The Prepared Mind: July 6, 2015

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

“Chance favors the prepared mind.” — Louis Pasteur

By Frank Fahey

“It seems that the necessary thing to do is not to fear mistakes, to plunge in, to do the best that one can, hoping to learn enough from blunders to correct them eventually.”

Abraham Maslow

US markets were closed on Friday in honor of Independence Day. The holiday shortened trading week was dominated by worries about Greece. These concerns led to a sell=off of 1% to 2.5% in domestic indexes. The Greek government instituted capital controls and closed banks. The Greek Prime Minister rejected all bailout offers from creditors – the European Central Bank, European Commission and the International Monetary Fund. On Tuesday, Greece defaulted on over $500 billion in loans, bond obligations, central-bank liquidity assistance, and interbank balances. The default will color the tenor of European markets for the foreseeable future. We all know the story up to this juncture. What happens next? There is no procedure for exiting the Euro in the treaties creating the EMU. This is the crux of the problem.

Here is an overview of the market behavior last week:

Index 2-Jul Weekly Change % Weekly 2015 YTD Volatility of Index
Dow Jones Industrials (DJIA) 17730.11 (216.91) -1.21% -0.52% 17.00% (VXD)
S&P 500 (SPX) 2076.78 (24.83) -1.18% 0.87% 16.79% (VIX)
NASDAQ 100 (NDX) 4436.00 (51.31) -1.14% 4.64% 17.66% (VXN)
Russell 2000 (RUT) 1248.43 (33.48) -2.61% 3.63% 19.92% (RVX)
S&P 100 (OEX) 913.77 (11.30) -1.22% 0.59% 17.72% (VXO)
CBOE Volatility Index (VIX) 16.79 2.77 19.76% NA

Data Source: OptionVue 7

Tuesday marked the end of the second quarter.   The S&P 500 broke a 9 quarter winning streak with a loss of 4.22 points. All the losses for the Dow Jones Industrials occurred in June. The NASDAQ was the best performing index for the quarter. The gain of 248.07 points was the tenth consecutive positive quarter for the NDX. Year-to-date performance numbers are in the table above.

 

 

Index

30-Jun QTR Change % QTR YTD Change % YTD
Dow Jones Industrials (DJIA) 17609.50 (166.60) -0.94% (213.50) -1.20%
S&P 500 (SPX) 2063.12 (4.77) -0.23% 4.22 0.20%
NASDAQ 100 (NDX) 4487.31 92.00 2.09% 248.07 5.85%
Russell 2000 (RUT) 1253.26 2.21 0.18% 48.56 4.03%
S&P 100 (OEX) 908.26 6.27 0.70% (19.21) -2.07%

Data Source: OptionVue 7

The VIX and related products showed a dramatic reaction to the market concerns about Greece and the Chinese sell-off. Here are some interesting points about the VIX last week,

 

  1. The VIX was in backwardization (cash higher than future) for three consecutive days. This was the first time since January of 2015.
  2. Average daily volume of VIX options and futures increase over 100% from previous weeks.
  3. The VIX rose 34.5% on June 29. This was the largest increase since April 16, 2013.
  4. The VIX 20-day put/call ratio fell to 0.51. This is the lowest level since 2008.

 

Watch the VIX and VIX futures for a good current reading of market sentiment. Watch the behavior of the VIX, VXST, VXMT and VXV versus the prices of the VIX futures prices most relevant to each index. The levels of backwardization or contango (cash lower than the future) provide a very good simple summation of future market sentiment.

 

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

Indexes Ticker 2-Jul 26-Jun Change % Change
CBOE Volatility Index VIX 16.79 14.02 2.77 19.76%
VIX July Future VXN5 16.925 14.525 2.400 16.52%
VIX August Future VXQ5 17.025 15.475 1.550 10.02%
VIX September Future VXU5 17.300 16.175 1.125 6.96%
CBOE Short-term Volatility Index VXST 17.97 15.49 2.48 16.01%
CBOE 3 Month Volatility Index VXV 17.68 15.46 2.22 14.36%
CBOE Mid-term Volatility Index (6 month) VXMT 18.34 16.86 1.48 8.78%
VIX of VIX VVIX 105.14 83.09 22.05 26.54%
Long VIX ETP’s
iPath S&P 500 VIX Short Term Futures ETN VXX 19.97 17.35 2.62 15.10%
pShares VIX Short Term Futures ETF VIXY 13.29 11.55 1.74 15.06%
iPath S&P 500 VIX Mid-Tem Futures ETN VXZ 11.06 10.66 0.40 3.75%
Inverse VIX ETP’s
Daily Inverse VIX Short Term ETN XIV 40.29 48.6 (8.31) -17.10%
ProShares Short VIX Short Term Future ETF SVXY 79.47 95.13 (15.66) -16.46%

