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SPX opened this morning at $2162, traded down to $2152, but then rebounded to close at $2171, up $11 on the day. Candlestick enthusiasts will note this as a long lower shadow, a classic clue that the bulls are strong, i.e., they saw that intraday low on SPX as a bargain and starting buying, driving the price higher. And this was on higher trading volume, with 2.2 billion shares of the S&P 500 trading today. Trading volume was up 16% on the NYSE and was 4% higher on NASDAQ.

But there was another significant clue of bullish strength today. The durable goods orders report came out today for August and was dead flat, 0.0% change. July was up 3.6%. The durable goods report is one of the fundamental measures of U.S. economic strength, and this was a terrible report. But the market shrugged it off and traded higher. Strong bull markets ignore bad news... until they don't.

Tomorrow brings the final estimate of the second quarter GDP growth rate. The last estimate was a paltry +1%, annualized. If the report tomorrow continues on that weak line, it will be a another test for the bulls.

In the meantime, the recent market behavior has been nearly ideal for delta neutral traders. My September SPX iron condor closed at a 16% gain. The SPX condor for October is up 21% and the November position is already up 6%, even though it has only been open for a couple of weeks.

The market clearly has a bullish bias, but be careful. It remains a nervous market.

Last Friday, SPX fell out of bed and lost over $53 or 2.4%. You might think that a negative GDP number or something equally disturbing had been reported. But nothing that logical occurred. A couple of the Fed governors had suggested in interviews that the economy might be sufficiently strong for another interest rate hike in the near future. If the Fed believes the economy has recovered sufficiently to handle higher interest rates, that should be good news. But traders hit the sell button. Does that make sense? I don't think so. But maybe I shouldn't be trying to view this market action so rationally.

Whether you have been trading the markets for the past 5 years or 30 years, you have never seen near zero interest rates at all, much less for several years in succession. So traders are in uncharted territory. Normally, the younger staff in the trading firm turn to the older staff and hear comments like, "Don't be too concerned, this looks similar to the markets in late 1987 after the big crash in October. Within a year the markets had recovered all of those losses." Today's market is unique. No one has seen this situation before. Consequently, market observers are nervous and tend to sell at the slightest sign of trouble. Consider the recent BREXIT panic as an example. The BREXIT vote scared traders and the markets sold off quickly. The fact that the effects of Britain leaving the European Union would not be realized for two years or more was known and well publicized, but it didn't matter. Traders were scared and hit the sell button. But this has happened many times over the past few years. Those same nervous traders have learned to "buy the dip". Thus we have the so-called "V-bottoms" that have been a common characteristic of recent markets. The BREXIT panic caused a loss on the S&P 500 of 5.3% in only two trading sessions; within four trading sessions, that entire loss was recovered, and the market continued to trade higher yet for about two weeks. Traders are nervous in this "uncharted territory" and sell upon the least rumor or speculation. But we are all well aware that we have been in a strong bull market, so we quickly "go all in" whenever we see market prices start to rise - hence, we buy the dip.

After losing over 2% last Friday, SPX recovered much of that loss on Monday, but then traded back down on Tuesday. SPX closed today at $2147, not quite back to last Thursday's close at $2181, but close enough that volatility declined almost two points today. What is a trader to do? Psychotherapy? Antidepressants?

As many of you know, I trade iron condors on the broad market indices every month. Before the market opened last Friday, I was planning to sell my November SPX iron condor. But all of the red ink stopped me. As I listened to all of the talking heads interview the gurus predicting "the sky is falling", I couldn't get too excited about this decline. As the day wore on, the indices started to stabilize and I decided to sell the November SPX 1890/1900 put spreads. As the markets rebounded on Monday, I sold the November SPX 1940/1950 put spreads. At today's close, the short puts at 1900 and 1950 are 1.7 and 1.3 standard deviations out of the money. This corresponds to probabilities of these spreads expiring worthless of 96% and 92%, respectively. Don't misunderstand. I was still focused on risk management. I sold only half of my normal capital allocation on Friday and was prepared to buy it back on Monday if was wrong. But, instead, I sold the balance on Monday at a higher index price.

This market remains volatile and unpredictable, so stay cautious and manage your risk carefully. However, rational analysis of market behavior remains a useful discipline.

