The Prepared Mind: January 12, 2015

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

“Chance favors the prepared mind.” — Louis Pasteur

By Frank Fahey

The market has given us a wild ride the past 6 weeks. A two day rally this week moved the SPX from 1,992 to 2,055. The financial media is focused on V-shaped rallies. These rallies are characterized by quick moves to the downside followed by very quick recoveries. The S&P 500 has seen nine V-shaped recoveries this year.   The magnitude and speed of the moves makes it very difficult for a campaign or position options trade. These levels of volatility require a trader to be nimble. These levels of market volatility increase the likelihood of selling a bottom or buying a top.

Technical indicators are vacillating between bullish and bearish. Thursday’s close above 2060 was very bullish. Friday’s sell-off prevented a second day close above 2060 and resulting confirmation of a new bullish trend. Trading volume was low on the downdraft and even lower on the rally.   Market breadth has been all over the map with boy market breadth oscillator providing buy signals. The VIX is a providing short-term buy signals with a close below 18 and a market “spike” peak.   The disparity in advice makes me long for forecasts with clarity of George Carlins’s Hippy Dippy Weatherman, “Weather tonight: dark. Turning partly light by morning.”

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

Index Jan 9 Close Weekly Change % Weekly % 2015 YTD Volatility of Index
Dow Jones Industrials (DJIA) 17,737.37 (95.62) -0.54% -0.48% 16.27%(VXD)
S&P 500 (SPX) 2,044.81 (13.39) -0.65% -0.68% 17.55% (VIX)
NASDAQ 100 (NDX) 4,207.71 (11.85) -0.28% -0.71% 18.4% (VXN)
Russell 2000 (RUT) 1,183.43 (12.21) -1.02% -1.77% 21.29% (RVX)
S&P 100 (OEX) 902.13 (5.37) -0.59% -0.69% 16.27%(VXO)
CBOE Volatility Index (VIX) 17.55 (0.24) -1.35% NA

 

Market panic, as measured by the VIX, seems minimal. The VXST, CBOE Short-term Volatility Index, is at a significant Index to the VIX. In addition, the volatility of the VIX, the VVIX, was down as VIX futures were up. This disconnect between futures behavior and other measurements could easily be viewed as mildly bullish. It is also an indication of trader unwillingness to sell volatility in the current market environment. Per Russell Roads of the CBOE, the trade of the weak was a three-leg spread with the sale of VIX Jan 17 Puts at 0.93 and the purchase of an equal number of Jah 19 calls at o,98 and sale of VIX Jan 24 calls for 0.40.We do not know if this postion is a stand-alone position or a hedge of an existing position – VIX or equities.

 

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

 

Index Ticker 9-Jan Change % Change 2-Jan
CBOE Volatility Index VIX 17.55 (0.24) -1.35% 17.79
VIX January Future VXF5 18.62 0.80 4.46% 17.83
VIX February Future VXG5 18.68 0.45 2.50% 18.23
VIX March Future VXH5 18.72 0.24 1.33% 18.48
CBOE Short-term Volatility Index VXST 15.20 (1.27) -7.71% 16.47
CBOE 3 Month Volatility Index VXV 19.32 (0.14) -0.72% 19.46
CBOE Mid-term Volatility Index VXMT 20.13 (0.11) -0.54% 20.24
VIX of VIX VVIX 103.77 (8.38) -7.47% 112.15
Long VIX ETP’s
iPath S&P 500 VIX Short Term Futures VXX 31.98 0.99 3.19% 30.99
pShares VIX Short Term Futures ETF VIXY 21.28 0.67 3.25% 20.61
iPath S&P 500 VIX Mid-Tem Futures ETN VXZ 13.24 0.21 1.61% 13.03
Short VIX ETP’s
Daily Inverse VIX Short Term ETN XIV 31.69 0.00 0.00% 31.69

Domestic emphasis will be on manufacturing and the consumer. Economists are waiting to see a reflection of improving jobs numbers in the retail sales number. December retail sales will be released on Wednesday. Manufacturing has been lackluster. Expectations are that the improving job markets should positively influence manufacturing. The Empire Sate Manufacturing Survey and Industrial Production will be released on Thursday and Friday respectively. International economic reports will be light for the week. European inverstors are waiting for Greek election on January 22.

 

Alcoa’s earnings announcement Monday is historical start of the earnings season. Earnings announcement will be in full force for the 3 weeks following this week. 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 January 12:

 

Economic: No major announcements.

 

International Economic: China Merchandise Trade Balance.

 

Other: Atlanta Federal Reserve Bank Dennis Lockhart speech on monetary policy, in Atlanta – 12:40 PM.

