The Prepared Mind: December 30, 2013

“Chance favors the prepared mind.” — Louis Pasteur

This past Friday’s lower closing was an anomaly.  Prior to Friday, the S&P 500 (SPX)  and Dow Jones Industrial Average (DJIA) had a string of six consecutive all-time record closing highs.  Friday closed marginally lower and continued depressed holiday trading volume.  Despite the sell-off, the RUT, OEX, SPX and DJIA still managed to record all-time weekly closing highs.  The DJIA recorded its 50th record closing high.  This means the DJIA set a record high on over 20% of the trading days in 2013.  The other indexes (with the exception of the NDX which is still light years away from its highs of the dot com era) showed similar behavior this year.

The weight of market evidence is against the bears. Earlier in this quarter analysts were predating a consensus gain of 10%.  The 4th quarter is poised to end with gains exceeding 10%.  The same prognosticators are now scrambling to come up with new predictions after the markets fulfilled the 2014 goal during the 4th quarter of 2014.  The consensus among analysts and individual investors is growing more bullish.  Bears are pointed to this bullishness as a contra indicator for 2014.  We will not know if a sell-off is a correction until after the fact.  The media market mavens proclaimed the beginning of a correction multiple times this year.   These “corrections” proved to be nothing more than missed buying opportunities.

The new highs for the SPX did not result in new lows for the VIX.  The VIX closed at 12.46 for the week – a loss of 1.33 or 9.64%.  Thursday provided the weekly low for the VIX at 11.60.  The closing lows for the VIX this year were 11.30 on March 14th and March 15th.  The S&P 500 is up 18% or 280 points since these lows.  The VIX is becoming more popular among retail option investors.  Be aware the underlying for these options is not the VIX.  VIX options prices are calculated based on the price of a feature associated with each expiring month.  For example, the underlying for January VIX options is VX F4.   The January future closed at 13.70 – down 0.75 or -5.19%.  The February options trade based on the future VX G4.  Make sure you paper trade or scrimmage VIX option strategies before committing cash.

Here is a capsule view of last week’s market numbers:

Index

Close

Weekly Change

% Weekly

% YTD

Volatility of  Index

Dow Jones Industrials (DJIA)

16,478.41

257.27

1.59%

25.75%

11.70% (VXD)

S&P 500 (SPX)

1,841.40

23.09

1.27%

29.11%

12.46% (VIX)

NASDAQ 100 (NDX)

3,574.02

42.83

1.21%

34.31%

14.51% (VXN)

Russell 2000 (RUT)

1,160.74

14.74

1.29%

34.60%

16.17% (RVX)

S&P 100 (OEX)

821.25

11.51

1.42%

27.01%

10.93% (VXO)

CBOE Volatility Index (VIX)

12.46

-1.33

-9.64%

NA

 

Quarterly Options expire on Tuesday.  The coming  week will be characterized by a dearth of economic reports and low holiday trading volume.  However, it will provide the opportunity to position trades for future economic events.  The first full week of January will highlight employment numbers for December and release of retail sales numbers.  There are no earnings announcements this coming week, but it istime to start paying attention to the dates for earnings announcements.  The earnings cycle will start with the announcement by Alcoa Aluminum (AA) Thursday, January 9.   Every week I scan stocks announcing earnings the coming week. This week the scan produced nearly 250 stocks meeting robust criteria indicating liquid option markets.  I use the following criteria:  Price > 20, 30 Day Implied Volatility > 20, and Average Daily Option Volume > 200 contracts.  It is your responsibility to confirm the earnings dates. They can and do change.

Symbol

Company Name

December 27  Close

IV30

Date

INFY Infosys Ltd ADR

$57.49

41.1

January 10, 2014

IBKR Interactive Brokers Group, Inc.

$24.66

26.2

January 14, 2014

ADTN ADTRAN, Inc.

$27.10

43.3

January 14, 2014

LLTC Linear Technology Corporation

$45.32

21.7

January 14, 2014

FRX Forest Laboratories, Inc.

