The Prepared Mind: January 5, 2015

"Chance favors the prepared mind." -- Louis Pasteur

“Chance favors the prepared mind.” — Louis Pasteur

During the past week the bull market rested. All the major equity indexes were down by more than 1% in trading characterized by a lack of overall participation. Analysts noted that the downward move was characterized not by selling pressure, but rather by a dearth of buyers. Market technicians are unwilling to draw any conclusions from this move since trading volumes were so anemic. The SPX remains above the 20-day moving average. Any close below 2050 would be considered bearish. Equity put/call ratios remain bearish with additional bearish sentiment from market breadth indicators. Last week’s rise in the volatility indexes indicated additional bearish sentiment.

Equities ended the year with positive numbers despite last week’s sell-off. Here is an overview of past year’s market performance:

Index Dec 31 2015 Close 2014 Change % YTD Dec 31 2014 Close
Dow Jones Industrials (DJIA) 17,823.00 1,246.34 7.52% 16,576.66
S&P 500 (SPX) 2,058.90 210.54 11.39% 1,848.36
NASDAQ 100 (NDX) 4,237.90 645.90 17.98% 3,592.00
Russell 2000 (RUT) 1,204.70 41.09 3.53% 1,163.61
S&P 100 (OEX) 908.40 84.59 10.27% 823.81

Here is an overview of the past week’s market behavior.

Index Jan 2 Close Weekly Change % Weekly % 2015 YTD Volatility of Index
Dow Jones Industrials (DJIA) 17,832.99 (220.72) -1.22% 0.06% 16.07%(VXD)
S&P 500 (SPX) 2,058.20 (30.57) -1.46% -0.03% 17.79% (VIX)
NASDAQ 100 (NDX) 4,219.56 (94.18) -2.18% -0.43% 19.20% (VXN)
Russell 2000 (RUT) 1,195.64 (19.60) -1.61% -0.75% 22.42% (RVX)
S&P 100 (OEX) 907.50 (14.98) -1.62% -0.10% 15.69%(VXO)
CBOE Volatility Index (VIX) 17.79 3.29 22.69% NA

 

The VIX reached the highest levels in 2 years. Most of the increase was in Q4 2014. Option trading volume in the VIX has grown to 630,000 contracts per day. VIX futures had an average daily trading volume of 323,000 contracts – an increase of 26.5% over last 2013 trading levels. One of my New Year’s resolutions is to better understand price movement and liquidity in VIX and related products. Some these products are better used as indicators rather than trading vehicles. Liquidity levels make some of them very unattractive from an option trading perspective.

 

VIX movement is ephemeral and very short lived compared to price movement in equities or indexes. This products are a different beast. It is for this reason I have not provided a table for 2014 performance in this products

 

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

Index Ticker 2-Jan Change % Change 26-Dec
CBOE Volatility Index VIX 17.79 3.29 22.69% 14.50
VIX January Future VXF5 17.83 1.98 12.46% 15.85
VIX February Future VXF5 18.23 1.73 10.45% 16.50
VIX March Future VXH% 18.48 0.88 4.97% 17.60
CBOE Short-term Volatility Index VXST 16.47 4.38 36.23% 12.09
CBOE 3 Month Volatility Index VXV 19.46 2.30 13.40% 17.16
CBOE Mid-term Volatility Index VXMT 20.24 1.28 6.75% 18.96
VIX of VIX VVIX 112.15 19.87 21.53% 92.28
Long VIX ETP’s
iPath S&P 500 VIX Short Term Futures VXX 30.99 2.40 8.39% 28.59
pShares VIX Short Term Futures ETF VIXY 20.31 1.33 7.01% 18.98
iPath S&P 500 VIX Mid-Tem Futures ETN VXZ 13.03 0.40 3.17% 12.63
Short VIX ETP’s
aily Inverse VIX Short Term ETN XIV 31.69 (3.05) -8.78% 34.74

 

Tuesday’s release of last month’s FOMC minutes will have the ability to move the market. These minutes will be parsed in an attempt to determine the extent and magnitude of future Fed involvement in the economy. The first full trading week of the New Year will have a full slate of domestic economic reports. The reports will focus on the consumer sector, manufacturing and employment. The week starts with Motor Vehicle Sales on Monday. Analysts are hoping for a continuation of strong November vehicle sales. A major focus for the rest of the week will be employment. Employment levels remain the primary measurement of economic growth for many investors and analysts. A range of reports will be released on Wednesday through Friday. The culmination will be Friday’s release of the December employment situation report. Continued job growth and stagnant wage growth are expected to remain the norm.

