The Prepared Mind: March 30, 2015

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

“Chance favors the prepared mind.” — Louis Pasteur

By Frank Fahey

Major indexes fell over 2% reversing the previous week’s gains of nearly 3%. The NDX fell nearly 3%, suffering its worst week in five months. The markets exhibited continuing schizophrenic behavior as bad news shifting from being good news to being once again bad news. Disappointing economic news, new turmoil in the Middle East and a strong dollar contributed to investor concern. The biggest disappointment of the week was Wednesday’s Durable Goods report. This report is considered by many market analysts as a harbinger of first quarter earnings level. Their expectation of a minor rise in durable goods orders were dashed by a fall in orders of over 1% in February. Oil prices rose over 7% in response to Saudi Arabian led airstrikes against Shiite Yemeni rebels. This led to the bizarre situation where the same analysts went from worrying about the impact falling oil prices at the beginning of the week to concern about rising oil prices at week’s end. This mixed message left me wondering if there is a price action in crude oil which is good for the markets.

The SPX broke through the 2090 support level this week on its way to a 2061 close. 2090 is now resistance. New support levels are at March lows (2040) and the December/January low range of 1980-1990. The general consensus among technicians is we are in a bearish trend within a bull market.   Equity put/call ratios continue to be on sell signals. Market sentiment, as indicated by VIX futures and associated volatility product, is best described as complacent.

Here is an overview of the market behavior last week:

Index Mar 27 Close Week Change % Week % 2015 YTD Volatility of Index
Dow Jones Industrials (DJIA) 17,712.66 (414.73) -2.29% -0.62% 15.06% (VXD)
S&P 500 (SPX) 2,061.02 (47.08) -2.23% 0.10% 15.07% (VIX)
NASDAQ 100 (NDX) 4,332.55 (128.32) -2.88% 2.23% 16.89% (VXN)
Russell 2000 (RUT) 1,237.97 (28.38) -2.24% 2.76% 18.00% (RVX)
S&P 100 (OEX) 900.19 (22.31) -2.42% -0.90% 16.07% (VXO)
CBOE Volatility Index (VIX) 15.07 2.05 15.75% NA

 

Data Source: OptionVue7

Short term volatility indicators (VIX and VXST) showed gains last week. The rest of the VIX products (long and short) and VIX derived products showed little response to the selloff of the S&P 500. Past moves of similar magnitude in the SPX have led to much greater increases in the CBOE’s two benchmark short-term volatility indexes. The smaller moves seems to be the result of recent behavior. Over the past year, market moves been characterized by downturns immediately followed by a return to previous or higher price levels.  These moves have created a sense of complacency among many traders. Beware of complacency. Complacency while trading often leads to ignoring or discounting risk, Ignoring risk has never paid off.

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

Indexes Ticker 27-Mar 20-Mar Change % Change
CBOE Volatility Index VIX 15.07 13.02 2.05 15.75%
VIX April Future VXJ5 16.22 16.18 0.04 0.25%
VIX May Future VXK5 17.72 17.62 0.10 0.57%
VIX June Future VXM5 18.17 18.02 0.15 0.83%
CBOE Short-term Volatility Index VXST 14.69 10.73 3.96 36.91%
CBOE 3 Month Volatility Index VXV 17.40 16.71 0.69 4.13%
CBOE Mid-term Volatility Index (6 month) VXMT 18.77 18.16 0.61 3.36%
VIX of VIX VVIX 86.50 80.49 6.01 7.47%
Long VIX ETP’s
iPath S&P 500 VIX Short Term Futures ETN VXX 25.74 25.73 0.01 0.04%
pShares VIX Short Term Futures ETF VIXY 17.11 17.10 0.01 0.06%
iPath S&P 500 VIX Mid-Tem Futures ETN VXZ 12.57 12.49 0.08 0.64%
Inverse VIX ETP’s
Daily Inverse VIX Short Term ETN XIV 34.47 34.63 (0.16) -0.46%
ProShares Short VIX Short Term Future ETF SVXY 67.73 67.98 (0.25) -0.37%

Data Source: OptionVue7

Employment, manufacturing, housing and the consumer dominate a shortened trading week. Multiple March employment numbers will be released at the end of the week. Consumer behavior has been tempered the weather. March Motor Vehicle Sales and the Personal Income Report will provide a snapshot of consumer spending. The flurry of employment data will culminate with Friday’s release of the March Employment Situation Report.

