The Prepared Mind: October 13, 2014

"Chance favors the prepared." -- Louis Pasteur

“Chance favors the prepared mind.” — Louis Pasteur

It was a wild week for the markets. Wednesday was the biggest up day of the year for the Dow Jones Industrial Average – up 275, while Thursday was the biggest down day of the year – down 335.The major indexes fell to 8-week lows with fears fueled by slowing global (specifically European) growth, the specter of deflation, An Ebola pandemic, turmoil in the Mideast, and the end of the Fed’s quantitative easing. Equity indexes were down 3% for the week and drown 5% from recent all-time highs. The current move downwards is halfway to the 10% move used to define a market correction.

Remain calm and have a plan. After the crash of 1987, famed financier John Templeton said one of his foundations for success was never having bought a bottom nor sold a top. Bernard Baruch said the same thing with a different twist: “Don’t try to buy at the bottom and sell at the top. It can’t be done except by liars.” This adage is a good description of what it means to let a market come to you. Uncertainty increases the value of judicial use of the strategy – “Do nothing.”

Here is an overview of last week’s market performance:

Index Oct 10 Close Weekly Change % Weekly % YTD Volatility of Index
Dow Jones Industrials (DJIA) 16,544.10 -465.29 -2.74% -0.20% 17.11%(VXD)
S&P 500 (SPX) 1,906.13 -61.77 -3.14% 3.13% 21.21% (VIX)
NASDAQ 100 (NDX) 3,858.36 -165.43 -4.11% 7.42% 22.62% (VXN)
Russell 2000 (RUT) 1,051.58 -50.80 -4.61% -9.63% 24.35% (RVX)
S&P 100 (OEX) 853.36 -25.41 -2.89% 3.59% 20.2% (VXO)
CBOE Volatility Index (VIX) 21.21 6.66 45.77% NA

 A reminder: On Monday, October 6, the CBOE is changed the methodology use to calculate the VIX. In addition, the CBOE has added trading in weekly options on the VIX. The VIX you see on the board under the symbol “VIX” will include the qualifying monthly and weekly SPX options. The VIX value used to settle VIX futures and options will only include monthly SPX options, same as before. Except that VIX will now use the symbol “VIXMO.” Add, track and compare the two measurements to gain a real life understanding.

The weekly gain for the VIX was the seventh highest since 1990. The absence of what had become expected buy programs for the equities fueled a 46% gain in the VIX and a 58% gain in VXST – the VIX Short-term Volatility Index.

VIX curves went from contango from backwardization. The front month future is now trading higher than the back month VIX futures. This change can bee seen in the chart below. Compare last week’s VIX futures settlements with this week’s settlements.

Here is an overview of last week for the VIX and related products:

 

Index Ticker 10/10 Close Change % Change 10/3 Close
CBOE Volatility Index VIX 21.24 6.69 45.98% 14.55
VIX October Future VXV4 19.78 4.58 30.13% 15.20
VIX November Future VXX4 18.65 2.85 18.04% 15.80
VIX December Future VXZ4 18.44 2.29 14.18% 16.15
CBOE Short-term Volatility Index VXST 21.95 8.09 58.37% 13.86
CBOE 3 Month Volatility Index VXV 19.93 3.89 24.25% 16.04
CBOE Mid-term Volatility Index VXMT 20.56 2.92 16.55% 17.64
VIX of VIX VVIX 113.38 25.61 29.18% 87.77
Long VIX ETP’s
S&P 500 VIX Short Term Futures ETN VXX 35.85 6.23 21.03% 29.62
S&P 500 VIX Mid-Tem Futures ETN VXZ 13.87 1.08 8.44% 12.79
Short VIX ETP’s
Daily Inverse VIX Short Term ETN XIV 31.86 (8.12) -20.31% 39.98
Short VIX Short Term Futures ETF SVXY 62.46 (15.96) -20.35% 78.42

 

The domestic economic focus this week will be on the consumer sector and housing. Wednesday’s Retail Sales report is expected to confirm positive reports on consumer behavior in September. Recent reports for housing have shown slippage in sales and prices. Homebuilders are the largest contributor to housing starts Thursday’s report on Housing Starts is an indicator of builders’ perception of the strength of the housing market. International economic reports will carry greater weight then US reports. China will be releasing CPI, PPI and merchandise trade data. Eurozone reports will focus on consumer and producer prices. These numbers will be parsed for any evidence of deflation.

