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The markets shocked many traders last Thursday with that huge spurt upward based on what many would call vague promises by Draghi - it was the equivalent of, "Trust me. I'll fix it somehow." Perhaps even more of a surprise was the modest uptick Friday; I expected some profit taking after that strong rally. But today, traders found it hard to press the bullish case. The markets sluggishly trudged sideways most of the day and then weakened as we went into the final hours of trading. SPX lost $9 to close at $1429 while RUT lost $3 to close at $839. Trading volume fell off with 2.4 billion shares of the S&P 500 stocks trading; this is right at the 50 day moving average. Volume on the NYSE dropped 12% and trading on NASDAQ fell 9%. VIX increased nearly two points to 16.3%.
No economic news of any significance was released today. Everyone is focused on Wednesday's Fed announcement. Some analysts believe the markets have priced in the next round of quantitative easing, so an announcement of QE III may not greatly boost the markets - in fact, it could be a "sell the news"event. But what if Bernanke continues with the recent message of "we'll step in when we deem it necessary"? Will markets just wander sideways in disappointment or will that set off a profit taking selling spree? Bottom line: Wednesday could be a down market day whichever way Ben turns. We aren't likely to see much movement in the markets until the FOMC announcement.
My Sept iron condor on RUT is limping along with a P/L of -$3,810 with position delta = -$15 and position theta = +$323. Our adjustments have moved this position back to delta neutral and theta decay is starting to ramp up as expiration approaches. But this condor is in a precarious spot; in theory we could salvage a gain, but most likely we will be fighting to minimize the loss. The Oct condor position has also been hedged and stands at a P/L of -$260 with position delta = -$53 and position theta = +$70, so this condor is in pretty good shape.
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I admit to being surprised at the market's huge spurt upward yesterday, apparently on the back of Draghi's press conference in Europe. First of all, no one really thinks the European debt issues have been solved. Moreover, the German courts have not yet ruled on the constitutionality of the bailout funds. So declaring victory appears naive at best. Today this was followed with a weak jobs report with only 96k new jobs; analysts were expecting around 130k - 140k. But the market seemed to ignore the bad news. SPX gained $6 to close at $1438 while RUT closed at $842, up $4. Trading volume dropped a bit from yesterday with 2.7 billion shares of the S&P 500 stocks trading (still well above the 50 dma at 2.4B). Trading on the NYSE dropped 6% and trading volume decreased 9% on NASDAQ. Perhaps the poor jobs report has fueled hopes for Bernanke to come to the rescue next week.
I hedged my Sept condor yesterday morning and then repositioned both spreads in the afternoon. I hedged with the Oct 840 calls and then closed the 650/660 put spreads and rolled them to 790/800 and closed the 850/860 call spreads and rolled them up to 860/870. That position stands at a P/L of -$3,320 with delta = -$65 and theta = +$215. I hedged the Oct condor on RUT today with the Nov 880 call; that position stands at a P/L of -$350, with delta = -$48 and theta = +$70.
Shake off the last two days of tension and enjoy the weekend with your family. There will be plenty of time next week to fret about our trading.
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Today's trading started out pretty weak as SPX fell to $1397 by mid-morning. But the last two hours of trading were another story: SPX recovered most of its losses to close at $1405, down $2 on the day. RUT had a similar intraday pattern, but its afternoon recovery did not falter at all. RUT gained $10 to close at $822. But RUT continues to trade below its May highs while SPX has traded back down to its May highs. Trading volume was mixed, but roughly flat from Friday with 2.1 billion shares of the S&P 500 stocks trading; trading volume on the NYSE was down 6%, but trading on NASDAQ was up 10%. VIX bumped up about half a point to 18%.
The ISM manufacturing index report was released for August at 49.6, down from the previous month. This is the third month of manufacturing contraction and is the lowest reading of this index since July of 2009. Construction spending dropped by 0.9% in August, after a 0.4% increase in July.
It almost seemed as though the negative economic data encouraged the bulls that Bernanke was going to unveil QE III at next week's FOMC meeting.
