The Prepared Mind: June 1, 2015

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

“Chance favors the prepared mind.” — Louis Pasteur

By Frank Fahey

“Risk is like fire: If controlled it will help you; if uncontrolled it will rise up and destroy you.”       Theodore Roosevelt

Have the summer doldrums started a month earlier than usual?   Investor sentiment has reached levels of neutral feelings about the market – approaching 50%. The normal proportion of neutral investors is about 31%. The lack of bullish or bearish sentiment was reflected in trading volumes. May was the quietest trading month this year. Last week’s sell-off woke up some of the inveterate doomsayers. It be noted that the losses in the indexes were nothing more than a speed bump for the bull market.

The VIX came of its lowest closing levels since the past December. The SPX is still within a good one day move of its all-time highs. The next level of support is at the March and April lows of 2070 to 2075. Market breadth and other technical indicators have moved from sideways movement to bearish. Equity only put/call ratios, market breadth, and the VIX point to weakness in the market.

Here is an overview of the market behavior last week:

Index May 29 Close Weekly Change % Weekly 2015 YTD Volatility of Index
Dow Jones Industrials (DJIA) 18010.58 (221.44) -1.21% 1.05% 13.92% (VXD)
S&P 500 (SPX) 2107.39 (18.67) -0.88% 2.36% 13.84% (VIX)
NASDAQ 100 (NDX) 4515.46 (11.62) -0.26% 6.52% 14.75% (VXN)
Russell 2000 (RUT) 1244.74 (4.38) -0.35% 3.32% 16.56% (RVX)
S&P 100 (OEX) 926.11 (7.97) -0.85% 1.95% 14.46% (VXO)
CBOE Volatility Index (VIX) 13.84 1.71 14.10% NA

Data Source: OptionVue7

 

It was a quiet week for major indexes. Russell Rhoads, senior analyst at the CBOE, brought VIX trade taking place before the close on Friday. A broken wing butterfly June 15/19/22 call butterfly was purchased 10,000 times for 0.34. The trade profits at expiration if the VIX closes at 15.34 or higher. A sell-off next week would lead to a spike in the VIX. I will be watching time and sales to see if this is a short-term or long-term play.

 

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

Indexes Ticker 29-May 22-May Change % Change
CBOE Volatility Index VIX 13.84 12.13 1.71 14.10%
VIX June Future VXM5 14.625 14.425 0.20 1.39%
VIX July Future VXN5 15.825 15.725 0.10 0.64%
VIX August Future VXQ5 16.425 16.375 0.05 0.31%
CBOE Short-term Volatility Index VXST 13.67 9.6 4.07 42.40%
CBOE 3 Month Volatility Index VXV 15.38 14.48 0.90 6.22%
CBOE Mid-term Volatility Index (6 month) VXMT 17.33 16.72 0.61 3.65%
VIX of VIX VVIX 79.07 75.98 3.09 4.07%
Long VIX ETP’s
iPath S&P 500 VIX Short Term Futures ETN VXX 19.02 18.68 0.34 1.82%
pShares VIX Short Term Futures ETF VIXY 12.65 12.42 0.23 1.85%
iPath S&P 500 VIX Mid-Tem Futures ETN VXZ 11.19 11.16 0.03 0.27%
Inverse VIX ETP’s
Daily Inverse VIX Short Term ETN XIV 45.19 46.09 (0.90) -1.95%
ProShares Short VIX Short Term Future ETF SVXY 88.5 90.32 (1.82) -2.02%

 

This week the focus will be on jobs. “Jobs Week” tends to bring volatility to the equity markets. The reports start with the ADP Employment Report and the Gallup US Job Creation Index reports on Wednesday followed by the Weekly Jobless Claims and the Challenger Job-Cut Reports on Thursday. The reports culminate with Friday’s release of the May Job Situation. These job reports will affect analyst’s expectations for the Fed’s first rate hike. The consensus among the “experts” is the hike will take place in September. Any significant deviation from the forecast of 220,000 for non-farm payroll will immediately impact the equity markets. Monetary policy meetings will be held by the European Central Bank and the Bank of England. These meetings are not expected to result in market moving changes is policy. Greece is once again roiling EMU markets. Friday is the deadline for a Greek payment of 1.5 billion Euros to the International Monetary Fund.