Market focus may be changing from global concerns to earnings. The 3rd Quarter earnings season has started. The earnings will have the ability to trump global concerns. The announcements will start coming out in full force at the end of this week. Equity traders need to know if earnings fall before or after the expiration date of any options traded. I have scanned for stocks announcing earnings the coming week using the following criteria: Price > 20, 30 Day Implied Volatility > 22, and Average Daily Option Volume > 400 contracts. It is your responsibility to confirm these earnings dates. Earnings dates can and do change.

 

Trading advice to remember:

“Chance favors the Prepared Mind.” – Louis Pasteur

“Don’t try to buy at the bottom and sell at the top. It can’t be done except by liars.” Bernard Baruch
Monday October 13:

Economic: US Holiday – Stocks and Futures Open, Bonds Closed.

International Economic: Japan Producer Price Index (PPI) – 7:50 PM, Markets closed in Canada, Japan, and Argentina.

Other: Chicago Federal Reserve Bank President Charles Evans speech to National Council on Teacher Retirement in Indianapolis – 12:30 PM.

Optionable Earnings: None meeting criteria.

Tuesday October 14:

Economic: NFIB Small Business Optimism Index – 7:30, ICSC – Goldman Sachs Store Sales – 7:45, Redbook – 8:55.

International Economic: France CPI – 2:45 AM, Great Britain PPI – 4:30 AM, EMU Industrial Production – 5:00 AM.

Other:

Optionable Earnings:

Symbol Company Name Oct 10 Close IV30 B/A XEPS
C Citigroup Inc $51.14 30.1 B $1.12
DPZ Domino’s Pizza, Inc. $76.70 26.9 B $0.61
JBHT J.B. Hunt Transport Services, Inc. $73.05 25.5 B $0.85
JPM JPMorgan Chase & Co. $59.08 24.4 B $1.39
WWW Wolverine World Wide, Inc. $25.07 32.9 B $0.59
CSX CSX Corporation $30.73 26.7 A $0.47
INTC Intel Corporation $33.62 33.0 A $0.65
LLTC Linear Technology Corporation $41.30 32.5 A $0.54

 Wednesday October 15:

Economic: MBA Purchase Applications – 7:00, PPI- FD (PPI – Final Demand) – 8:30, Retail Sales – 8:30, Empire State Manufacturing Survey – 8:30, Atlanta Fed Business Inflation Expectations – 10:00, Business Inventories – 10:00 – 10:00, Beige Book – 2:00 PM.

International: Germany CPI – 8:00 AM.

Other:

Optionable Earnings:

Symbol Company Name Oct 10 Close IV30 B/A XEPS
ASML ASML Holding NV (ADR) $94.33 34.6 B $0.72
BLK BlackRock, Inc. $315.21 27.1 B $4.71
SCHW Charles Schwab Corp $27.13 33.8 B $0.25
STJ St. Jude Medical, Inc. $61.95 28.9 B $0.96
AXP American Express Company $85.89 23.3 A $1.38
EBAY eBay Inc $52.86 29.3 A $0.57
LVS Las Vegas Sands Corp. $60.61 38.6 A $0.85
NFLX Netflix, Inc. $461.62 35.2 A $0.91
URI United Rentals, Inc. $97.91 43.1 A $2.05
ADS Alliance Data Systems Corp. $242.00 33.2 B $3.12

 Thursday October 16:

Economic: Weekly Jobless Claims – 8:30, Industrial Production – 9:15, Philadelphia Fed Survey – 10:00, Housing Market Index – 10:00, EIA Natural Gas Status Report – 10.30 EIA Petroleum Status Report – 11:00..

