The Prepared Mind 8.27.2012

The three month trend in the indexes was tempered by a minor sell-off last week.  The indexes met resistance at past 4 to 7 year highs.  The good news/bad news game impacted the market.  On Thursday, James Bullard, St. Louis Fed President, talked about the improvement in US economic data over the previous month.   This “good news” led to a 1% decline in the markets.  If “good news” lessens the chances of QE3, it becomes “bad news.”  The expectations were pumped up a bit on Friday resulting in a 0.5% increase in the S&P 500.

Index Close Weekly Change % Weekly % YTD Volatility of  Index
Dow Jones Industrials (DJIA) 13,157.97 -117.23 -0.88% 7.70% 13.85% (VXD)
S&P 500 (SPX) 1,411.13 -7.03 -0.50% 12.21% 15.18% (VIX)
NASDAQ 100 (NDX) 2,778.05 -2.25 -0.08% 21.96% 16.60% (VXN)
Russell 2000 (RUT) 809.19 -10.70 -1.31% 9.21% 20.14% (RVX)
S&P 100 (OEX) 649.04 -2.54 -0.39% 13.71% 14.62%(VXO)
CBOE Volatility Index (VIX) 15.18 1.73 12.86% NA

The coming week will focus Ben Bernanke’s Friday speech in Jackson Hole. Pundits are looking for information about the state of the economy and the impending “fiscal cliff.” ECB President Mario Draghi is expected to weigh-in with comments which may provide market direction.  Economic reports will focus on preliminary GDP, housing, consumer confidence and manufacturing.  Earnings are not expected to be a significant factor this week.

A topic of discussion last week was the low levels of the VIX.  Everyone wanted to buy the VIX.  Unfortunately, it is impossible to buy the VIX.  The implied volatility numbers I quote in my weekly musings are the daily cash settlement for the VIX.  The underlying product for the options traded on the VIX at CBOE are monthly futures.  The option trading in September use a September VIX future. The difference or contango between the VIX cash and VIX future can be significant.  Cash VIX closed at 15.18% and the September future (VX U2) closed at 18.55%.  The ETN based on the VIX – VXX and XIV – are not methods to directly trade the VIX.  It is your responsibility to know what you are trading.  Misunderstanding and lack of knowledge can and will lead to losses.  Expend the effort to educate yourself on the behavior of these products over price, time and implied volatility.   Call DiscoverOptions if you want to expand your understanding of these products.

Be disciplined.  Trade with a plan. Know where you will take profits and losses.


“Chance favors the Prepared Mind.” – Louis Pasteur

This week’s economic news (All times are Eastern Daylight Time.) Dates and times are subject to change:

Monday August 27:

Economic:  August Dallas Fed Manufacturing Survey – 8:30.

Earnings:  BMO:  Donaldson Company (DCI),  Seadrill (SDRL), Tiffany & Co (TIF);  AMC:  Focus Media (FMCN), Phillips- Van Heusen (PVH),

Other:  Cleveland Federal Reserve Bank President Sandra Pianalto speaks to the Newark Area Business Luncheon, in Newark, Ohio – 12.15, Chicago Federal Reserve Bank President  Charles Evans speaks to an MNI seminar in Hong Kong – 6:15.

Tuesday August 28:

Economic:  ICSC Goldman Sachs Retail Store Sales – 7:45, Redbook – 8:55, June  S&P Case Shiller Home Price Index  – 9:00,  August Conference Board Consumer Confidence – 10:00, Richmond Fed Manufacturing Index – 10:00, State Street Consumer Confidence – 10:00.

Earnings:  BMO:  Bank of Montreal (BMO0, Bank of Nova Scotia (BNZ)<  Cyberonics (CYBX), Movado Group (MOV), Sanderson Farms (SAFM, Standex International (SXI); AMC:  Dycom (DY).

Other:  Spanish bond Auction.

Wednesday August 29:

Economic: MBA Purchase Applications – 7:00, Q2 GDP (Preliminary) – 8:30, Q2 Corporate Profits(Preliminary) – 8:30, Pending Home Sales Index – 10:00, EIA Petroleum Status Report – 10:30, Beige Book – 2:00.

Earnings: BMO:  Brown-Forman (BF>B), Genesco (GCO), HJ Heinz (HNZ), Jos. A Bank Clothiers (JOSB), The Fresh Market (TFM); AMC:  Greif (GEF), Oxford Industries (OXM), Pandora Media (P), Vera Bradley (VRA).

Other:  German Chancellor Angel Merkel meets Italian Prime Minister Mario Monti in Berlin.

Thursday August 30:

Economic:  Chain Store Sales – 7:00, Jobless Claims – 8:30, July Personal Income and Outlays – 8:30, Bloomberg Consumer Confidence Index – 9:45, EIA Natural Gas Status Report – 10:30, Kansas City Fed Manufacturing Index.

Earnings:  BMO:  Bio-Reference Labs (BRLI), Ciena Corp (CIEN), Canadian Imperial Bank of Commerce (CM), Toronto- Dominion Bank (TD);  AMC):  Cascade (CASC), Esterline Technologies (ESL), Omnivision (OVTI), Splunk (SPLK).


Friday August 31:

Economic: Chicago PMI – 9:45, August Dow Jones Economic Sentiment – 9:45, Reuters/University of Michigan Consumer Sentiment – 9:55, Factory Orders –  10:00

Earnings:  None optionable.

Other:  Ben Bernanke  speaks at Jackson Hole Conference – 10:00.

Monday September 3:

All U.S. Markets Closed – Labor Day

Tuesday September 4:

Economic:  ISM Manufacturing Index – 10:00. Construction Spending – 10:00.

Earnings:  BMO:  Campbell Soup )CPB), Quanex (NX), Smithfield Foods (SFD);  BMO: Guideware Software (GWRE). Pep Boys (PBY).

Other:  Cleveland Federal Reserve Bank President Sandra Pianalto speaks to the Newark Area Business Luncheon, in Newark, Ohio – 12.15, Chicago Federal Reserve Bank President  Charles Evans speaks to an MNI seminar in Hong Kong – 6:15.

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