The Prepared Mind: March 16, 2015

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

“Chance favors the prepared mind.” — Louis Pasteur

By Frank Fahey

The SPX was lower for the third straight week. A variety of factors pushed and pulled at the equity markets throughout last week.   The strengthening dollar, falling energy prices and fears of a Fed rate hike each impacted the markets. The strong dollar creates a fear of foreign exchange exposure for multinational large cap firms.   This downward pressure does not affect small caps with their heavier emphasis on domestic revenue.   The small cap laden Russell 2000 (RUT) was up over 1% while the other major equity indices were down 0.50 to 2.0 per cent. Last week’s better employment numbers led some investors to lighten up in advance of this week’s FOMC meeting.   The words of Wednesday’s press release will be parsed to the nth degree in hopes of divining the date of the next increase in interest rates.

Market indicators and technical analysts were all over the map. Some analysts are pointing to a break below 2090 as bearish. 2040 is seen as a major support level for the S&P 500, Other analysts are describing the current market environment as a bull market with a mildly bearish trend.   The chart is bearish. Market oscillators provided multiple signals last week. They went negative, attained oversold, and then provided buy signals. The VIX closed at 16% – the level which is the border between a sell signal and hold.

Here is an overview of the market behavior last week:

Index Mar 13 Close Weekly Change % Weekly % 2015 YTD Volatility of Index
Dow Jones Industrials (DJIA) 17,749.31 (107.47) -0.60% -0.41% 15.44%(VXD)
S&P 500 (SPX) 2,053.40 (17.85) -0.86% -0.27% 16.00% (VIX)
NASDAQ 100 (NDX) 4,314.90 (89.67) -2.04% 1.82% 17.55% (VXN)
Russell 2000 (RUT) 1,232.14 13.62 1.12% 2.28% 17.96% (RVX)
S&P 100 (OEX) 901.49 (10.51) -1.15% -0.76% 16.88%(VXO)
CBOE Volatility Index (VIX) 16.00 0.80 5.26% NA

Data Source: OptionVue 7

Observers of the cash VIX are surprised by the relative lack of strength in reaction to a third straight week of a market sell-off. This lack of movement is interpreted by some market watchers a a sense of complacency for short term. VIX monthly futures reflected a longer term concern with the direction of the volatility markets. Wednesday’s FOMC announcement will provide the impetus for a directional response from the equity and volatility indices. The VIX trade of the week, per Russell Rhoads at the CBOE took place Friday afternoon.   With the June VIX future (VXM5) trading at 18.475. The trade was the sale of VIX Jun 18 Puts at 2.25 andVIX Jun 18 Calls at 2.90 with the purchase of VIX Jun 26 Calls at 1.25 for a net credit of 3.90 on the total spread. At expiration the spread profits between the breakeven points of 14 and 22. .

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

Indexes Ticker 13-Mar 6-Mar Change % Change
CBOE Volatility Index VIX 16.00 15.20 0.80 5.26%
VIX March Future VXH5 16.42 16.22 0.20 1.23%
VIX April Future VXJ5 17.78 17.78 0.00 0.00%
VIX May Future VXK5 18.28 18.02 0.26 1.44%
CBOE Short-term Volatility Index VXST 15.25 14.31 0.94 6.57%
CBOE 3 Month Volatility Index VXV 17.89 17.51 0.38 2.17%
CBOE Mid-term Volatility Index (6 month) VXMT 19.16 18.70 0.46 2.46%
VIX of VIX VVIX 93.12 86.88 6.24 7.18%
Long VIX ETP’s
iPath S&P 500 VIX Short Term Futures ETN VXX 28.10 28.03 0.07 0.25%
pShares VIX Short Term Futures ETF VIXY 18.67 18.66 0.01 0.05%
iPath S&P 500 VIX Mid-Tem Futures ETN VXZ 12.66 12.45 0.21 1.69%
Inverse VIX ETP’s
Daily Inverse VIX Short Term ETN XIV 31.79 32.09 (0.30) -0.93%
ProShares Short VIX Short Term Future ETF SVXY 62.38 62.98 (0.60) -0.95%

Data Source: OptionVuem7

The Fed’s FOMC meeting manufacturing and housing will be the focus of this week’s news. The FOMC meeting will garner the most attention. Traders are looking for guidance on the timing of the first rate hike. The markets respond as traders respond to changes in the consensus of the date for the rate change.   There has been anything but a consensus as expectation bounce between June and September. Two key reports – Industrial Production and Housting Starts – will be released. Quadruple Witching takes place on Friday. Market activity will reflect position in traders’ anticipation of the expiration in equity futures, equity future options, equity options and equity index options. The Bank of Japand and the Swiss National Bank will be meeting this week.