International Economic: EMU HICP – 5:00 AM, EMU Merchandise Trade – 5:00 AM.

Other: Philadelphia Federal Reserve Bank President Charles Plosser speech on the economic outlook, in Allentown, PA – 8:00 AM

Optionable Earnings:

Symbol Company Name Oct 10 Close IV30 B/A XEPS
BHI Baker Hughes Incorporated $58.60 38.2 B $1.15
BX The Blackstone Group L.P. $29.77 31.8 B $0.85
DAL Delta Air Lines, Inc. $33.71 52.4 B $1.18
DHR Danaher Corporation $72.77 26.2 B $0.88
DOV Dover Corp $76.12 26.2 B $1.33
GS Goldman Sachs Group Inc $181.27 24.8 B $3.21
GWW W.W. Grainger, Inc. $246.15 24.0 B $3.28
MAT Mattel, Inc. $30.62 34.0 B $1.08
PPG PPG Industries, Inc. $186.03 25.4 B $2.76
TSM Taiwan Semiconductor Mfg. Co. Ltd. $20.47 29.6 B $0.49
UNH UnitedHealth Group Inc. $84.94 22.6 B $1.53
ATHN athenahealth, Inc $126.55 47.2 A $0.06
CCK Crown Holdings, Inc. $44.54 23.5 A $1.22
COF Capital One Financial Corp. $81.44 23.5 A $1.91
CPHD Cepheid $42.99 41.0 A ($0.16)
GOOG Google Inc – Class C $560.88 30.9 A $6.33
GOOGL Google Inc – Class A $570.81 31.1 A $5.35
SLB Schlumberger Limited. $94.92 32.1 A $1.47
SNDK SanDisk Corporation $89.99 41.3 A $1.25
XLNX Xilinx, Inc. $40.19 36.1 A $0.55

 

 Friday October 17:

Economic: Housing Starts – 8:30, Consumer Sentiment – 9:55.

International Economic: No major announcements.

Optionable Earnings:

Symbol Company Name Oct 10 Close IV30 B/A XEPS
BK The Bank of New York Mellon Corporation $37.31 24.4 B $0.61
CMA Comerica Incorporated $47.48 26.4 B $0.81
GE General Electric Company $24.78 23.1 B $0.38
HON Honeywell International Inc. $89.77 23.6 B $1.41
KSU Kansas City Southern $115.67 32.2 B $1.26
MS Morgan Stanley $33.30 31.8 B $0.55
STI SunTrust Banks, Inc. $36.43 25.0 B $0.82
SYF Synchrony Financial $24.55 24.9 B $0.64
TXT Textron Inc. $33.51 35.6 B $0.54
GCI Gannett Co., Inc. $159.21 32.2 B $0.55

 

Monday October 20:

Economic: No major announcements.

International Economic: Germany PPI – 2:00 AM, China GDP – 10:00 PM. China Retail Sales – 10:00 PM. China Industrial Production – 10:PM.

Other: Federal Reserve Gov. Daniel Tarullo speech to New York Fed conference on reforming the financial industry – 12:00 PM.

Optionable Earnings:

Symbol Company Name Oct 10 Close IV30 B/A XEPS
HAL Halliburton Company $27.89 41.4 B $1.11
HAS Hasbro, Inc. $55.00 25.3 B $1.46
SAP SAP SE (ADR) $68.92 25.9 B $0.94
VFC VF Corp $65.04 26.7 B $1.09
AAPL Apple Inc. $101.02 28.4 A $1.30
CE Celanese Corporation $660.61 33.1 A $1.43
CMG Chipotle Mexican Grill, Inc. $54.85 35.2 A $3.84
ILMN Illumina, Inc. $53.71 41.8 A $0.56
PKG Packaging Corp Of America $61.98 32.0 A $1.26
RCII Rent-A-Center Inc $30.61 35.9 A $0.46
STLD Steel Dynamics, Inc. $20.77 37.3 A $0.44
TXN Texas Instruments Incorporated $46.02 29.3 A $0.71
ZION Zions Bancorporation $27.64 28.8 A $0.45

 

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