The Prepared Mind: December 15, 2014

knifeBy Frank Fahey

Where is the Santa Claus rally? Worries about the state of the Chinese economy and falling oil prices led to a global sell off last week. The Dow Jones Industrials had their largest weekly point sell off since 2011and its largest percentage sell of since 2012.. The S&P 500 wiped out five weeks of gains. Crude oil fell 12.6% this week and is down 49% from its August highs. The Athens stock market fell by over 20% and EMU industrial production is essentially flat. All is not negative. US consumer confidence is the best in over a year and small business optimism is at its highest levels since 2007. Do not feel compelled to trade. Intraday volatility is a pitfall for traders with a shorter term window.

Market indicators have been moving towards bearish since mid-November. A week ago, I mentioned that price remained the final bullish indicator. The S&P 500 has moved through a number of support levels. Equity only put/call ratios remain on sell signals. The S&P has turned bearish while the VIX is now in an uptrend. Many analysts are calling this a correction. The same analysts are predicting the correction will be short lived. Be wary of trying to pick a bottom. This activity was described on the trading floor as “trying to catch a falling knife.”

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

Index Dec 12 Close Weekly Change % Weekly % YTD Volatility of Index
Dow Jones Industrials (DJIA) 17,280.83 (677.96) -3.78% 4.25% 20.45%(VXD)
S&P 500 (SPX) 2,002.33 (73.04) -3.52% 8.33% 21.08% (VIX)
NASDAQ 100 (NDX) 4,189.84 (123.62) -2.87% 16.64% 22.51% (VXN)
Russell 2000 (RUT) 1,147.13 (35.12) -2.97% -1.42%      24.4% (RVX)
S&P 100 (OEX) 885.88 (33.78) -3.67% 7.53% 20.89%(VXO)
CBOE Volatility Index (VIX) 21.08 9.26 78.34% NA

The move in the VIX products showed real strength this past week. The changes, particularly in the medium and longer term products, was the most dramatic I have seen in my years of watching volatility. This move raises questions about the strength of the market. The VVIX – the volatility or VIX of the VIX, closed at 138.60, its 3rd highest close since 2007.

Over 70% of the demand for VIX options was on the call side. The call demand was the driving force behind the volatility in VIX options. It indicates a heightening concern about the strength of the S&P 500. Russel Rhoads of the CBOE noted an interesting fact about the VIX inverse and leveraged ETPs and ETNs. In 2014, the VXX is down 20%, UVXY (2 x long) is down 55%, and SVXY (short) is down 12%.

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

Index Ticker 12-Dec Change % Change 5-Dec
CBOE Volatility Index VIX 21.08 9.26 78.34% 11.82
VIX December Future VXZ4 19.60 6.00 44.12% 13.60
VIX January Future VXF5 19.15 3.80 24.76% 15.35
VIX February Future VXF5 19.45 3.15 19.33% 16.30
CBOE Short-term Volatility Index VXST 23.82 13.12 122.62% 10.70
CBOE 3 Month Volatility Index VXV 21.00 5.45 35.05% 15.55
CBOE Mid-term Volatility Index VXMT 21.64 4.12 23.52% 17.52
VIX of VIX VVIX 138.60 53.19 62.28% 85.41
Long VIX ETP’s
iPath S&P 500 VIX Short Term Futures VXX 33.89 7.79 29.85% 26.10
pShares VIX Short Term Futures ETF VIXY 22.51 5.16 29.74% 17.35
iPath S&P 500 VIX Mid-Tem Futures ETN VXZ 13.87 1.59 12.95% 12.28
Short VIX ETP’s
Daily Inverse VIX Short Term ETN XIV 30.11 (9.96) -24.86% 40.07

The key events on the calendar is the FOMC meeting on Tuesday and Wednesday and Chair Janet Yellen’s ensuing press conference on Wednesday. Fed policy announcements on Wednesday will have the ability to further roil the skittish markets. Manufacturing and housing are the highlight economic reports this coming week. Weakness in either could fuel downward momentum in the market. Flash manufacturing PMIs will be released for China, Japan, Germany, France and the Eurozone.

