The Prepared Mind: March 23, 2015

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

“Chance favors the prepared mind.” — Louis Pasteur

By Frank Fahey

The SPX reversed three weeks of declines with a gain of over 2.5%.   Other indexes followed suit and closed just short of all-time highs. Once again bad news was good news for the market. The move to the upside was preceded by the statement from last week’s FOMC meeting. The Fed removed all references to “patient “in describing anticipated interest rate hikes. Fed Chair Janet Yellen stated, “because we removed the word patient from the statement doesn’t mean we are going to be impatient.” Investors interpreted the statement as an indication that a June rate hike was off the table. One pundit stated the rate hikes would be smaller, less frequent, and later than originally expected.

Technical analysis continues to baffle me. A survey of analysts reading of market indicators and technical analysts is generally bullish. Short-term momentum is non-trending. One report I read said market breadth is “bullish with a low risk of market reversal” with stocks on a buy signal. Yet another technical analyst described “stocks only” indicators as overbought and on a sell signal. Equity only put/call ratios have remained on sell through the entire recent rally. It was emphasized that heightened levels of market complacency warn that risk of a reversal of the bull market trend is high. The difference in opinion about the future direction of the market highlights the need for a well defined approach to trading. A well-crafted strategy combined with disciplined execution is necessary when a n underlying does not move in an expected direction. Bernard Ostler once said, “Medicine is the science of uncertainty and the art of probability.” The same sentiment holds true for trading.

Here is an overview of the market behavior last week:

Index Mar 20 Close Weekly Change % Weekly % 2015 YTD Volatility of Index
Dow Jones Industrials (DJIA) 18,127.39 378.08 2.13% 1.71% 13.03% (VXD)
S&P 500 (SPX) 2,108.10 54.70 2.66% 2.39% 13.02% (VIX)
NASDAQ 100 (NDX) 4,460.87 145.97 3.38% 5.26% 13.82% (VXN)
Russell 2000 (RUT) 1,266.35 34.21 2.78% 5.12% 15.00% (RVX)
S&P 100 (OEX) 922.50 21.01 2.33% 1.55% 12.94% (VXO)
CBOE Volatility Index (VIX) 13.02 (2.98) -18.63% NA

Data Source: OptionVue7

The decline of 18.6% in the cash or spot VIX was the second largest of the year. The VIX futures did not experience the same magnitude of decline. The futures’ premium over spot runs counter to the market complacency seen by some analysts in the current VIX spot level. This disparity can be seen when comparing the price of the Short-term Volatility Index (VXST) to the prices of the 3 month (VXV) and 6 month (VXMT) Volatility Indexes. The elevated levels of the longer term Volatility Indexes indicate concern about s market downturn over a longer time horizon. The week after next is “Employment Week.”   The days preceding the release of monthly employment numbers are generally characterized by steady, or even expanding, implied volatility.

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

Indexes Ticker 20-Mar 13-Mar Change % Change
CBOE Volatility Index VIX 13.02 16.00 (2.98) -18.63%
VIX April Future VXJ5 16.18 17.78 (1.60) -9.00%
VIX May Future VXK5 17.62 18.28 (0.66) -3.61%
VIX June Future VXM5 18.02 18.45 (0.43) -2.33%
CBOE Short-term Volatility Index VXST 10.73 15.25 (4.52) -29.64%
CBOE 3 Month Volatility Index VXV 16.71 17.89 (1.18) -6.60%
CBOE Mid-term Volatility Index (6 month) VXMT 18.16 19.16 (1.00) -5.22%
VIX of VIX VVIX 80.49 93.12 (12.63) -13.56%
Long VIX ETP’s
iPath S&P 500 VIX Short Term Futures ETN VXX 25.73 28.10 (2.37) -8.43%
pShares VIX Short Term Futures ETF VIXY 17.10 18.67 (1.57) -8.41%
iPath S&P 500 VIX Mid-Tem Futures ETN VXZ 12.49 12.66 (0.17) -1.34%
Inverse VIX ETP’s
Daily Inverse VIX Short Term ETN XIV 34.63 31.79 2.84 8.93%
ProShares Short VIX Short Term Future ETF SVXY 67.98 62.38 5.60 8.98%

Data Source: OptionVue  7

Manufacturing and housing will dominate the week’s domestic economic reports. The week will start with the release of new and existing home sales. Recent reports have been tempered by the seasonal impact of winter. It will probably be another month before reports are normal and devoid of seasonal adjustments. Manufacturing has contracted in response to the weather and the stronger dollar. Wednesday’s durable goods orders will highlight the impact of these factors on manufacturing. The international economic calendar is relatively empty this week.

