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We witnessed just how nervous this market is this afternoon. The markets opened this morning trading upward; SPX reached $1526 before a slow decline began that accelerated as the afternoon wore on with SPX closing at its low for the day, $1488, down $28. RUT lost $20 to close at $896. And trading volume spiked up with 2.8 billion shares of the S&P stocks. Trading on the NYSE was up 19% and volume increased 21% on NASDAQ. I took a look at VIX this morning and noted that it was up to about 15%, which isn't really too high, but it seemed a little ominous. Of course, it continued to rise as the markets sold off, ending the day at 19%, up almost 5 points.
Most analysts believe the elections in Italy triggered this slide because the election results increased the probability of Italy reneging on its tough measures to get their financial house in order. The fear is that recession in Europe will spread globally. Other analysts attribute at least part of the slide to the impending sequester deadline on Friday. The administration is predicting all kinds of dire consequences of sequestration, loss of TSA employees and air traffic controllers at the airports, fewer border agents, and on and on. Our government currently spends about 3.5 trillion dollars and the sequester will cut 85 billion dollars. To put this in perspective, this is equivalent to my business budget being 3.5 million dollars and I am asked to cut 85 thousand dollars out of my spending. For anyone who has ever run an organization of any size, this is trivial. It is highly unlikely one would have to even cut any people's jobs to get 85k out of a 3.5M budget. And we aren't talking about fine-tuned organizations here. This is the Federal government - there is waste everywhere. We are witnessing political theater at its best. The politicians are trying to scare voters into thinking there is no reasonable choice - we can't reduce spending; we must raise taxes! We can't wait! It's an emergency! OK, I'll put my soapbox away.
Back to the markets, the question on our minds is: how far will it drop? SPX traded right down close to support at $1485. So I will be watching the open tomorrow to see if it breaks below $1485; the next well defined support level is around $1475. If we break that level, it gets pretty ugly, threatening to wipe out all of this year's gains. The SPX 50 dma is at $1477 and the 200 dma is at $1410. A correction of 10% from the high at $1530 would wipe out all of this year's gains, taking us down to $1377, a level last seen in mid-November. I don't think there is any rational basis for a correction of that magnitude, but one can lose a lot of money talking about what's rational.
The market slide is helping my condor positions; the March iron condor on RUT stands at a P/L of +$766 or +4% with position delta = -$8 and position theta = +$114 (for 20 contracts). Fortunately, my put spreads are down at 810/820, still about $75 OTM. I'm sure CNBC will have a full cast of doomsayers on tomorrow. I will watch Doomsday Preppers this evening to prepare...
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The markets jumped back and recovered yesterday's losses, but trading volume dropped off markedly. SPX gained $13 to close at $1516 and RUT gained $11 to close at $916. VIX fell a little over one point to 14.2%. SPX opened in positive territory but traded largely sideways until late morning, when it gradually strengthened for the balance of the day, closing at its high for the day.
Analysts have been looking for a correction and thought Thursday's drop was the beginning, but... maybe not. However, we have the sequester drama playing out in full next week, so it will be interesting to see where the market goes next week as we approach the March 1 deadline.
An interesting side note to today's bounce back upward was the lack of trading volume with only 2.4 billion shares of the S&P 500 stocks trading; the 50 dma is at 2.6B. Trading volume dropped 16% on the NYSE and dropped 23% on NASDAQ. It makes me wonder what is coming next week. Today was a bounce back with only modest conviction. Maybe all the bulls took off for a long weekend.
My Mar condor stands at a P/L of +$566 or +3% with delta = -$77 and theta = +$123. Rest up and enjoy the weekend; next week will be interesting.
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As our President paints a "sky is falling" scenario over the sequestration his party set in motion, this market just continues to climb higher. Market analysts continue to label this market "overbought" and predict a correction, but the markets haven't checked their email. SPX climbed another $11 today, closing at $1531. RUT is trading even stronger, up $9 at $932. Trading volume on the S&P 500 isn't available as I write this, but preliminary data on the exchanges suggests trading volume declined today. Normally, a decline after expiration Friday would be normal, but trading volume on Friday was unusually low. No one can deny the strength of this bullish rally, but the volume has been anemic.
There wasn't any significant economic data to propel this market today; the only report I saw was the National Association of Home Builders Index coming in at 46, down slightly from January's value of 47.
My March iron condor at 810/820 and 950/960 on RUT stands at a P/L of -$790 (-4%) with position delta = -$132 and position theta = +$108. I hedged the position today with some Apr 950 calls.
It seems to me there is increasing evidence that sequestration will occur March 1 and maybe it isn't as big a deal as we have been led to believe. I never ran any organization that couldn't take a few per cent off the top without causing any real damage. After all, we are talking about 85 billion dollars in cuts - remember the scale of this government behemoth - it is running over a trillion dollars (1000 billion) in the red each year. 85 billion is nothing. Therefore, the prospect of this Washington debate impacting the markets may have been overblown... but we'll see. I remain cautious.
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The markets looked weak, but not extraordinary until the last hour or so of trading. SPX dropped $19 to close at $1512 and RUT dropped off $19 to close at $914. Trading volume increased a bit to 2.8 billion shares of the S&P 500 stocks; trading on the NYSE increased 18% and trading on NASDAQ increased 8%. Today's drop puts SPX back in the trading range of about ten days ago, when it was trading between $1495 and $1512. Tomorrow's opening will be interesting. The sell off today was triggered by some comments in the FOMC minutes to the effect that the Fed's support of the markets may end sooner rather than later. As one might expect, VIX spiked up to 14.7%, up 2.4 points. But this is still within the range so far this year.
My Mar condor stands at break-even with delta = -$40 and theta = +$114. We'll see if the bulls see this as another buying opportunity tomorrow.
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The markets opened pretty flat this morning and traded sideways until late afternoon when they sold off dramatically. SPX traded down to $1514 before the bulls came to the rescue once again and recovered most of the losses to close at $1520, down $2. RUT lost $1 to close at $923. Even though the markets traded off, traders still see any pullbacks as buying opportunities. This dipping back to about $1514 and then closing around $1520 is becoming a common pattern of late for SPX. I think this has two messages: 1) this market has traded very high very fast, so a little breather is healthy, and 2) whenever there is a pullback of any kind, buyers appear, so this bullish trend still has legs. Trading volume was flat today with 2.8 billion shares of the S&P 500 stocks trading. Trading was up 9% on the NYSE, but down 3% on NASDAQ.
I keep thinking the impending March 1 deadline for sequestration will take its toll on this bull market, but thus far, traders seem to be trusting that a deal will be struck at the last minute. Or maybe there is a school of thought that the sequester will be good for us by forcing the spending cuts Congress seems unable to seriously contemplate.
The Empire manufacturing survey reported out at +10.0, an improvement from last month's -7.8. Industrial production for January dropped slightly by 0.1% and capacity utilization was flat at 79.1%. The University of Michigan consumer sentiment survey came in at 76.3 for February, up from 73.8 in January.
The settlement value for SPX for February expiration is $1523.06 and RUT settled at $928.61. Those of you who gambled on leaving our Feb 930/940 call spreads open won your bet, but that was a risky play. My Feb iron condor on RUT ended at a +5% gain - not wonderful, but I was happy to salvage that gain in this incredibly bullish market.
The exchanges will be closed Monday. Enjoy your long weekend.
