market higher in the afternoon. SPX opened lower and traded down to $1586 before recovering and trending higher to close up $4 at $1598. RUT gained $5 to close at $947. RUT still has a ways to go to beat its highs from March, but SPX set new historic highs today (it may have traded this high intraday in April, but this is a higher close). I was surprised by the market's strength today; I expected the markets to basically trade sideways as we move through the FOMC announcement and Bernanke's news conference tomorrow and then the jobs report on Friday. But these bulls are relentless.
The Chicago PMI came in at 49.0 for April, a big drop from last month's 52.4. But a positive note came from the Case Schiller Housing Price Index, up 9.3% in February after a strong +8.1% increase in January. In some areas, builders are resorting to lotteries to sell a limited number of housing to large numbers of hopeful buyers. This is some of the market action that is driving prices higher. My son sold his house in Plainfield, IL for the asking price in 5 hours yesterday!
I'm not a big fan of historical stock market statistics like the market being up or down in presidential election years and so on. But today marks the well known "Sell in May and go away" adage. Technically, the data suggest that selling on the last day in April and buying back into the market on Halloween, 10/31 would be a high probability strategy.
My May iron condor on RUT stands at a P/L of +$1,540 or +9% with position delta = +$8 and position theta = +$45. I bought some SPX puts for protection in my stock portfolio yesterday, but it doesn't seem like I need them... but I will feel better after the jobs report.
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First quarter GDP growth was reported this morning at an annualized rate of +2.5%. This was, to my mind, a pretty good result, and certainly much better than the fourth quarter's anemic +0.4%. But economists were expecting +2.8% and some were even expecting increases of 3 to 3.5%. SPX opened weakly and then rebounded, only to sink to its intraday low at $1578. But then it rebounded and closed at $1582, down only $3. RUT dropped $5 to close at $935. After such an unrelenting rise over the past several sessions, today's pause wasn't too surprising. Trading volume also fell off significantly, further supporting the idea that there is no reason to panic over this decline. Trading in the S&P 500 declined with 2.3 billion shares changing hands today and trading volume on the NYSE declined 11%; trading on NASDAQ declined 14%. Volatility remains unchanged with the VIX at 13.6%. All in all, it was a slow day on the street.
My May iron condor stands at a P/L of +$1,320 or +7% with position delta = +$23 and position theta = +$40. As a note to anyone new to my blog, I track the position theta of my condors because this is effectively the profit machine of the trade; it is a measurement of the gain in the position over the next 24 hours due to time decay. The position delta tells us how much risk we are incurring from a price move for the underlying index. In general, I like to see theta at levels greater than delta and ideally greater than twice delta. As position delta and theta values converge, it shows the pressure of stress placed on the position by the index moving too close to one side or the other of the condor. Thus, the current levels of delta and theta for this May position look pretty good.
Enjoy your weekend. It appears as though springtime may finally come to Chicago this weekend.
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Markets opened higher and SPX tried to break its old intraday high, but didn't quite make it. The consensus among the talking heads was that the bullish impetus was Italy finally forming a government. In any case, the bullish trend continued with SPX up $11 to close at $1594 and RUT gained $7 to close at $942. VIX remains low at 13.7%, but trading volume fell off markedly today with only 1.9 billion shares of the S&P 500 stocks trading. Trading volume fell 9% on the NYSE and decreased 8% on NASDAQ.
This bull run continues on the back of reasonable corporate earnings (but weaker this quarter) and the Fed's QE programs. The market averages are in lofty territory, so we are subject to an unexpected "bad" event. The correction could be nasty. A possible candidate is this Friday's jobs report. But the markets shrugged off last week's disappointing GDP report, so it is hard to predict. It may be a good idea to buy some protection in the form of SPX puts for your stock and option portfolios.The current low levels of volatility make protection cheap and, if we have a significant pull back, the spike in volatility will cause the value of those protective puts to sky rocket.
My iron condor on RUT for May stands at a P/L of +$1,400 (+8%) with delta = +$10 and theta = +$56. This condor is positioned well with 17 days to go until expiration. The 1010/1020 call spreads are just under two standard deviations OTM and the 840/850 put spreads are about two and a half standard deviations OTM. We may see some lazy sideways trading action this week as traders anticipate the jobs report Friday.
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SPX continued its run to the upside, adding $6 to close at $1585. One
week ago, SPX bounced off support at $1540 and started a bullish run the
next day that continues through today's market action. SPX is nearing
the highs around $1595 set about two weeks ago. RUT closed up $6 at
$940.The markets hit intraday peaks around 2 pm ET and declined from
there but still held onto gains for the day. SPX hit a high of $1593
before turning back. Volatility remains relatively low with the VIX at
13.6%. Trading volume edged up with 2.8 billion shares of the S&P
500 stocks trading today. Trading volume increased 5% on the NYSE and
increased 13% on NASDAQ.
Initial unemployment claims decreased 16 thousand to 339k and continuing unemployment claims decreased 93k to three million. Meanwhile, we hit a new record of 8.9 million on disability.
My
May iron condor on RUT is up 6% with position delta = +$20 and position
theta = +$57. If RUT climbs a few more points, we will be perfectly
delta neutral with three weeks to go.
As I look at the SPX price
chart, it is interesting that we are duplicating the run SPX made
earlier in April, when it bounced off $1540 and headed higher to hit
$1595 and then turned down. Now we are retracing the steps higher. Will
SPX break out to new highs or be pulled back into the trading range?
The nervous profit taking we saw this afternoon may grow. Stay tuned.