The fourth quarter earnings announcement cycle is officially over. Now is the time to start preparing for the next cycle. Numerous analysts are warning about the impact of the strong dollar on future earnings of multi-national corporations. . 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: Carnival, Sonic, Movado, Paychex, Worthington Industries, Red Hat, Oxford Industries, ConAgra, GameStop, and Winnebago. 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

 

“Exploring the unknown requires tolerating uncertainty.” – Brian Greene
“I took a test in Existentialism. I left all the answers blank and got 100.” – Woody Allen

 

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, EMU/EC Consumer Confidence Flash – 11:00 AM, China 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, San Francisco Federal Reserve Bank President John Williams speech on the economic outlook, in Sydney, Australia – 10:00 PM.

Optionable Earnings: None meeting criteria.

Tuesday March 24:

Economic: Consumer Price Index (CPI) – 8:3, Redbook – 8:55, FHFA House Price Index – 9:00, PMI Manufacturing Index Flash – 9:45 New Home Sales – 10:00, Richmond Fed Manufacturing Index – 10:00.

 

International Economic: EMU PMI Composite Flash –n 5:00 AM, Great Britain CPI & PPI – 5:30 AM.

Other: Louis Federal Reserve Bank President James Bullard on panel with ECB Vice President Vitor Constancio discussing monetary policy, in London – 6:05 AM.

Optionable Earnings:

Symbol Company Name March 20 Close IV30 B/A XEPS
HDS HD Supply Holdings Inc $30.21 33.4 B $0.10
SONC Sonic Corporation $33.74 38.8 A $0.12

 

Wednesday March 25:

Economic: MBA Purchase Applications – 7:00, Durable Goods Orders – 8:30, EIA Petroleum Status Report – 10:30.

International Economic: No major announcements.

 

Other: Chicago Federal Reserve Bank President Charles Evans lecture on monetary policy, in London – 6:30 AM.

Optionable Earnings:

Symbol Company Name March 20 Close IV30 B/A XEPS
APOL Apollo Education Group Inc $27.58 46.4 B ($0.14)
FIVE Five Below Inc $31.37 55.0 A $0.60
FNV Franco-Nevada Corporation $49.22 39.0 A $0.20
PVH PVH Corp $101.63 35.4 A $1.72
RHT Red Hat Inc $69.18 37.5 A $0.28

 

Thursday March 26:

Economic: Weekly Jobless Claims – 8:30, PMI Services Flash – 9:45, Bloomberg Consumer Comfort Index – 9:45, EIA Natural Gas Report – 10:30, Kansas City Fed Manufacturing Index – 11:00.

International: France GDP – 3:45 AM, Japan Household Spending – 7:30 PM, Japan Unemployment Rate – 7:30 PM.

Other: St Louis Federal Reserve Bank President James Bullard speech on the economy and monetary policy, in Frankfurt, Germany – 4:35 AM, Atlanta Federal Reserve Bank President President Dennis Lockhart to discuss monetary policy and economic outlook, in Detroit – 9:00 AM.

Optionable Earnings:

Symbol Company Name March 20 Close IV30 B/A XEPS
ACN Accenture Plc $90.19 23.5 B $1.07
CAG ConAgra Foods Inc $34.36 22.3 B $0.53
LULU Lululemon Athletica inc. $64.40 43.3 B $0.73
SIG Signet Jewelers Ltd. $125.63 27.6 B $3.03
WGO Winnebago Industries, Inc. $22.70 42.7 B $0.38
GME GameStop Corp. $40.79 46.4 A $2.16
RH Restoration Hardware Holdings Inc $90.74 45.9 A $1.01

 

Friday March 27:

Economic: Gross Domestic Product (GDP) – 8:30, Corporate Profits- 8:30, Consumer Sentiment – 10:00.

International Economic: No major announcements.

 

Other: Federal Reserve Vice Chair Stanley Fischer speech to Bundesbank conference on bank regulation, in Frankfurt. Germany.

Optionable Earnings:

Symbol Company Name March 20 Close IV30 B/A XEPS
FINL Finish Line Inc $23.92 45.2 B $0.84

 

Monday March 30:

Economic: Personal Income and Outlays – 8:30, Pending Home Sales Index – 10:00, Dallas Fed Manufacturing Survey – 10:30.

International Economic: EMU Economic Sentiment – 6:00 AM, Germany CPI – 9:00 AM.

Other: Federal Reserve Vice Chair Stanley Fischer speech to Atlanta Fed conference on monetary and financial stability, in Stone Mountain, Georgia – 7:15 PM.

Optionable Earnings:

Symbol Company Name March 20 Close IV30 B/A XEPS
CALM Cal-Maine Foods Inc $37.78 38.4 B $1.06

 

 

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