The Standard and Poor’s 500 Index (SPX) has been trapped in a sideways trading channel for the past couple of months. SPX dramatically broke out of that channel on Friday, closing at $2128, down $53 or 2.4%. SPX gapped lower Friday morning, opening at $2169, and didn’t even pause as it broke the 50 day moving average (dma) and then took out long-term support at $2160. Even more ominously, all three major broad based indices, SPX, RUT and the NASDAQ Composite, closed at their intraday lows. This type of close is very bearish; go back and study the charts preceding the August flash crash from last year.

What triggered this breakout? The best answer appears to be recent interviews with two FOMC members suggesting a rate hike may come as soon as the Fed meeting later this month. This certainly isn’t the first time that the market has seemed to freak out over a quarter point interest rate move. To my mind, it doesn’t make any more sense this time than it has previously. Interest rates are going to remain below one percent for the balance of 2016 in all plausible scenarios. Would that increase in interest rates throw cold water on business expansion plans? I seriously doubt it. For that reason, I think this correction will be brief, but that doesn’t mean we should just sit on our hands.

On the other hand, perhaps weak economic data, such as one percent GDP growth, and a string of five consecutive quarters of declining corporate earnings, are beginning to weigh on the market. The Russell 2000 Index (RUT) closed Friday at $1219, down $39 or 3.1%. RUT has been trading higher since the BREXIT panic, so Friday’s large move wasn’t a breakout from a sideways channel as it was with SPX. RUT closed on Friday near a solid support level around $1220. RUT remains as the only major market index that has failed to make new all-time highs over the past couple of months. The lagging behavior of RUT as other indices traded higher suggested some restraint on the part of the bulls. But RUT’s smaller drop on Friday also suggests that the bearish action has not fully impacted the small caps as yet. If we see a solid break of the 50 dma on Monday, that would underscore the bearish move.

Volatility spiked much higher on Friday, with the VIX closing at 17.5%, up five points in one day. Those of you speculating with VIX calls are celebrating this weekend.

Given the backdrop of weak GDP growth and declining corporate earnings, a bearish move certainly shouldn’t be surprising. The surprise is the suddenness of the move and the move being attributed to the possibility of the Fed increasing interest rates at the meeting this month. Perhaps this is just one more illustration of a nervous market that can turn on a dime in either direction, e.g., the BREXIT panic resulting in a large price decline for only two days, followed by a prolonged bullish run higher.

The Federal Reserve has historically maintained a strong non-political posture. I don’t think that is likely to change, so the prospect of the FOMC raising interest rates on September 21st, less than two months ahead of the presidential election, seems very unlikely. Thus, I would not expect Friday’s significant price drop to continue on Monday, which is why I held my positions on Friday, and even sold some far OTM SPX put spreads. But if this decline continues on Monday, I will be aggressively closing and/or hedging positions.

The Standard and Poor’s 500 Index (SPX) closed today at $2180, up $9. SPX has been trading in a tight channel from $2157 up to $2194 over the past seven weeks. This channel has been reinforced over the past couple of weeks by the shadows of the candlesticks. Pull up a chart of SPX and observe how the upper and lower candlestick shadows define support and resistance.

The bulls and the bears are in a closely matched tug of war. The bulls are being held in check by poor economic data, such as one percent GDP growth, and a string of five consecutive quarters of declining corporate earnings. On the other hand, the bears can’t manage to take control and drive the market lower primarily because the FOMC has left interest rates at record lows.

Trading volume in the S&P 500 continues to run below average with neither the bulls nor the bears able to sustain a strong push. SPX trading volume has only increased enough to touch the 50-day moving average (dma) a couple of times during August.

The Russell 2000 Index (RUT) price chart presents a different picture from SPX in two key respects. First, RUT has been trading higher rather consistently since the BREXIT panic. Today’s close at $1252, up $12, is the high for RUT for 2016. But the second difference between RUT and SPX is that SPX has set several
all-time highs over the past few weeks. RUT remains 4% below its high from last year at $1296.

This lagging behavior of RUT suggests some restraint on the part of the bulls. They are not sufficiently confident to “go all in” and strongly buy the small cap stocks. But the persistent trending of RUT higher as SPX is trapped in a sideways channel may suggest that the bulls are gaining confidence.