 

Optionable Earnings:

Symbol Company Name Jan 5 Close IV30 B/A XEPS
AA Alcoa 16.11. 35.1 A $0.26

 

Tuesday January 13:            

 

Economic: NFIB Small Business Optimism Index – 7:30, Redbook – 8:55, JOLTS – 10:00.

 

International Economic:

 

Other: Philadelphia Federal Reserve Bank President Charles Plosser speech on the economic outlook, in Philadelphia – 8:00 AM, Minneapolis Federal Reserve Bank President Narayana Kocherlakota speech on goal-based monetary policy to MNI Connect event, in New York – 5:00 PM.

 

Optionable Earnings: None meeting criteria,

 

Wednesday January 14:

 

Economic: MBA Purchase Applications – 7:00, Retail Sales – 8:30, Import and Export Prices = 8:30, Atlanta Fed Business Inflation Expectations – 10:00, Business Inventories – 10:00, EIA Petroleum Status Report – 10:30, Beige Book – 2:00.

 

International: Great Britain CPI – 4:30 AM.

 

Other:   EMU Industrial Production – 5:00 AM, Jan PPI – 6:50 PM, Japan Machine Orders – 6:50 PM.

 

Optionable Earnings: None meeting criteria,

 

 

Thursday January 15:

 

 

Economic: Jobless Claims – 8:30, PPI – Final Demand – 8:30, Empire State Manufacturing Survey – 10:00, Business Inventories – 10:00, Bloomberg Consumer Comfort Index – 9:45, Philadelphia Fed Survey – 10:00, EIA Natural Gas Report – 12:00.

 

International: EMU Merchandise Trade – 5:00, Jpan Tertiary Index – 6:50 PM.

 

Optionable Earnings:

Symbol Company Name Jan 5 Close IV30 B/A XEPS
BLK BlackRock, Inc. $353.42 23.4 B $4.78
C Citigroup Inc $51.94 26.2 B $0.13
FAST Fastenal Company $46.52 25.1 B $0.40
LEN Lennar Corporation $46.86 31.7 B $0.97
PPG PPG Industries, Inc. $229.88 24.6 B $1.97
TSM Taiwan Semiconductor Mfg. Co. Ltd. $21.81 29.0 B $0.49
INTC Intel Corporation $36.69 26.2 A $0.66
SLB Schlumberger Limited. $82.70 33.9 A $1.47

 

Friday January 16:

 

Economic: Consumer Price Index – 8:30, Industrial Production – 9:15, University of Michigan Reuters Consumer Sentiment – 9:55, Treasury International Capital – 4:00.

 

International Economic: Germany CPI = 2:00 AM, EMU HICP 0 5:00 AM.

 

Other: Minneapolis Federal Reserve Bank President Narayana Kocherlakota speech on goal-based monetary policy in Golden Valley, Minnesota – 8:50 AM.

 

Optionable Earnings:

Symbol Company Name Jan 5 Close IV30 B/A XEPS
CMA Comerica Incorporated $44.64 30.3 B $0.77
GS Goldman Sachs Group Inc $190.27 22.9 B $4.66
STI SunTrust Banks, Inc. $40.17 23.4 B $0.80

 

Monday January 19:

All US Markets Closed – Martin Luther King Birthday

 

International Economic: China GDP – 9:00 PM, China Industrial Production – 9;00 PM, China Retail Sales – 9:00 PM.

 

Optionable Earnings: None meeting criteria.

 

Tuesday January 20:

Economic: Housing Market Index – 10:00.

 

International Economic: Germany PPI – 2:00 AM, Bank of England Minutes – 4:30 AM, Japan All Industry Index – 11:30 PM.

 

Optionable Earnings:

Symbol Company Name Jan 5 Close IV30 B/A XEPS
ATI Allegheny Technologies Incorporated $32.33 40.1 B $0.00
BHI Baker Hughes Incorporated $57.03 35.1 B $1.12
DAL Delta Air Lines, Inc. $48.19 39.0 B $0.75
EDU New Oriental Education & Tech Grp (ADR) $20.77 43.0 B $0.06
HAL Halliburton Company $40.21 40.5 B $1.14
MS Morgan Stanley $37.49 27.3 B $0.52
SAP SAP SE (ADR) $66.13 26.1 B $1.46
CA CA, Inc. $31.11 24.5 A $0.56
CREE Cree, Inc. $31.65 52.2 A $0.11
IBKR Interactive Brokers Group, Inc. $29.62 25.8 A $0.10
IBM International Business Machines Corp. $158.42 23.6 A $5.49
NFLX Netflix, Inc. $334.45 51.7 A $0.44

 

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