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: Cal Maine Foods, AAR, Movado, Monsanto, Perry Ellis, CarMax and Micron Techonology.. 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

“To think creatively, we must be able to look afresh at what we normally take for granted”
― George Keller
Always first draw fresh breath after outbursts of vanity and complacency.” – Franz Kafka

 

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.

Optionable Earnings:

Symbol Company Name March 27 Close IV30 B/A XEPS
CALM Cal-Maine Foods Inc $38.81 38.5 B $1.06

 

 

Tuesday March 31:

Economic: Redbook – 8:55, S&P Case-Shiller Home Price Index – 9:00, Chicago PMI – 9:45, Consumer Confidence – 10:00, State Street Investor Confidence – 10:00.

International Economic: Germany Retail Sales – 2:00 AM, Germany Unemployment – 3:55 AM, Great Britain GDP – 4:30, EMU Unemployment Rate – 5:00 AM.

Other: Kansas City Federal Reserve Bank President Esther George speech in New York, Cleveland Federal Reserve Bank President Loretta Mester moderates panel on the future of banks, at Atlanta Fed conference, in Stone Mountain, Georgia – 9:00 AM, Richmond Federal Reserve Bank President Jeffrey Lacker speech on the economic outlook, in Richmond – 9:00 AM.

Optionable Earnings:

Symbol Company Name March 27 Close IV30 B/A XEPS
CLDN Celladon Corp $20.50 215.3 B ($0.36)
CONN CONN’S, Inc. $28.39 96.2 B $0.63

 

Wednesday April 1:

Economic: Motor Vehicle Sales, MBA Purchase Applications – 7:00, ADP Employment Report – 8:15, Gallup US Job Creation Index – 8:30, PMI Manufacturing Index – 9:45, ISM Manufacturing Index – 10:00, Construction Spending – 10:00, EIA Petroleum Status Report – 10:30.

 

International Economic: EMU PMI Manufacturing Index – 4:00 AM, All Global Manufacturing PMI – 11:00 AM.

Other: San Francisco Federal Reserve Bank President John Williams on panel on financial stability, at Atlanta Fed conference, in Stone Mountain, Georgia, Atlanta Federal Reserve Bank President Dennis Lockhart chairs panel on monetary policy, at Atlanta Fed conference, in Stone Mountain, Georgia.

Optionable Earnings: None meeting criteria.

Thursday April 2:

Economic: Challenger Job-Cut Report – 7:30, International Trade – 8:30, Weekly Jobless Claims – 8:30, Gallup US Payroll to Population – 8:30, Bloomberg Consumer Comfort Index – 9:45, Factory Orders – 10:00, EIA Natural Gas Report – 10:30.

International: European Central Bank Minutes – 12:00 AM, China PMI Composite – 9:45 PM.

Other: Federal Reserve Chair Janet Yellen opening remarks at St Louis Fed community development conference, in Washington – 8:30, Federal Reserve Gov. Lael Brainard speech on economic mobility at St Louis Fed community development conference, in Washington – 8:30.

Optionable Earnings:

Symbol Company Name March 27 Close IV30 B/A XEPS
GBX Greenbrier Companies Inc $56.34 40.1 B $1.26
KMX CarMax, Inc $65.80 35.4 B $0.60
MU Micron Technology, Inc. $26.66 41.4 A $0.82

 

Friday April 3:

US Markets Closed

Economic: Employment Situation – 8:30.

International Economic: No major announcements.

Other: Minneapolis Federal Reserve Bank President Narayana Kocherlakota opening remarks at St Louis Fed community development conference, in Washington – 8:30, St Louis Federal Reserve Bank President James Bullard remarks at St Louis Fed community development conference, in Washington – 12:30.

Optionable Earnings: None meeting criteria.

Monday April 6:

Economic: Gallup US Consumer Spending Measure – 8:30, PMI Services Index – 9:45, Labor Market Conditions Index – 10:00, ISM Non-Manufacturing Index – 10:00, TD Ameritrade IMX – 12:30.

International Economic: No major announcements.

Optionable Earnings: None meeting criteria.

 

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