GDP growth rates of one percent or less are on the brink of recession. At best, we have a very lackluster economic environment. When I add five consecutive quarters of declining corporate earnings, I am seriously concerned about our economy. But then I look at the market prices. How long can this continue?

Be cautious.

The Standard and Poor’s 500 Index (SPX) set a new all-time high on August 15th and tried to reach that number again on August 23rd, but it has faltered since then.  Janet Yellen spoke at the Jackson Hole economic conference at 10 am ET this morning, and SPX made its intraday high a few minutes later. But then the party ended. Traders decided another interest rate hike is coming and sold off. SPX reached a low around 2:30 pm ET but then recovered a bit to close at $2169, down $3. The second quarter GDP growth numbers, announced earlier this morning, with an annualized growth rate of 1.1%, probably didn’t help. That is pretty weak. FACTSET released the final earning results for the S&P 500 for the second quarter, down 3.2%. This is the fifth consecutive quarter of earnings declines. This is the first time we have seen a five quarter string of declines since 2008-2009.

However, SPX is holding up rather well. $2160 has set up as a solid support level and that is where SPX bounced today. If we break $2160, the next level to watch is the 50-day moving average (dma) at $2144. Trading volume in the S&P 500 companies has run below the 50 dma since August 8th. This market is certainly out of steam, but that doesn’t necessarily mean it is going over the cliff. SPX has been very resistant to the bearish arguments.

The Russell 2000 Index (RUT) just traded modestly higher this week, but closed at $1238 today, down two dollars. RUT was not able to match its highs from last year during this strong post-BREXIT run, a bearish sign.

After trading near 2016 lows last week, the SPX volatility Index (VIX) moved higher this week, opening Monday at 12.5% and closing today at 13.7%. Perhaps more significantly, VIX moved as high as 15% earlier today. I would guess the bounce of SPX off support at $2160 calmed some nerves.

A couple of weeks ago, I offered two possible driving forces behind the bullish post-BREXIT market:

1) Traders are buying with renewed confidence that the Fed won't raise interest rates before the end of the year.

2) We may be seeing the effects of global cash flows seeking a safe haven in our stock market. The global economy is slowing and, even though the U.S. economic data are mediocre at best, we are looking better than most.

With the market’s reaction to Yellen’s comments today, perhaps we are left with the “best house in the bad neighborhood” theory. It may be significant that the market did not trade lower this morning after the weak GDP growth numbers. Poor economic data continue to be ignored by this market. It appears to be primarily Fed driven, which would argue that a pull back won’t come until the FOMC actually raises interest rates. But will Yellen and company raise rates before the election? I doubt it. They don’t want to be seen as adding fuel to the fire for either side’s arguments.

Be cautious. This is a nervous market. As evidence, look at the three point intraday range of the VIX today.



The title of this song from one of my favorite bands, Queen, came to mind today as I thought about today's price action. This bull market, that by all measures should not be continuing higher, did just that again today. SPX tacked on another six points to close at $2190, while RUT spurted higher by $12 to close at $1242. And the NASDAQ Composite did not want to be outdone, gapping open this morning and gaining $29 to close at another all-time high at $5262. All-time highs are becoming passe.

Many valuation measures, such as the price to earnings ratio and the average dividend yield of the S&P 500, suggest a pricey market. We are nearing the end of the second quarter earnings announcement cycle, and earnings have declined once again on a year over year basis. When you think about it, the only way the P/E for the S&P 500 may continue to rise is that share prices are rising faster than earnings are declining. At its most fundamental level, stocks are priced on the value of the discounted cash flow of the projected earnings. Yet prices continue higher as earnings decline.

Don't misunderstand. I am not trying to say the market has it all wrong. The ultimate arbiter is the market price. But that brings me back to the title, Another One Bites the Dust. In this context, another bear covers his shorts. Where does it end? No one knows. But it is clear that we are increasingly on thin ice.

So what should we be doing in this market? I don't presume to have all the answers, but my trading boils down to a few bullet points:

  • I am continuing to play bullish stocks as they trade higher. But I am using diagonal call spreads to give myself some safety margin on the downside, just in case the market pulls back one of these days.
  • I am closing profitable trades early to lock in gains. If I can bank 70-75% of the potential gains on a trade, I take it.
  • As I position my non-directional trades, I am allowing for more safety margin on the up side. I am not betting against the bull.
  • I am as nervous as a long tailed cat in a room full of rocking chairs.