The fourth quarter earnings announcement cycle is officially over. Now is the time to start preparing for the next cycle. OptionVue provides a column for the date of earnings announcements. Use it. OptionVue tools and charts assist you in determining the effect of these announcements on the historic stock prices and implied volatility of the options. Major earnings announcements include: Quicksilver, Oracle, Adobe Systems, Zebra, General Mills, Guess?, Williams-Sonoma, FedEx, Nike, Lennar, KB Homes and Darden Restaurants. 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


“If a problem cannot be solved, enlarge it.” – Dwight Eisenhower

Don’t gamble; take all your savings and buy some good stock

and hold it till it goes up, then sell it. If it don’t go up, don’t buy it.” – Will Rogers

Monday March 16

Economic: Empire State Manufacturing Survey – 8:30, Industrial Production – 9:15, Housing Market Index – 10:00, Treasury International Capital – 4:00.

International Economic: Bank of Japan Announcement.


Optionable Earnings:

Symbol Company Name March 13 Close IV30 B/A XEPS
OMER Omeros Corporation $24.52 73.7 A ($0.06)
QUNR Qunar Cayman Islands Ltd $28.30 45.7 A ($0.54)


Tuesday March 17:

Economic: Housing Starts – 8:30, Redbook – 8:55.

International Economic: EMU HICP = 6:00 AM. Japan Merchandise Trade – 7:50PM.

Other: FOMC Meeting Starts

Optionable Earnings:

Symbol Company Name March 13 Close IV30 B/A XEPS
BURL Burlington Stores Inc $57.59 41.1 B $1.32
DSW DSW Inc. $37.16 39.8 B $0.27
RSPP RSP Permian Inc $29.05 52.6 B $0.22
ZBRA Zebra Technologies Corp. $87.82 34.0 B $0.95
ADBE Adobe Systems Incorporated $77.40 29.6 A $0.27
ORCL Oracle Corporation $41.62 28.8 A $0.64


Wednesday March 18:

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

International Economic: Bank of England Minutes – 5:30 AM, EMU Merchandise Trade – 6:00 AM.

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

Optionable Earnings:

Symbol Company Name March 13 Close IV30 B/A XEPS
FDX FedEx Corporation $173.58 23.3 B $1.88
JBL Jabil Circuit, Inc. $21.69 31.6 A $0.37
WSM Williams-Sonoma, Inc. $81.59 32.8 A $1.51


Thursday March 19:

Economic: Weekly Jobless Claims – 8:30, Current Account – 8:30, Bloomberg Consumer Comfort Index – 9:45, Philadelphia Fed Business Outlook Survey – 10:00, Leading Indicators – 10:00, EIA Natural Gas Report – 10:30.

International: Bank of Japan Minutes – 7:50 PM.

Other: Federal Reserve Gov. Daniel Tarullo testifies before Senate Banking Committee on banking regulation, with FDIC Chair Martin Gruenberg – 10:00

Optionable Earnings:

Symbol Company Name March 13 Close IV30 B/A XEPS
LEN Lennar Corporation $49.56 31.5 B $0.45
MIK Michaels Companies Inc $28.03 41.5 B $0.75
CTRP International, Ltd. (ADR) $45.23 57.6 A ($0.31)
NKE Nike Inc $97.04 24.7 A $0.85


Friday March 20:

Quadruple Witching – Expiration of market index futures, market index options, equity options and single stock futures.

Economic: Atlanta Fed Business Inflation Expectations – 10:00.

International Economic: Germany PPI – 3:00 AM.

Other: Atlanta Federal Reserve Bank President Dennis Lockhart speech on the economy and monetary policy in Athens, Georgia – 10:20, Chicago Federal Reserve Bank President Charles Evans on panel discussing risk management near the zero lower bound, in Washington – 11:30.

Optionable Earnings:

Symbol Company Name March 13 Close IV30 B/A XEPS
DRI Darden Restaurants, Inc. $63.53 26.1 B $0.84
TIF Tiffany & Co. $86.30 31.8 B $1.50

Monday March 23:

Economic: Chicago Fed National Activity Index – 8:30, Existing Homes Dales – 10:00..

International Economic: Great Britain Industrial Trends Survey – 7:00 AM, Chinna PMI Flash Manufacturing Index – 9:45 PM.

Other: Cleveland Federal Reserve Bank President Loretta Mester and Bank of France Gov. Christian Noyer discuss monetary policy context, in Paris, Federal Reserve Vice Chair Stanley Fischer speech in New York.

Optionable Earnings: None meeting criteria.


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