My Sept iron condor is standing at a P/L of -$800 with delta = -$152 and theta = +$154. Today's strong run by RUT squeezed this position once again. The October condor position stands at a net gain of $440 with delta = -$42 and theta = +$86.
I hope you enjoyed your Labor Day weekend. Now it's back to work... but remember to be thankful for a job. It's tough out there.
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It seems as though much of the financial news for the past few months has been about the market waiting on something: FOMC meetings, ECB meetings, jobs reports, an announcement of QE III, etc. Now we are supposedly waiting on the ECB meeting tomorrow, but I doubt anything of substance can come of that until the German courts rule on the constitutionality of the bail-out funds. Then we will be waiting on the jobs report Friday; then we will wait on the FOMC meeting next week. Why do traders appear to be so indecisive and tentative? That's a tough question to answer, but here's my stab at it. I believe traders, regardless of their political stripes, realize this economy is in the toilet and isn't showing any signs of improving anytime soon. On the other hand, the large corporations that make up our stock market shed people several years ago when this economic spiral started; they have reduced their costs and continue to make reasonable profits, although revenue growth is hard to find. So there isn't a strong case to either buy or sell this market. Layer the election uncertainties on top of that and you have a lot of traders hiding under their desks. They alternate between fear of missing out on gains and fear of losing their clients' money. So many are jumping in and out of the market like the nervous chipmunks scurrying around my back yard. And many are simply sitting in cash, waiting for "normalcy" to return. But I think that is wishful thinking - we are in a "new normal".
SPX chopped sideways throughout the day, closing down $2 at $1403 and RUT lost $1 to close at $821. Trading volume was flat with 2.2 billion shares of the S&P 500 trading. Trading on the NYSE was up 4% and trading volume on NASDAQ was down 2%.
Tomorrow brings the ADP private payrolls number, which many will take as a precursor to Friday's non-farm payrolls report. Chances are these data will simply support the muddling along we have seen in recent months: not a disaster but certainly not evidence of a strong recovery either.
My Sept iron condor on RUT stands at a P/L of -$720 with position delta = -$148 and position theta = +$157. The October condor stands roughly at break-even with delta = -$52 and theta = +98. Non-directional trading looks pretty good in these choppy markets. So we wait on the other shoe to drop...
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Is the market waiting on Bernanke's speech tomorrow? Or have traders given up hope for another round of quantitative easing? The markets basically have traded sideways this week on lower volume, but today's markets were pretty weak. SPX lost $11 to close at $1399 while RUT dropped $9 to close at $809. Today's close on SPX was close to the lows last Thursday and Friday. Trading volume has continued weakly with 1.7 billion shares of the S&P 500 trading. Trading volume was flat on the NYSE and down 4% on NASDAQ. VIX increased another percentage point today to close at 17.8% - perhaps a little anxiety in front of Bernanke's speech at Jackson Hole?
The big question is the market's reaction to Bernanke's speech. If he maintains his posture of saying the Fed will intervene when and if they think it necessary, will the market tank? Or is that baked into the prices at this point? It would surprise me if Bernanke changes his posture, but who knows? He is receiving a lot of political pressure to intervene. I think those politicians are looking for someone else to blame for their own failure to lead.
The jobless claims data appear to be roughly flat - so that's good news to a degree. But I looked at a long term plot of jobless claims with a 4 week moving average and was a bit shocked. If you draw the typical trend lines as you would on a stock's price chart, you will see that jobless claims have been trending sideways without improvement since late December of 2011 - that just blows my mind. I somehow had lulled myself into thinking we were slowly recovering; that may be the view through the rose colored glasses. It is worse than I thought.
Both my Sept and Oct iron condors on RUT stand roughly at break-even at this point. The Sept condor has a position delta of -$88 and theta = +$124 while Oct has a delta of -$18 and theta = +$82. I am looking forward to the three day weekend - all of us delta neutral traders love to listen to the time of our positions decaying away over long weekends.
