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I missed yesterday's blog - it was the anniversary of my son's death and was also a busy day in the markets and my business. Consequently, by the time the markets closed, I was spent.
The big question in my mind is the title of this blog. After such a huge day last Thursday, it seems like all of the excitement about the Fed pumping up the market is spent. Markets were weak, both yesterday and today, but they aren't giving back much thus far. SPX closed down $2 at $1459 and RUT also gave up $2 to close at $857. Trading volume in the S&P 500 dipped below the 50 dma to 2.4 billion shares today. Trading on the NYSE was flat and increased 15% on NASDAQ. The VIX is relatively low at 14.2% and actually decreased today, in a weak market. That tells me this market still has considerable underlying strength. SPX hit an intraday high around $1475 on Thursday but seems to be holding a solid support level around $1460. RUT broke its 2012 highs Thursday and appears to be establishing $855 as the near-term support. The $840 level was the support level defined before Thursday's run upward.
FedEx warned that they are seeing signs of a global slowdown, but that didn't seem to have a significant effect on the markets. Markets strengthened from about 2 pm ET through the close. There wasn't much in the way of economic data today; we get housing starts and building permits tomorrow.
My Sept iron condor position is essentially complete; assuming the remaining 790/800 put spreads expire worthless, I will take a loss of $4,680 on 20 contracts or 27% on capital at risk. That drops my year to date performance back to a 30% gain. I didn't control my losses on this position as well as I would have liked; I gave back two months of gains. The October condor stands at a net P/L of -$1,580 with delta = -$28 and theta = +$116. We have repositioned the call spreads to 900/910 and our maximum potential gain has been reduced to about 9%.
Isn't it about time for some dire news out of Europe?
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Bernanke and company have certainly lit a fire under this market. After a very strong day yesterday, the rally continued as SPX gained $6 to close at $1466 and RUT tacked on $9 to close at $865. Trading volume spiked up to 3.6 billion shares of the S&P 500 stocks; this is the highest trading volume on the S&P 500 since March, in the midst of the rally earlier this year. Trading increased 9% on the NYSE and was up 6% on NASDAQ. Oddly, the VIX opened lower at 13.8%, but actually increased by about a half point to close at 14.5%.
Some of the economic data released today was positive, starting with the University of Michigan Consumer Sentiment reading at 79.2 for September, up from 74.3. And retail sales increased 0.9% in August. But the balance of the data was mediocre with industrial production dropping 1.2% in August, capacity utilization dropping to 78.2% from 79.2%, and business inventories rising 0.8%. One could view the inventory data in a more positive light by suggesting businesses are seeing more demand for products and increasing production. But that may be a stretch. More likely, sales are soft.
In the past two instances of quantitative easing, the ensuing rally lasted for a shorter period of time after each announcement. Will this one be different since the Fed didn't specify a definitive end? Or will the euphoria wear off pretty quickly?
The only remaining positions in my September condor are the put spreads and the Oct call hedges. These positions are mitigating some of my losses. The current P/L of my 20 contract position is now -$3,820 or about 13%. I also closed the call spreads in the October position today. I will roll those up and reposition them as soon as this rally moderates a bit. This leaves the October position with a P/L of -1,720. The Greeks for either position aren't particularly relevant since these are no longer delta neutral trades. I rolled the 710/720 puts in October up to 790/800. As soon as I reestablish the call spreads, this position will be back in the black.
This has been a rough couple of weeks for iron condor traders. I will be happy to relax this weekend and leave the market behind for a couple of days.
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The waiting game continues, but one of the big risk factors was taken off the table today. The German high court refused to grant the injunction to stop Germany's participation in the ESB (European Stability Mechanism). But, and that's a big "but", the court limited Germany's participation to 190 Euros without going back to the Bundestag (the equivalent of our House of Representatives) for approval. The ESM has not actually been formally approved by the Euro Zone countries, so any number of snags may appear in that process. Germany is the largest contributor to the ESM and many observers expect the required contributions to increase as the detailed plans are nailed down. So the European debt crisis is far from over, but the problem is sufficiently deferred for the markets to move on for now. The markets have a notoriously short attention span.
