The Prepared Mind: December 22, 2014

By Frank Fahey

Last week I voiced concern about the absence of a Santa Claus rally. This week it seemed we had the missing rally. There was no rally if we look at market behavior over the past two weeks. Market analysts were touting the 3% – 4% weekly gains across the broad range indexes. The numbers show all of the indexes, with the exception of the Russell 2000 (RUT), to be at lower than the December 5th close.

The trading over the next two weeks should be very light. Releases of economic reports and corporate earnings will be equally light. The second team will be trading the accounts over the next two weeks. They will be trading with half an eye on the markets. Their primary focus will be on confidence pools for the NCAA football bowl games. If you walk into any trading rooms over the next two weeks, screens will be replaced by whatever sporting event is currently being broadcasted. The lack of liquidity and activity will allow a large trade to create a significant move in individual equities and some indexes. This “second team” is easily panicked and can over react to market moves. Do not allow yourself to be sucked into a liquidity trap.

I have found the next two weeks are best spent with family and friends and recharging my trading batteries. Enjoy the trading lull. Have joyous holidays and prepare for a prosperous 2015.

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

Index Dec 19 Close Weekly Change % Weekly % YTD Volatility of Index
Dow Jones Industrials (DJIA) 17,804.80 523.97 3.03% 7.41% 16.05%(VXD)
S&P 500 (SPX) 2,070.65 68.32 3.41% 12.03% 16.49% (VIX)
NASDAQ 100 (NDX) 4,274.16 84.32 2.01% 18.99% 16.89% (VXN)
Russell 2000 (RUT) 1,195.19 48.06 4.19% 2.71% 20.03% (RVX)
S&P 100 (OEX) 915.23 29.35 3.31% 11.10% 14.63%(VXO)
CBOE Volatility Index (VIX) 16.49 (4.59) -21.77% NA


The VIX sold of nearly 22% this past week as the S&P 500 again approaching another record high. This VIX level does not tell the whole story. The VIX levels do not mirror the optimism indicated by the price of the SPX. The past two weeks showed a gain of 39.5% in the VIX with index price levels showing a minor change. These volatility levels show skepticism about last week’s gains in the SPX. These levels leave room for a significant downward move with a few days of holiday doldrums or even a minor rally.


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

Index Ticker 19-Dec Change % Change 12-Dec
CBOE Volatility Index VIX 16.49 (4.59) -21.77% 21.08
VIX December Future VXZ4 16.55 (3.05) -15.56% 19.60
VIX January Future VXF5 17.15 (2.00) -10.44% 19.15
VIX February Future VXF5 17.55 (1.90) -9.77% 19.45
CBOE Short-term Volatility Index VXST 13.77 (10.05) -42.19% 23.82
CBOE 3 Month Volatility Index VXV 18.47 (2.53) -12.05% 21.00
CBOE Mid-term Volatility Index VXMT 19.66 (1.98) -9.15% 21.64
VIX of VIX VVIX 99.17 (39.43) -28.45% 138.60
Long VIX ETP’s
iPath S&P 500 VIX Short Term Futures VXX 29.90 (3.99) -11.77% 33.89
pShares VIX Short Term Futures ETF VIXY 19.89 (2.62) -11.64% 22.51
iPath S&P 500 VIX Mid-Tem Futures ETN VXZ 12.69 (1.18) -8.51% 13.87
Short VIX ETP’s
Daily Inverse VIX Short Term ETN XIV 33.22 3.15 10.48% 30.07


The key events on the calendar are at the beginning of the week. The three key reports are personal income-spending in the consumer sector, durable goods orders in manufacturing, and existing home sales, new home sales and FHFA home prices in housing. There will be a dearth of domestic and international economic information released over the next two weeks. Potential wild cards are any international crises which may appear.

It is time to start preparing for the 4th quarter’s earning cycles. 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

When you combine ignorance and leverage, you get some pretty interesting results.” –Warren Buffett


Monday December 22:

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

International Economic: EC Consumer Confidence Flash – 10:00 AM.

Optionable Earnings: None meeting criteria.



Tuesday December 23:          

Economic: ICSC–Goldman Sachs Store Sales – 7:45, Durable Goods Orders – 8:30, GDP – 8:30, Personal income and Outlays – 8:30, Corporate Profits – 8:30, Redbook – 8:55, FHFA House Price Index = 9:00, Consumer Sentiment – 9:55, New Home Sales – 10:00, Richmond Fed Manufacturing Index – 10:00..

International Economic: Great Britain GDP – 4:30 AM.

Optionable Earnings:

Symbol Company Name Dec 19 Close IV30 B/A XEPS
WAG Walgreen Company $74.38 26.4 B $0.74
CALM Cal-Maine Foods Inc $43.95 45.3 A



Wednesday December 24:

NYSE closes early – 1:00 PM EST.

Economic: MBA Purchase Applications – 7:00, Jobless Claims – 8:30, Bloomberg Consumer Comfort Index – 9:45, EIA Petroleum Status Report – 10:30.

International: Bank of Japan Minutes – 6:50 PM.

Optionable Earnings: None meeting criteria.


Thursday December 25:

All US markets closed.

International Economic: Japan Unemployment – 6:30, Japan Industrial Production – 6:50 PM.

Optionable Earnings: None meeting criteria.


Friday December 26:

Economic: No major announcements.

Optionable Earnings: None meeting criteria.


Monday December 29:

Economic: Dallas Fed Manufacturing Survey – 10:30.

International Economic: No major announcements.

Optionable Earnings: None meeting criteria.

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