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The markets opened in positive territory this morning, but then seemed to stall and trade sideways. Around 1 pm ET, SPX began a slow but steady climb upward, closing at $1564, up $12 on the day. This is the fourth day in the last nine sessions of trading that SPX has come very close to its all time high just above $1565. So tomorrow's trading will be interesting - break-out or fake-out? RUT has been trading in a much more muted fashion than SPX the past several sessions. RUT was unchanged much of today, but traded higher in the afternoon, closing up $4 at $950.
One can draw a pretty clear trading range from $940 to about $955 on the RUT chart. But there have been very few closes near the bottom of that trading range during the past nine trading sessions. The corresponding trading range on SPX has been about $1550 to $1560, but the daily price ranges have been much larger. Take last Thursday and Friday for example. On Thursday, SPX dropped $13 or 0.8%, only to retrace almost all of that the next day with an $11 gain or 0.7%. By contrast, RUT lost $3 or 0.3% last Thursday and gained $2 or 0.2% on Friday. That makes for an interesting observation, but what does it mean? Normally, I think of the mid and small cap stocks (represented by RUT) as the "risk on" stocks, trading up strongly when we are bullish and trading down strongly when we are spooked. On that basis, perhaps this relationship of SPX and RUT is just one more indicator of traders' collective nervousness as we reach for all time highs on SPX.
The low levels of trading volume support that thesis. Only two billion shares of the S&P 500 stocks traded today and trading volume declined 12% on the NYSE; trading fell off 13% on NASDAQ. It is certainly true that the bulls have effectively shrugged off the Cyprus Banking bad news, but that doesn't mean traders are euphorically bullish and buying with both hands.
Today's batch of economic news was mixed: durable goods orders jumped 5.7% in February, up from a decline of 3.8% in January. The Case-Schiller Home Price Index increased 8.1% in January, up from a 6.8% gain. But, on the other hand, consumer confidence dropped to 59.7 in March, down from 68.0; new home sales came in at 411k for February, down twenty thousand from January. Perhaps this data contributed to most of today's sideways trading.
My April condor remains underwater by 9% with position delta = -$8 and position theta at +$95. Watch for tomorrow's open on SPX. If it opens higher, don't be surprised if that triggers some profit taking. This market is bullish, but nervous.
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The futures were positive this morning on the news of the Cyprus bank bailout and the markets opened higher as one would expect. But the euphoria didn't last long. SPX hit up against its all time high near $1565 by 10 am and crumbled from there. SPX closed at $1552, down $5 but RUT remained unchanged at $946. Volatility remained unchanged with the VIX at 13.7%.
Most market observers attributed the reversal this morning to concerns that other European banks may be subject to similar bailout requirements, taxing large depositors, and this prospect may begin a flight out of the European banks. Bank stocks in Europe traded down.
There wasn't any economic news today, but tomorrow brings a host of data with durable goods, Case-Schiller, consumer confidence, and new home sales. It should be interesting.
My April iron condor position stands at a net P/L of -$2,110 or -11% with delta = -$5 and theta = +$107.
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Bernanke reassured traders that he isn't going to remove the punch bowl from the party anytime soon and the markets resumed the rally. SPX closed at $1559, up $10 and RUT gained $9 to close at $952. Markets were up at the open today, having put Cyprus behind them, but hit new intraday highs after the FOMC minutes were released at 2 pm ET. But trading volume remains weak with 2.3 billion shares of the S&P 500 stocks trading today. Trading on the NYSE was down 10% and trading volume fell 6% on NASDAQ.
The FOMC reported a view of a strengthening economy, but did not feel confident about ending the quantitative easing until further evidence of recovery is confirmed. As expected, interest rates remain unchanged. That would appear to give the bulls a green light to continue this strong rally. Of course, that also fuels the predictions of many analysts that this rally has run too high and too quickly to not be subject to a correction soon. The Cyprus alarm appeared to possibly be the correction trigger, but the market quickly dismissed the news.
The Cyprus incident does show how close to the sell trigger traders are in this market. No one wants to give back the gains of the past few months. But when so many analysts are warning of a correction, will the market just keep climbing?
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The markets bounced back into positive territory today with SPX moving up $11 and closing at $1557. RUT was more muted with a two dollar increase to $946. Trading volume continues to be weak with 2.2 billion shares of the S&P 500 stocks (the 50 dma is 2.5B). Trading on the NYSE dropped 10% and trading volume on NASDAQ dropped 1%.
A large proportion of financial news was devoted to the Cyprus banking crisis this week. Traders seem to have discounted the negative effects since the markets were consistently in positive territory today, even though no resolution of the Cyprus problems is expected until early next week. SPX opened higher this morning, and then traded higher all day, including a last minute spurt that took it near its intraday highs for the close. SPX came close to completely recovering all of the losses from yesterday. That doesn't sound like a market that is worried about Cyprus.
The bullish strength underlying this market was demonstrated once again this week. Given the chorus of analysts and gurus calling for correction, this seems all the more surprising. Perhaps the recent bullish excesses will be gradually absorbed via some sideways consolidation action. In spite of all of the wringing of hands this week, SPX never came close to its solid support level at $1530.
Volatility dropped a bit today with about a half point drop in the VIX, down to 13.6%. Historically, this remains a low volatility environment. By comparison, the volatility index for the Russell 2000 index, RVX, ranged from about 24% to 32% last year, but has remained largely below 20% this year, with only two exceptions in late February. RVX closed at 17% today.
My April iron condor on RUT at 880/890 and 990/1000 remains underwater by about 13% with delta = -$12 and theta = +$108. With both spreads being greater than one standard deviation OTM with less than a month to go, this position is in moderately good shape. However, the adjustments to date have consumed much of the potential profit for this position.
Enjoy the weekend.
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Cyprus' plan to tax bank deposits to fund its banking bail-out spooked global markets overnight, but you could see the futures beginning to strengthen even before the markets opened this morning. SPX dropped to its low for today of $1545 in the first three or four minutes of trading and then recovered much of that loss by early afternoon. But then the markets weakened with SPX closing at $1552 for a loss of $9. RUT lost $5 to close at $947. As one might expect, the uncertainty tossed into the markets by the Cyprus news punched up the VIX two points to 13.4%, but that remains a relatively low level of volatility.
Trading volume dropped off as expected from Friday's quadruple witching highs with 2.2 billion shares of the S&P 500 stocks. Trading on the NYSE dropped 51% and trading decreased 30% on NASDAQ. In the last fourteen trading sessions, trading volume in the S&P 500 stocks has only exceeded the 50 day moving average twice. Today's drop back to 2.2 billion shares is back in the range of relatively low trading volume we have been observing - this is the one measure that isn't consistent with a bull market.
Given the relative insignificance of Cyprus, today's market action demonstrated how nervous these markets are - we have been setting records in this bullish run, and that very fact has traders watching over their shoulders. The slightest twitch is resulting in flurries of sell orders.
Economic reports were scarce today, but the FOMC meeting starts tomorrow and reports out on Wednesday. But it appears unlikely that Bernanke is going to change much, if any, of the language in their report. Traders will be watching for hints of the Fed pulling back from their stimulative posture, but Bernanke has been much more transparent than previous Fed administrations. He has been very clear about the criteria they will use to begin raising interest rates and phasing out the quantitative easing programs, and it isn't likely to happen anytime soon.
Today's market reaction to the Cyprus news makes one wonder what will happen if we have a truly negative news event...