It will be yet another quiet week for earnings. Earnings announcements include: Thor Industries, Quicksilver, Medtronic, Guess?, Dollar General, Brown-Forman, Verifone, Diamond Foods, Cienna, Joy Global and Analogic.  OptionVue provides information on the effect of individual earnings announcements on the historic stock price and the pre and post earnings implied volatility of the options. These OptionVue tools designed to help the trader successfully trade options around earnings plays. There are five different kinds of earnings play which OptionVue tracks.

I have provided a list of major earning announcements along with Friday’s closing price and implied volatility, time of announcement, and expected earning range. The selected stocks are the result of a scan for stocks announcing earnings in 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. The date and time of earnings announcements can and do change.

 

Trading advice to remember:

 

“Chance favors the Prepared Mind.” – Louis Pasteur
“What we think, or what we know, or what we believe is, in the end, of little consequence.

The only consequence is what we do.” – John Ruskin

 

“Bank failures are caused by depositors who don’t deposit enough money

to cover the losses due to mismanagement.” – Dan Quayle

 

Monday June 1:

 

Economic: Personal Income and Outlays – 8:30, Gallup US Consumer Spending Measure – 8:30, PMI Manufacturing Index – 9:45, ISM Manufacturing Index – 10:00, Construction Spending 10:00.

 

International Economic: Germany Retail Sales – 2:00 AM, EMU PMI Manufacturing Index – 4:00 AM.

 

Other: Boston Federal Reserve Bank President Eric Rosengren speech in Hartford, Connecticut – 9:05 AM.

 

Optionable Earnings:

Symbol Company Name May 29 Close IV30 B/A XEPS
NGL NGL Energy Partners LP $30.25 28.56 B $0.77
PVH PVH Corp $104.97 35.35 A $1.36

 

 

Tuesday June 2:

 

Economic: Motor Vehicle Sales, Gallup US Economic Confidence Index – 8:30, Redbook – 8:55, Factory Orders – 10:00.

 

International Economic: Germany Unemployment Rate – 3:55, EMU HICP Flash – 5:00 AM, EMU PPI – 5:00 AM.

 

Optionable Earnings:

Symbol Company Name May 29 Close IV30 B/A XEPS
CBRL Cracker Barrel Old Country Store $142.41 26.58 B $1.39
CONN CONN’S, Inc. $37.31 96.74 B $0.42
DG Dollar General Corp. $73.11 24.60 B $0.82
AMBA Ambarella Inc $88.96 54.86 A $0.44
GIII G-III Apparel Group, Ltd. $57.10 45.36 A $0.07

 

 

Wednesday June 3:

 

Economic: MBA Mortgage Applications – 7:00, ADP Employment Report – 8:15, International trade – 9:30, Gallup US Job Creation Index – 8:30, PMI Services Index – 9:45, ISM Non-manufacturing Index – 10:00, EIA Petroleum Status Report – 10:30, Beige Book – 2:00.

 

International Economic: EMU PMI Composite – 4:00 AM, EMU Unemployment Rate – 5:00 AM, All Global Composite PMI – 11:00 AM.

 

Other: European Central Bank Announcement – 7:45 AM, Chicago Federal Reserve Bank President Charles Evans speech to banking symposium in Chicago – 2:15 pm, St Louis Federal Reserve Bank President James Bullard press briefing in St. Louis – 4:00 PM.

 

Optionable Earnings:

 

Thursday June 4:

 

Economic: Chain Store Sales, Challenger Job-Cut Report – 7:30, Weekly Jobless Claims – 8:30, Productivity and Costs 8:30, Gallup US Payroll to Population – 8:30, Bloomberg Consumer Comfort Index – 9:45, EIA Natural Gas Report – 10:30.

 

International Economic: EMU

 

Other: Federal Reserve Gov. Daniel Tarullo speech to IIF summit in New York – 12:00 PM

 

Optionable Earnings:

 

Friday June 5:

 

Economic: US Employment Situation – 8:30.

International Economic: Germany Manufacturer’s Orders – 2:00 AM.

 

Other: Deadline for Greece to pay the IMF 1.5 billion euros.

 

Optionable Earnings: None meeting criteria.

 

Monday June 8:

 

Economic: Labor Market Conditions – 10:00.

 

International Economic: Germany Industrial Production and Merchandise Trade – 2:00 AM, China PPI and CPI 9:30 PM.

 

Optionable Earnings:

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