$59.15

32.2

January 14, 2014

SLM SLM Corp

$26.05

20.1

January 15, 2014

SCHW Charles Schwab Corp

$25.74

25.6

January 15, 2014

INTC Intel Corporation

$25.70

22.3

January 15, 2014

XLNX Xilinx, Inc.

$45.20

20.2

January 15, 2014

FAST Fastenal Company

$47.13

28.9

January 15, 2014

EPB El Paso Pipeline Partners, L.P.

$35.23

23.5

January 15, 2014

CSX CSX Corporation

$28.43

20.1

January 15, 2014

BK The Bank of New York Mellon

$34.56

20.7

January 15, 2014

UNH UnitedHealth Group Inc.

$74.85

22.8

January 16, 2014

BLK BlackRock, Inc.

$315.39

22.1

January 16, 2014

PPG PPG Industries, Inc.

$188.08

21.4

January 16, 2014

C Citigroup Inc

$52.35

22.5

January 16, 2014

COF Capital One Financial Corp.

$75.88

21.7

January 16, 2014

AAL American Airlines Group Inc

$26.13

42.0

January 16, 2014

MS Morgan Stanley

$31.10

25.2

January 17, 2014

SLB Schlumberger Limited.

$89.39

21.7

January 17, 2014

CMA Comerica Incorporated

$47.51

21.4

January 17, 2014

STI SunTrust Banks, Inc.

$36.71

20.2

January 17, 2014

Trading advice to remember:

  “Chance favors the Prepared Mind.” – Louis Pasteur

“Our enterprising security buyer, of course, will desire and expect to attain better results than his defensive or passive companion.  But first he must make sure that his results will not be worse.  It is no difficult trick to bring a great deal of energy, study, and native ability into Wall Street and to end up with losses instead of profits.  These virtues, if channeled in the wrong directions, become indistinguishable from handicaps..  Thus it is most essential that the enterprising investor start with a clear conception as  to which courses of action offer reasonable chances of success and which do not.”

– Benjamin Graham, The Intelligent Investor

Monday December 30:

Economic:  Pending Homes Sales Index – 10:00, Dallas Fed Manufacturing Survey – 10:30, Farm Prices – 3:00.

International Economic: No major reports.

Optionable Earnings:   None meeting criteria.

Tuesday December 31:

Economic:  ICSC-Goldman Store Sales – 7:45, Redbook – 8:55, S&P Case Shiller Home Price Index – 9:00, Chicago PMI – 9:45, Conference Board Consumer Confidence – 10:00, State Street Investor Confidence – 10:00.

International Economic:  No major reports.

Other:  Quarterly Options Expiration.

Optionable Earnings: None meeting criteria.

Wednesday January 1:

U.S. Holiday – New Year’s Day

Markets Closed

International Economic:

Thursday January 2:

Economic:  MBA Purchase Applications – 7:00, Gallup U.S. Job Creation Index 8:30, Jobless Claims – 8:30, PMI Manufacturing Index – 8:58, Bloomberg Consumer Comfort Index – 9:45,  ISM Manufacturing Index – 10:00, Construction Spending – 10:00.

International Economic:  EMU PMI Manufacturing Index – 4:00.

Optionable Earnings:  None meeting criteria.

 

Friday January 3:

Economic: EIA Natural Gas Report – 10:30, EIA Petroleum Status Report – 11:00.

International Economic: No Major Reports.

Other:  Philadelphia Fed’s Charles Plosser on panel on global economy in low interest rate environment in Philadelphia – 12:45, Federal Reserve Gov. Jeremy Stein speech on banks as patient debt investors, in Philadelphia -1:15, Richmond Federal Reserve Bank President Jeffrey Lacker speech on the economic outlook in Baltimore – 1:30, Federal Reserve Chairman Ben Bernanke speech on the changing Fed in Philadelphia -2:30, Philadelphia Fed’s Charles Plosser speech in Philadelphia – 5:00.

Optionable Earnings:  None meeting criteria

Monday January 7:

Economic:  No Major Reports.

International Economic: China Merchandise Trade – 10:30 PM Sunday, Japan GDP 6:60 PM, China PPI – 8:30 PM.

Optionable Earnings:   None meeting criteria

 

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