Make money while you can, but be careful out there.

After Friday's huge move higher, it was natural to expect a little bit of a slowdown today. SPX lost $2 to close at $2181 and RUT was down a dollar to close at $1230. Volatility was essentially unchanged with the VIX at 11.5%. Trading volume slowed with 1.9 billion shares of the S&P 500 companies trading. Trading volume declined 10% on the NYSE and dropped 20% on NASDAQ.

Many of the big names have already made their earnings announcements for this cycle. We have NVDA later this week and CSCO and WMT next week. 86% of the S&P 500 have already reported and 69% beat analyst estimates, but that ignores the fact that earnings continue to decline on a year over year basis. According to FACTSET, the current earnings decline for the second quarter is -3.5%. If that number holds, it will be the fifth consecutive quarter of earnings declines. That has not happened since 2008-2009. In addition, guidance for the third quarter has been largely negative with 67% of companies offering lower guidance. FACTSET reports that the price to earnings ratio (P/E) of the S&P 500 now equals 17.0 on an 12 month forward looking basis. The five year average P/E is 14.7 and the ten year average P/E is 14.3. These data offer a quantitative basis for the commonly heard opinion that this market is overbought. However, overbought markets may remain overbought longer than I have funds to short the market.

But we are left with the question: What is driving this market higher? As we have seen above, the run higher certainly isn't based on stronger earnings streams. Maybe traders are buying with renewed confidence that the Fed won't raise interest rates before the end of the year. Another possibility is that we are seeing the effects of global cash flows into our stock market, i.e., the "best house in the bad neighborhood" theory. Our economic data are mediocre at best, but the U.S. stock market looks better than many other global markets.

So we are left with a quandary. The market's most probable direction is to continue higher, but a pull back or correction is overdue. We just don't know what may trigger the sell off or when that might occur.

I am continuing to trade bullish positions in this market, but I am favoring diagonal bull call spreads because those positions offer some downside protection if the stock or index pulls back. I am also positioning my non-directional trades with additional safety margin on the upside. And my stops are on a hair trigger.

Be safe out there.

The big news today was the announcement from the FOMC meeting and there were no surprises. Interest rates remain unchanged. The Fed says "near term risks to the economic outlook have diminished". Only one member of the committee voted to raise rates. Most Fed observers believe interest rates will remain unchanged until the December meeting, due to a reluctance to be seen as interfering with the presidential election.

Markets traded weakly all morning, but rebounded after the FOMC announcement to close roughly unchanged for the day. SPX closed down $3 at $2167 and RUT closed up $2 at $1219. The VIX declined slightly to 12.8%. Trading volume was much higher with 2.5 billion shares of the S&P 500 trading today. Trading volume rose 20% on the NYSE and increased 4% on NASDAQ.

$2160 appears to be a strong support level on SPX. The lower shadows of the candlesticks have been consistently hitting around $2160 and bouncing higher for about the last ten trading sessions.

Several significant economic reports were issued yesterday and today. Durable goods orders declined 4.0% in June, even worse than May's 2.8% decline.  But on the flip side, real estate data continue to be positive. New home sales increased to an annualized rate of 592 thousand in June, up from 572 thousand. Pending home sales increased 0.2% in June, up from a negative 3.7%. The Case Schiller housing price survey stayed north of 5% with an annualized rate of 5.2% in May, down from 5.4%. The Conference Board's consumer confidence survey was flat for June at 97.3, virtually unchanged from May's 97.4. The real estate story remains positive, but general economic growth remains weak.

It will be interesting to see tomorrow's markets. Often the traders appear to consider the FOMC announcement overnight and come back the next day, moving strongly one way or the other. Have the markets been coiling for a spurt higher with the flat sideways trading of the past couple of weeks? Or are we due for a correction of an overbought market? In view of the weak economic data, I am inclined to the latter view.