Asian market starts tomorrow. Most markets were closed on January 2. European markets are expected to react to inflation reports in the EMU and the potential to affect Mario Draghi’s stimulus plans for 2015. Expectations are for a zero rate growth in EMU consumer prices. Chinese merchandise trade and inflation numbers may have a rolling effect upon global equity and future markets.

We continue to be in the lull before the earnings storm. Alcoa’s earnings announcement is considered to be the start of the earnings season. Start preparing for the 4th quarter earning cycle. The Alcoa earnings announcement is scheduled for after the close on Monday January 12. 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 January 5:

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

International Economic: No major announcements.

Other: San Francisco Federal Reserve Bank President John Williams on panel discussing housing, unemployment and monetary policy, in Boston – 8:00 AM.

Optionable Earnings: None meeting criteria.

Tuesday January 6:   

Economic: ICSC–Goldman Sachs Store Sales – 7:45, Gallup US ECI – 8:30, Redbook – 8:55, PMI Services Index – 8:45,, Factory Orders – 10:00, ISM Mon-Manufacturing Index – 10:00. Global Composite PMI – 11:00, Global Composite Services PMI – 11:00.

International Economic: Germany PMI Composite – 3:55 AM, EMU PMI Composite – 4:00 AM.

Optionable Earnings:

Symbol Company Name Jan 2 Close IV30 B/A XEPS
MU Micron Technology, Inc. $35.01 46.4 A $0.92
SONC Sonic Corporation $27.23 36.4 A $0.16

Wednesday January 7:

Economic: MBA Purchase Applications – 7:00, ADP Employment Report – 8:15, Gallup US Job Creation Index – 5:30, International Trade – 8:30, EIA Petroleum Status Report – 10:30, FOMC Minutes – 2:00.

International: Germany Unemployment Rate – 3:55.

Other:   Chicago Reserve Bank President Charles Evans discussion on the impact of monetary policy in an uncertain economy, in Chicago.- 6:30 PM.

Optionable Earnings:

Symbol Company Name Jan 2 Close IV30 B/A XEPS
GBX Greenbrier Companies Inc $53.73 55.9 B $0.76

 

Thursday January 8:

Economic: Chain Store Sales, Challenger Job-Cut Report – 7:30, Gallup US Payroll to Population – 8:30, Jobless Claims – 8:30, Bloomberg Consumer Comfort Index – 9:45, EIA Natural Gas Report – 12:00.

International: Germany Manufacturers’ Orders – 2:00 AM, EMU-EC Economic Sentiment – 5:00 AM, EMU Retail Sales – 5:00. Great Britain Bank of England Announcement – 7:00 AM, China CPI and PPI – 8:30 PM.

Optionable Earnings:

Symbol Company Name Jan 2 Close IV30 B/A XEPS
APOL Apollo Education Group Inc $34.11 59.6 B $0.41
STZ Constellation Brands, Inc. $98.17 27.7 B $1.14
BBBY Bed Bath & Beyond Inc. $76.17 37.2 A $1.19
CUDA Barracuda Networks Inc $35.84 58.8 A $0.03

 

Friday January 9:

Economic: Employment Situation – 8:30, Wholesale Trade – 10:00.

International Economic: Germany Industrial Production – 2:00, Germany Merchandise Trade – 2:00, Great Britain Industrial Production – 4:30 AM.

Other: Richmond Federal Reserve Bank President Jeffrey Lacker speech on the economic outlook, in Richmond – 1:20 PM.

Optionable Earnings:

Symbol Company Name Jan 2 Close IV30 B/A XEPS
INFY Infosys Ltd ADR $31.46 38.6 B $0.43

 

Monday January 12:

Economic: No major announcements.

International Economic: No major announcements.

Optionable Earnings: None meeting criteria.

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