The Prepared Mind 1.07.2013

“Chance favors the prepared mind.” — Louis Pasteur

Markets reached five year highs as the “fiscal cliff” continued to dominate and move the equity markets.   One of the best market weeks in a very long time showed gains in the indexes of 4%-5%.  Stocks rallied on Monday when President Obama and legislative leaders from both parties indicated a resolve to fix the tax rate portion of the cliff.  Legislators started the New Year with near midnight vote to end the tax rate impasse.  Equities continued to surge on Wednesday. The end of the week was tempered by concerns about the possibility of QE ending earlier than previously expected, the U.S. debt ceiling, and automatic government spending cuts.  The focus will now be on the spending portion of the “fiscal cliff.”  These negotiations have moved out to March.

Small cap stocks outperformed the big caps last week.  The Russell 2000 (RUT) was the strongest index for the week.  The RUT soared to 876.18 a gain of 5.75% or nearly 48 points. The Dow Jones Industrial Average (DJIA) jumped 497 points, or 3.84%, to close at 13,435.21.  The S&P 500 closed at 1,66.47, up 64 points or a gain of 4.57%.  The S&P 100 (OEX) gained 4.48%, or 28.52 points, to close 664.69.  The NDX closed at 2,724.48, a triple digit gain of 118.13 points or 4.53%. The VIX and other volatility indexes reflected a cosmic sigh of relief. The VIX showed the largest one week decline since its inception.   The VIX closed last week at 13.83, an decrease of 8.89 points or a weekly loss of 39.13%.  The other volatility indexes reflected market optimism and showed similar losses for the week.  Here is a capsule view of last week’s market numbers:

Index

Close

Weekly Change

% Weekly

% YTD

Volatility of  Index

Dow Jones Industrials (DJIA)

13,435.21

497.10

3.84%

2.53%

13.06% (VXD)

S&P 500 (SPX)

1,466.47

64.04

4.57%

2.82%

13.83% (VIX)

NASDAQ 100 (NDX)

2,724.49

118.13

4.53%

2.39%

15.51% (VXN)

Russell 2000 (RUT)

876.18

47.64

5.75%

2.91%

17.21% (RVX)

S&P 100 (OEX)

664.69

28.52

4.48%

2.80%

13.80% (VXO)

CBOE Volatility Index (VIX)

13.83

-8.89

-39.13%

NA

CBOE Volatility Index (VIX)

13.83

-8.89

-39.13%

NA

It is good to have the Sturm and Drang (Storm and Stress for the non-Teutonic types) of the fiscal cliff behind us for the next few months.   The movement of the VIX the past month has led to increased conversation about trading the VIX.  This conversation invariably leads to conversations about trading the VIX and hedging portfolios with the VIX.   It should be noted that we cannot trade the VIX.  The VIX is the volatility index created by the CBOE to calculate a blended 30 calendar day implied volatility based  on the options for two different expirations date for the S&P 500 (SPX).  This number is known as the “spot” or the “cash” on the VIX.  Options are not traded on the VIC cash.  The options for each expiring month are traded against a VIX future for that specific month.  For example the February VIX options trade against February VIX future. The price of the future is determined an auction market.

The bottom separate and distinct 30 day time windows will have different implied volatilities.  This is highlighted by the following example:

Expiration

Symbol

1/4/2013 Close
Cash/Spot VIX

13.83

Jan 13 VX F3

15.30

Feb 13 VX G3

16.67

Mar 13 VX H3

18.02

Apr 13 VX J3

18.73

The futures trade at a higher prices as we move further out in time.  This is a result of known factors (the spending portion of the fiscal cliff) and unknown factors.  I watch the cash VIX and the front four months of the VIX futures.  When trading options know what you are trading – i.e the VIX options trade on a specific VIX future not the spot VIX.  It is your responsibility to make sure you understand what the underlying is for any options you trade. This is very important when you trade ETF’s or ETN’s based on a derivative.  The information is available in the body of the “Contract Specifications” for any product with options.  Know the impact of changes in price of the underlying, volatility and time upon the options you are trading.

Stick with your plan.    Remain disciplined.  Remain on top of market news and movers.  Do not chase profits and disregard risk.

Remember:

  “Chance favors the Prepared Mind.” – Louis Pasteur

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

Monday January 7:

Economic: 

Other: 

Earnings: None meeting criteria (Criteria = IV30 > 20, Price > 20, Daily option volume > 200.)

Tuesday January 8:

Economic:  NFIB Small Business Optimism 7:30, ICSC-Goldman Sachs Store Sales – 7:45, Redbook – 8:55, Consumer Credit – 3:00.

Other:  Richmond Federal Reserve Bank President Jeffrey Lacker speech on the economic outlook to the South Carolina Business & Industry Political Education Committee –  1:30.

Earnings:

Symbol

Company Name

Jan 4 close

IV30

B/A

XEPS

MON Monsanto Co.

$95.34

21.6

B

$0.37

SCHN Schnitzer Steel Industries Inc.

$31.25

44.3

B

$0.04

APOL Apollo Group Inc.

$21.78

62.5

A

$0.90

 

 

Wednesday January 9:

Economic:  MBA Purchase Applications – 7:00, EIA Petroleum Status Report – 10:30.

Other:

Earnings:

Symbol

Company Name

Jan 4 close

IV30

B/A

XEPS

STZ Constellation Brands Inc.

$36.69

41.3

B

$0.55

Thursday January 10:

Economic:  Jobless Claims – 8:30, Bloomberg Consumer Comfort Index – 9:45, Wholesale Trade – 10:00, EIA Natural Gas Report – 10:30.

 

Other:  Kansas City Federal Reserve Bank Esther George speaks to the Central Exchange on the “2013 Economic Outlook” – 12:45, St Louis Federal Reserve Bank President James Bullard speech on the economy and monetary policy to the Wisconsin Economic Forecast Luncheon – 2:00, Minneapolis Federal Reserve Bank President Narayana Kocherlakota speech and town hall meeting in Minneapolis -8:00.

Earnings:  None meeting criteria.

 

Friday January 11:

Economic:  International Trade – 8:30, Import and Export Prices – 8:30.

Other:  Philadelphia Federal Reserve Bank President Charles Plosser speech on the economic outlook at New Jersey Economic Leadership Forum – 9:30.

Earnings:

 

Symbol Company Name Jan 4 close IV30 B/A XEPS
INFY Infosys Technologies Ltd.

$43.47

39.5

B

$0.73
WFC Wells Fargo & Company

$34.76

20.5

B

$0.89

 

Monday January 14:

Economic:  

Earnings: None meeting criteria.

Other: San Francisco Federal Reserve Bank President John C. Williams keynote speech to the SEMI ISS 2013 Industry Strategy Symposium – 11:55/

 

 

 

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