Data Source: OptionVue7

The coming week is short on economic reports. The most important are the Wednesday release of the minutes from the last FOMC meeting and the Wednesday night release of Chinese inflation numbers – PPI and CPI. There is a referendum in Greece today – July 5 – on whether the Greek government should continue austerity measures and accept the requirements set forth by its creditors. The results of the referendum should by known by the time US markets open on Monday. The Sunday night trade in VIX futures (VXN5) and S&P 500 E-mini futures (ESU5) will provide early sentiment about Monday’s market direction

The new earnings cycle starts this week with the release of Alcoa’s earnings on Wednesday. This week will have very few announcements despite the traditional beginning of the earnings cycle.  Announcements (including those not meeting my earnings criteria) include: Alcoa, WD-40, PepsiCo, VOXX, and Walgreen. Earnings will ramp up in the following weeks. It is imperative for an option trader to know the date of earnings announcements in relationship to the expiration date of options being traded.   It is your responsibility to know the dates of announcements. You should call an confirm earnings dates with the individual company’s investor relations department. The July and August monthly expirations encompass over 90% of the 2nd quarter earnings announcements for the S&P 500. 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. Once again, 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
“The easy way out usually leads back in.” Peter Senge

 

“Volatility is a symptom that people have no idea of the underlying value” – Jeremy Grantham

Monday July 6:

 

Economic: PMI Services Index – 9:45, Labor Market Conditions Index – 10:00, ISM Non-Manufacturing Index – 10:00, TD Ameritrade IMX, Gallup US Consumer Spending Measure – 1:00.

 

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

 

Optionable Earnings: None meeting criteria.

 

 

 

Tuesday July 7:

 

Economic: International Trade – 8:30, Gallup US ECI – 8:30, Redbook – 8:55, JOLTS – 10:00.

 

International Economic: Germany Industrial Production – 2:00 AM, Great Britain Industrial Production – 4:30 AM.

 

Optionable Earnings: None meeting criteria.

 

 

Wednesday July 8:

 

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

 

International Economic: Japan Machine Orders – 7:50 PM, China CPI and PPI – 9:30 PM.

 

Other: FOMC Minutes – 2:00, San Francisco Federal Reserve Bank President John Williams outlook speech in Los Angeles – 2:00.

 

Optionable Earnings: None meeting criteria.

 

 

Thursday July 9:

 

Economic: Chain Store Sales, Weekly Jobless Claims – 8:30, Bloomberg Consumer Comfort Index – 9:45, EIA Natural Gas Report – 10:30.

 

International Economic: Germany Merchandise Trade – 2:00 AM, Japan PPI – 7:50 PM

 

Other: Minneapolis Federal Reserve Bank President Narayana Kocherlakota on panel discussing on how crises change central bank practice, in Frankfurt – 5:45 AM, Federal Reserve Gov. Lael Brainard speech on financial regulation, in Washington – 10:00 AM, Kansas City Federal Reserve Bank President Esther George speech on monetary policy and the economic outlook, in Stillwater, Oklahoma – 12:30 PM.

 

Optionable Earnings:

Symbol Company Name July 2 Close IV30 B/A XEPS
CUDA Barracuda Networks Inc $39.54 52.23 A $0.04
WBA Walgreens Boots Alliance Inc $85.77 23.50 B $0.88

 

 

Friday July 10:

 

Economic: Wholesale Trade –

 

International Economic: Great Britain Merchandise Trade – 4:30

Other: Boston Federal Reserve Bank President Eric Rosengren speech to Rocky Mountain Economic Summit, in Victor, Idaho – 11:00 AM, Federal Reserve Chair Janet Yellen speech, in Cleveland – 12:

 

Optionable Earnings: None

 

Monday July 6

 

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