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The markets continue in overdrive. SPX closed at $1503, breaking the psychological barrier at $1500. It is interesting to note that about five minutes before the close, SPX remained below $1500. RUT continues to lead SPX. RUT traded as high as $905 yesterday but then pulled back. Today, RUT closed at a high of $905. These moves higher are significant: since 12/31, SPX has gained 7% and RUT has even outdone that with an 8.5% increase. These are huge moves in a little less than four weeks. And the gains are even greater if you measure from the low back in November. Many traders have been caught unawares by this massive bull run. Personally, I admit that I have been focused on the fiscal cliff, debt ceiling, spending debates and the prospects for a second recession before we have recovered from the first one.
This is a classic example of the market “climbing the wall of worry”.
This situation is treacherous for the trader. He can jump on the bandwagon and
take bullish positions. The danger is that after such a strong run, the
likelihood of a strong correction is growing. So any bullish position needs to
be protected with tight stops. Many technical measures suggest this market is overbought, but markets can continue to trade higher even when it defies the analysis. So it may be too early
to predict an end of the party. But I do think caution is in order.
My Feb condor is getting squeezed by the relentless move upward. It stands at a 5% loss with delta = -$145 and theta = +$160. If the market doesn't slow next week, I will need to make some adjustments.
We finally have snow here in Chicago. I did my first shoveling of the winter this morning; the landscape is much prettier with snow.
Have a great weekend.
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The markets appeared to be taking a breather today, but this has been a dangerous market to bet against. SPX is up about 7% just since 12/31 - that is a significant rally. SPX ran as high as $1502 today, but pulled back to close at its open at $1495, for no change on the day. RUT closed up $3 at $900. The SPX chart is a classic doji candlestick, the indicator of indecision, or a balancing of the bulls vs. bears tug of war. Dojis often, but not always, appear just before a trend reversal on the chart. With the strength of this market, I hesitate to predict any reversal; but it does have to at least slow down and trade sideways once in a while. Trading volume was up a bit today with 2.7 billion shares of the S&P 500 stocks trading. Trading on the NYSE was up 7% and volume jumped up 19% on NASDAQ, probably reflecting the carnage in AAPL. I studied AAPL at length yesterday, but just could not convince myself that any trade was even remotely safe. If some of you were willing to place the bearish bet, congratulations. I was tempted to make the classic, "it can't trade lower" bet, but finally decided that the bloom was off this rose, whether it made sense or not.
Initial unemployment claims hit a new low today at 330k claims. This is the lowest report since January, 2008.
The VIX moved up slightly to 12.7%, still very low historically.
My Feb iron condor on RUT stands at break-even with delta = -$95 and theta = +$133.
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The markets opened weakly this morning with SPX losing about $5 before recovering to close at $1486 for a gain of $5 on the day. Virtually all of that gain came in the last 45 minutes of trading today. RUT closed at $893, up $2. After yesterday's break-out on SPX, today's strong close was even more bullish, but virtually any measure tells us this market is overbought. It has surprised me that the debt ceiling and spending debates have not taken a toll on this market. Apparently, traders are taking all of the rhetoric with a grain of salt. VIX actually fell a bit further today, closing at 12.5%. This is a record low; you have to go back to the summer of 2007 to find lower values of the VIX. This low level of VIX further confirms the complacency of the large institutional traders - they are not concerned about the political battles.
RUT settled at $889.72 today and SPX settled at $1481.36. Hopefully, none of you carried positions into expiration that were anywhere near those values. I recommend my Two Sigma Rule: close any spread on the Friday before expiration week that is less than two standard deviations OTM. The difference between the Thursday close and the settlement price on RUT last year averaged $4.46. Since one standard deviation a week out is typically around $6 to $9, this is a conservative rule.
My Feb condor on RUT stands at a net gain of $600 or +4% with delta = -$191 and theta = +$141 (20 contracts).
Next week is going to be exciting. GOOG, AAPL, IBM, ISRG and others all report earnings next week. There will be many opportunities for some speculative trades if that's your bag. As long as you don't bet the farm, a little speculation can be fun. The exchanges will be closed Monday. Enjoy the long weekend.
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The bulls are clearly in charge. This morning, the market opened weakly and traded down a bit as the existing home sales report wasn't in line with analyst expectations. But then the major indexes solidified and headed higher. SPX gained $7 to close at $1493 after trading as low as $1481. SPX closed at its high for the day - classic bullish behavior. RUT ran up $6 to close at $899. VIX increased a bit this morning, but then stabilized at 12.4%, no change on the day. The only weak component to this bullish market was trading volume. Trading in the S&P 500 came in at 2.6 billion shares, a decline from Friday, but still above the 50 dma. Trading volume on the NYSE was down 6%, while NASDAQ was also down 5%.
Existing home sales came in for Dec at an annualized rate of 4.94 million; analysts were expecting 5.1 million. Now, some analysts are predicting increased housing prices because of supply constraints. That seems amazing to me; we have had only bad news about real estate for so long.
My Feb condor position on RUT remains above water at a 3% gain with delta = -$72 and theta = +$96 on 20 contracts. I closed the 910/920 calls today and rolled them up to 930/940.
Since the first of the year, this has been a classic bull market in the sense that it has continued upward in spite of a host of reasons we should be bearish. We are trading upward in spite of no agreement on taxes, spending or the debt ceiling. Yes, everyone agreed on tax rates, but many voices are now calling for more revenues. And the President insists we don't have a spending problem. And the GOP has agreed to raise the debt ceiling without spending cuts. Unemployment in Europe is at record highs. These chickens will come home to roost someday, but this market is continuing higher...
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Markets continue to trade sideways as the debt ceiling debate heats up. SPX closed unchanged at $1473 while RUT lost $2 to close at $882. VIX dropped a touch to 13.4%. So traders aren't fleeing for the exits, but they aren't buying either.
The Fed's Beige Book was released today with nothing new - the economy is slowing recovering; I think we have heard that somewhere.
The CPI data for Dec was released with 0.0% change. Industrial production came in for Dec up 0.3% and capacity utilization was flat at 78.8%. All in all, the same news we have been hearing: slow and steady, nearly flat, low or no economic growth.
I watched an interview today with a Boston College professor of economics, Lawrence Kotlikoff. He proposes looking at the government's debt based on a balance sheet like we would use for a business: assets and one side and liabilities on the other. He uses CBO numbers for the next ten years of tax revenue (assets) and the next ten years of government obligations (social security payments, etc.). On that basis, he says our deficit is 211 trillion dollars not sixteen. On that basis, the professor claims we are in worse shape than Greece. I'm not an economist, so I don't know the pros and cons of this approach, but even the traditional economic reporting I see isn't pretty. Bernie Madoff was a piker compared to our politicians.
My Feb condor stands at a net gain of $980 (7%) with delta = -$102 and theta = +$147.
