The Prepared Mind: December 29, 2014

By Frank Fahey

I stand corrected. I though the Santa Claus rally was a rally which occurred the last two weeks of the year. It is much more than that. The Santa Claus Rally has a very precise definition. According to multiple sources, the time period for the Santa starts the first trading day after Christmas and finishes at the end of the second trading day of the New Year. Since the Dow Jones Industrial Average was created in 1896, it has gained an average of 1.7% during this seven day trading session period, rising 77% of the time. Every time I hear this “facts” bandied about I am reminded of Darrell Huff’s 1954 classic “How to Lie with Statistics.” Be wary. Mark Twain famously opined, “There are three kinds of lies: lies, damned lies, and statistics.”

The equity indexes continue to hit new highs. The Dow Jones Industrials Average crossed 18,000 for the first time on Tuesday finishing the week up 1.4% at 18,053.71. The S&P 500 (SPX) hit new highs on 3 of the 4 trading days last week.. Friday’s close was the 52nd record closing high for the S&P 500. The Dow Jones Industrial Average has rallied over 1,000 points in the past 10 trading days. It is tempting to try and pick a top in this bull market run. The past 5 years are littered with the financial corpses of those who tried to pick a top. The DJIA is up 175% from its 2009 low. There have been many opportunities to pick a top and be wrong. Respect market trends.

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

Index Dec 26 Close Weekly Change % Weekly % YTD Volatility of Index
Dow Jones Industrials (DJIA) 18,053.71 248.91 1.40% 8.91% 14.01%(VXD)
S&P 500 (SPX) 2,088.77 18.12 0.88% 13.01% 14.50% (VIX)
NASDAQ 100 (NDX) 4,313.74 39.58 0.93% 20.09% 16.27% (VXN)
Russell 2000 (RUT) 1,215.24 20.05 1.68% 4.44% 18.75% (RVX)
S&P 100 (OEX) 922.48 7.25 0.79% 11.98% 13.62%(VXO)
CBOE Volatility Index (VIX) 14.50 (1.99) -12.07% NA


The VIX sold off 12% this past week as the S&P 500 again closed at another record high. This VIX level does not tell the whole story. The longer term VIX levels do not mirror the drop in the VIX and the VXST. Some analysts believe the difference between the longer term VIX products and the shorter term VXST and VIX levels are the result of pressure from anemic holiday trading volumes, two trading holidays and expectations of an end of year rally. The volatility trade of the week was the sale of 10,000 VXX Jan32-Jan36 call verticals for a net credit of $0.41. This trade profits if volatility levels remain steady or go lower.


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

Index Ticker 26-Dec Change % Change 19-Dec
CBOE Volatility Index VIX 14.50 (1.99) -12.07% 16.49
VIX December Future VXZ4 15.83 (0.73) -4.38% 16.55
VIX January Future VXF5 16.53 (0.62) -3.62% 17.15
VIX February Future VXF5 17.05 (0.50) -2.85% 17.55
CBOE Short-term Volatility Index VXST 12.09 (1.68) -12.20% 13.77
CBOE 3 Month Volatility Index VXV 17.16 (1.31) -7.09% 18.47
CBOE Mid-term Volatility Index VXMT 18.96 (0.70) -3.56% 19.66
VIX of VIX VVIX 92.28 (6.89) -6.95% 99.17
Long VIX ETP’s
iPath S&P 500 VIX Short Term Futures VXX 28.59 (1.31) -4.38% 29.90
pShares VIX Short Term Futures ETF VIXY 18.98 (0.91) -4.58% 19.89
iPath S&P 500 VIX Mid-Tem Futures ETN VXZ 12.63 (0.06) -0.47% 12.69
Short VIX ETP’s
Daily Inverse VIX Short Term ETN XIV 34.74 1.52 4.58% 33.22


The key events on the calendar are at the beginning of the week. Domestic economic reports will emphasize manufacturing, housing and consumer confidence. There are no global economic reports of any significance. The B team will manning the trading desks. Trading volume will be low to non-existent. This is a good week to clean your desk and prepare for the new year.

No earnings meet the scan criteria. Start preparing for the 4th quarter earning cycle. 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

“You don`t need to be a weatherman to know which way the wind blows” – Bob Dylan


“Volatility is greatest at turning points, diminishing as a new trend becomes established.” – George Soros



Monday December 29:

Economic: Dallas Fed Manufacturing Survey – 10:30.

International Economic: No major announcements.

Optionable Earnings: None meeting criteria.

Tuesday December 30:          

Economic: ICSC–Goldman Sachs Store Sales – 7:45, Redbook – 8:55, S&P Case-Shiller HPI – 9:00, Consumer Confidence – 10:00, State Street Investor Confidence – 10:00, Farm Prices – #:00.

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

Optionable Earnings: None meeting criteria.

Wednesday December 31:

Economic: MBA Purchase Applications – 7:00, Jobless Claims – 8:30, Chicago PMI – 9:45, Bloomberg Consumer Comfort Index – 9:45, Pending Home Sales Index – 10:00, EIA Petroleum Status Report – 10:30, EIA Natural Gas Report – 12:00.

International: No major announcements.

Optionable Earnings: None meeting criteria.

Thursday January 1:

All US markets closed.

International Economic: No major announcements.

Optionable Earnings: None meeting criteria.

Friday January 2:

Economic: PMI Manufacturing Index – 8:58, ISM Manufacturing Index – 10:00, Construction Spending 10:00, All Global Manufacturing PMI – 11:00.

International Economic: Germany PMI Manufacturing Index – 3:55, EMU PMI – 4:00, All Global Manufacturing PMI – 11:00.

Optionable Earnings: None meeting criteria.

Monday January 5:

Economic: US Motor Vehicle Sales, TD Ameritrade IMX – 12:30, Gallup US Consumer Spending Measure – 8:30.

International Economic: No major announcements.

Optionable Earnings: None meeting criteria.

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