After the BREXIT panic, the markets roared back and simply never stopped. SPX bounced back over 8% from June 28th to today's close at $2175. But SPX has looked pretty flat for the past seven trading sessions. Is the bull running out of steam? The Russell 2000 Index (RUT) closed today at $1213, up $9. RUT remains about $83 below its all-time high set last year. RUT would have to rally nearly 7% from here to set a new high. So RUT and SPX are telling entirely different stories. The NASDAQ Composite Index is somewhere in between. NASDAQ closed at $5100 today, and only has to move another one percent to match its previous all-time high at $5155. But NASDAQ's chart looks more like SPX; it is trending upward in steady fashion - no plateau there.

Why is this comparison of the major market indices useful? The small caps that make up the Russell 2000 are the classic high beta stocks. When the bull market runs, small caps typically lead the action as the big institutional firms go "risk on". But they also lead the corrections as well, as everyone looks for safety in the blue chips of the S&P 500. So the fact that RUT has traded higher for the past few weeks, but much more slowly than SPX may be significant. Maybe the bullish activity is more conservative than we may think. If that is the case, then the apparent flattening of the S&P 500 index may be telling.

If we look for hard economic data to support this bullish run, we are going to come up short. Part of the reason SPX is slowing is the lack of glowing reports from the current earnings cycle. Maybe this run is based on renewed confidence that the Fed won't raise interest rates again anytime soon. Another possibility is the "best house in the bad neighborhood" theory. The global economy is slowing and, even though the U.S. economic data are mediocre at best, we are looking better than most of the developed economies. Perhaps we are seeing the effects of global cash flows into our stock market.

As long as RUT lags behind, I am inclined to be cautious about jumping on the bulls' band wagon. I am playing some bullish trades and I am hedging some of my short call spreads positioned above the market, but I am watching it closely. At best, I'm a nervous bull.

The new market highs led the news yesterday, but the markets took a breather today. SPX closed unchanged at $2152 and RUT pulled back $5 to close at $1201. Volatility continued to contract with the VIX closing at 13.0%, down another half point. Trading volume has been at or below the 50 day moving average (dma) for the past eight trading sessions. Trading in the S&P 500 declined again today to 1.9 billion shares. trading volume decreased 15% on the NYSE and pulled back 11% on NASDAQ.

If we look at the longer term charts on SPX, RUT and NASDAQ composite, one thought is on many traders' minds: We've been trapped in this sideways market for several months; is this really a break-out or is this market just teasing us? Many of us have an almost automatic response to a rational, cause and effect explanation of the markets. We try to determine whether the price "makes sense". We look at price to earnings ratios, dividend yields and much more. But ultimately, the market price is correct. We may not understand it or it may not agree with our careful analysis, but it is what it is. An alternative approach is more statistical.

SPX has now gapped open at the first trade four days in succession. Today's open was very muted, but it was technically higher. But today ended the Russell 2000 Index's string of gap opens higher. The NASDAQ Composite's string of gap opens higher ended today and NASDAQ pulled back $17 to close at $5006. In fact, the all time high of NASDAQ at $5219 from last July remains unchallenged. If we apply the Bollinger bands to our price charts (plus and minus two standard deviations around the 20 dma), we would expect the index price to remain within the bands about 95% of the time, purely on a statistical basis. In fact, it works out just that way. Plot the Bollinger bands on your favorite stock or index and you will see what I mean. For the previous two days of trading, SPX was running right along the upper edge of the band. But SPX pulled back a bit today. RUT actually closed outside the upper edge of the band yesterday, but pulled back within the band today. NASDAQ matched SPX's price action, running right along the upper edge of the band, but pulling back today. We expect the small cap stocks in RUT to lead the market higher if, in fact, we are breaking out to a new bullish run. It is the classic "risk on" trade.

That's the positive case. But there are many negatives: BREXIT, a slowing economy in China, a couple of tepid GDP numbers for the U.S., and much uncertainty surrounding our presidential election.

What? You're waiting for the answer? Unfortunately, my crystal ball is as murky as yours. Those confident gurus on CNBC must know the secret, or at least they have mastered sounding confident. For me, I hedge positions as necessary, and slowly add bullish positions as I see the bullish strength of this market continue. But I remain cautious. We hit some relatively high numbers in December before we went over the cliff. Betting the farm on this bullish run is a good way to lose the farm.