Next on the agenda is the FOMC announcement and news conference tomorrow. Personally, I think our biggest risk was passed by without any damage today (the German court decision). Depending on whom you speak with, some are claiming most traders and economists are expecting QE III is a "done deal"; others report just the opposite. That tells me that observers are split on whether QE III is needed or appropriate, so I don't expect a huge market move as a result of tomorrow's announcement. A great deal of the market's rise over the past several weeks is probably best attributed to Draghi's comments and anticipation of QE III, so we may well give back some of that if Bernanke delivers the usual message, "we stand ready to intervene if necessary..." But given today's gift of taking the European debt crisis off the radar temporarily, I don't expect a Bernanke disappointment to be devastating. On the other hand, the announcement of QE III could trigger a "sell the news" event.
SPX gained $3 to close at $1437 and RUT also gained $3 to close at $845. Trading volume dropped off a bit to 2.5 billion shares of the S&P 500, but remains above the 50 dma. Trading rose 6% on the NYSE and increased 5% on NASDAQ. The VIX dropped almost one percentage point to 15.8%.
My Sept condor position remains underwater at a P/L of -$3,940 with delta = -$93 and theta = +$418 (huge theta!). A big move up tomorrow could trigger closing the call spreads and lock in a loss for this position. The Oct condor stands at a P/L of -$810 with delta = -$62 and theta = +$79. The delta of our short calls is up to 21 so the pressure on the call spreads isn't too severe so far.
Get your popcorn ready for the show tomorrow.
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I will be traveling to Las Vegas to speak at the Forex and Options Expo shortly after the market closes today, so I will be unable to write my usual blog after the close. At this point in time, the market has responded very positively to Bernanke's policy changes. SPX is up over $23 to $1459 and RUT is up $11 to $857. VIX has dropped almost two percentage points to 14.3% as the market rallies strongly.
I must admit this strong move surprised me. I thought QE III had been sufficiently telegraphed that the market response would be mild, but that is certainly not the case.
RUT has trampled on my Sept condor; the market is still out on the damages, but a loss of the order of 30% for this month is my best guess at this point. I did not succeed in my usual objective of holding the losses to a good month's gains; I ended up giving back about two month's gains. But we remain in the black for the year and the October position is hedged and doing fine.
That's life in the trading game: sometimes you win and sometimes you lose; success is in minimizing the losses so that you remain positive over time.
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Ask any active trader this week what she is thinking and you will hear one or all three of the following: 1) AAPL's big show tomorrow, 2) the German court ruling tomorrow, and 3) Bernanke's announcement Thursday. But my sense is that the markets have decided that the German courts will approve the Euro Zone bailout and Bernanke will announce QE III. SPX gained $4 to close at $1434 and RUT gained $3 to close at $842. And this occurred on higher volume: 2.7 billion shares of the S&P 500 (50 dma = 2.4B). This appears to show traders taking bullish positions rather than taking their profits and hiding. If the German courts rule against the bailout, we could see a very ugly market to the downside tomorrow. I am inclined to think QE III is already baked into the current market levels, so if Bernanke continues to communicate the same message of the past few months (i.e., "we will act if necessary"), I doubt that will cause a huge downward move. In any case, the name of the game is waiting. VIX moved lower this morning, but then strengthened to close at 16.4% - hedging is the name of the game.
As mentioned earlier, we have the German court decision tomorrow, then unemployment claims, the PPI and Bernanke on Thursday. Friday brings the CPI and the consumer sentiment numbers. The next couple of days have the potential to be very volatile.
My Sept iron condor on RUT stands at a net P/L of - $3,300 with delta = -$30 and theta = +$298. Time decay is starting to help this position each day, but we are now sitting in a fairly narrow window of profitability. The October position stands at a P/L of -$170 with delta = -$45 and theta = +$70.
Now I will return to my "thinker" pose and wait...