It is time to start preparing for the 4th quarter’s earning cycles. December monthly options are expiring this Friday. Equity traders should be aware of the dates of earnings announcements. Many earnings announcements will take place before the expiration of January options. Be aware of the effect of these announcements on the implied volatility of the options you are trading. 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

“The large print giveth and the small print taketh away.” – Tom Waits
Monday December 15:

Economic: Empire State Manufacturing Survey – 8:30, Industrial Production – 9:15, Housing Market Index – 10:0.

International Economic: China PMI Flash Manufacturing Index – 8:45 PM.

Optionable Earnings:

Symbol Company Name Dec 5 Close IV30 B/A XEPS
PAY VeriFone Systems Inc $34.48 47.0 A $0.31



Tuesday December 16:          

Economic: ICSC–Goldman Sachs Store Sales – 7:45, Redbook – 8:55, PMI Manufacturing Index Flash.

International Economic: Germany PMI Composite Flash – 3:30 AM, EMU PMI Composite Flash – 4:00AM, Great Britain CPI and PPI – 4:30 AM, EMU Merchandise Trade – 5:00 AM, Japan Merchandise Trade 6:50 PM,

Other: FOMC meeting begins.

Optionable Earnings:

Symbol Company Name Dec 5 Close IV30 B/A XEPS
DRI Darden Restaurants, Inc. $57.83 27.6 B $0.27
NAV Navistar International Corp $36.79 44.1 B $0.03



Wednesday December 17:

Economic: MBA Purchase Applications – 7:00, Consumer Price Index – 8:30, EIA Petroleum Status Report – 10:30.

International: Bank of England Minutes – 4:30 AM, EMU Harmonized Index of Consumer Prices (HICP) – 5:00 AM.

Other: FOMC Meeting Announcement – 2:00, FOMC Forecasts- 2:00, Fed Chair Press Conference-2:30.

Optionable Earnings:

Symbol Company Name Dec 5 Close IV30 B/A XEPS
FDX FedEx Corporation $176.88 25.5 B $2.18
JOY Joy Global Inc. $49.08 44.9 B $1.14
WCC WESCO International, Inc. $72.90 30.4 B $1.51
JBL Jabil Circuit, Inc. $20.10 37.0 A $0.40
ORCL Oracle Corporation $40.76 27.5 A $0.64


Thursday December 18:

Economic: Jobless Claims – 6:30, PMI Services Flash – 9:45, Bloomberg Consumer Comfort Index – 9:45, Philadelphia Fed Survey 0 10:00, Leading Indicators – 10:00, EIA Natural Gas Report – 10:30.

International Economic: Bank of Japan Announcement.


Optionable Earnings:

Symbol Company Name Dec 5 Close IV30 B/A XEPS
ACN Accenture Plc $83.88 23.6 B $1.20
CCL Carnival Corporation $43.53 32.8 B $0.19
SAFM Sanderson Farms, Inc. $90.70 44.1 B $4.21
AIR AAR Corp. $27.38 47.4 A $0.37
CTAS Cintas Corporation $72.80 23.9 A $0.78
NKE Nike Inc $96.93 26.0 A $0.69
RHT Red Hat Inc $58.42 36.4 A $0.27


Friday December 19:

Economic: Atlanta Fed Business Inflation Expectations, Kansas City Fed Manufacturing Index – 11:00, Reuters/University of Michigan Consumer Sentiment – 9:55.

International Economic: No major announcements.

Other: Quadruple Witching – Expirations in stock index futures, stock index options, equity options, and single stock futures.

Optionable Earnings:

Symbol Company Name Dec 5 Close IV30 B/A XEPS
FINL Finish Line Inc $28.17 38.0 B $0.02
KMX CarMax, Inc $59.51 40.1 B $0.54


Monday December 22:

Economic: Chicago Fed National Activity Index – 8:30, Existing Home Sales – 10:00.

International Economic: No major announcements.

Optionable Earnings: None meeting criteria.

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