The Prepared Mind: July 13, 2015

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

“Chance favors the prepared mind.” — Louis Pasteur

By Frank Fahey

“We simply attempt to be fearful when others are greedy, and to be greedy when others are fearful.” Warren Buffett

A comparison of this week’s closing prices compared to the closing prices of the previous week masks the underlying chaos of the trading week. A review of the table below shows week-to-week movement of less than 1% in the major domestic indexes. These numbers do not tell the whole story.  It was an ugly week. It was a test of patience versus panic. On Tuesday, the SPX had its largest one day down and up move in over 4 years. Tuesday, Thursday and Friday had overnight moves (lose to next day opening) in the futures of over 1%. Interday and intraday volatility were the highest I have seen this year. The following table and the daily chart for the SPX show the need to look at the whole story.

 

Here is an overview of the market behavior last week:

Index 10-Jul Weekly Change % Weekly 2015 YTD Volatility of Index
Dow Jones Industrials (DJIA) 17760.41 30.30 0.17% -0.35% 16.84% (VXD)
S&P 500 (SPX) 2076.62 (0.16) -0.01% 0.86% 16.83% (VIX)
NASDAQ 100 (NDX) 4415.79 (20.21) -0.46% 4.16% 17.92% (VXN)
Russell 2000 (RUT) 1247.85 (0.58) -0.05% 3.58% 19.40% (RVX)
S&P 100 (OEX) 914.30 0.53 0.06% 0.65% 17.77% (VXO)
CBOE Volatility Index (VIX) 16.83 0.04 0.24% NA

Data Source: OptionVue7

 

The following chart shows how volatile the daily price movement was last week. These movements were in response the latest news about the Chinese markets, Greek debt, Puerto Rican debt, and the timing Fed interest rate increase. There is little reason not to expect more of the same next week,

 

Data Source: thinkorswim

 

Monday’s spike in the VIX was 34.5% . This was the 11th largest percentage in spike in VIX history. Discussions in the VIX blogosphere are centering upon whether the VIX will see a “return to mean.’ The consensus is that there will be a return to mean. The disagreement among the VIX cognoscenti is about the mean should be calculated. This is a continuation of a common them in technical analysis – “the new normal.” This “new normal” for the VIX has moved from 18 to 16 to 12 and back to 15. This week’s question was if the new normal for the VIX is 17. Change is a constant in VIX levels.

 

We should have the results of this meeting soon after Sunday. E-mini trading starts on Globex.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 10-Jul 2-Jul Change % Change
CBOE Volatility Index VIX 16.83 16.79 0.04 0.24%
VIX July Future VXN5 16.775 16.925 (0.150) -0.89%
VIX August Future VXQ5 17.175 17.025 0.150 0.88%
VIX September Future VXU5 17.575 17.300 0.275 1.59%
CBOE Short-term Volatility Index VXST 17.24 17.97 (0.73) -4.06%
CBOE 3 Month Volatility Index VXV 17.76 17.68 0.08 0.45%
CBOE Mid-term Volatility Index (6 month) VXMT 18.62 18.34 0.28 1.53%
VIX of VIX VVIX 101.19 105.14 (3.95) -3.76%
Long VIX ETP’s
iPath S&P 500 VIX Short Term Futures ETN VXX 19.86 19.97 (0.11) -0.55%
pShares VIX Short Term Futures ETF VIXY 13.21 13.29 (0.08) -0.60%
iPath S&P 500 VIX Mid-Tem Futures ETN VXZ 11.15 11.06 0.09 0.81%
Inverse VIX ETP’s
Daily Inverse VIX Short Term ETN XIV 39.91 40.29 (0.38) -0.94%
ProShares Short VIX Short Term Future ETF SVXY 78.08 79.47 (1.39) -1.75%

Data Source: OptionVue7

The Eurozone finance ministers have walked out of their meeting as I write this blog on Sunday morning.  Eurozone heads of state gathered in Brussels on Sunday, with just hours remaining to reach a deal to keep Greece in Europe’s common currency. Will the heads of state be able to accomplish what their finance minister were unable to do? We should have the results of this meeting soon after Sunday’s 5 PM EDT opening of E-mini trading starts on Globex. Watch the E-mini, 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.

The week of July 13 includes reports on EU industrial production, US industrial production, Chinese GDP, and housing starts. Chinese equity markets and Greek debt will overshadow the impact of any economic report. News concerning both situations will dominate markets this week. The impact of a Greek exit from the Euro pales in comparison to the chaos from continued losses in Shanghai and Shenzhen markets. When combined, these markets are the world’s second largest. They have lost over $4 trillion over the past 4 weeks. This is a greater amount than entire French stock market. The full force of the Beijing government has been focused on preventing a further sell off.

Earnings expectations for this quarter have recently been lowered. A stronger dollar and weakening Chinese and European economies are the primary factors in lowered expectations. The new earnings cycle begins to ramp up this week with earnings announcements. Announcements (including those not meeting my earnings criteria) include: Yum!, Fastenal, JP Morgan Chase, Wells Fargo, Johnson & Johnson, Delta Air Lines, PNC, Bank of America, Intel, Seagate, BlackRock, Google, eBay, Mattel, Sherwin-Williams, CitiGrp, Schwab, Phillip Morris, PPG, Goldman Sachs, Schlumberger, Comerica, JB Hunt, General Electric, Honeywell and WW Grainger, . 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
“Luck is unreliable.” – Amanda Ripley

 

“The market can remain irrational longer than you can remain solvent.” John Keynes

 

Monday July 13:

 

Economic: No major announcements.

 

International Economic: No major announcements.

 

Optionable Earnings: None meeting criteria.

 

 

 

Tuesday July 14:

 

Economic: International NFIB Small Business Optimism Index – 6:00, Retail Sales – 8:30, Import and Export Prices – 8:30, Redbook – 8:55, Business Inventories – 10:00.

 

International Economic: Bank of Japan Announcement, Germany CPI – 2:00 AM, Great Britain CPI & PPI – 4:30 AM, EMU Industrial Production – 5:00 AM, China GDP and Retail Sales – 10 PM.

 

Optionable Earnings:

Symbol Company Name July 10 Close IV30 B/A XEPS
FAST Fastenal Company $42.00 23.57 B $0.47
YUM Yum! Brands, Inc. $87.99 36.00 B $0.63
CSX CSX Corporation $31.90 27.56 A $0.53

 

 

 

Wednesday July 15:

 

Economic: MBA Mortgage Applications – 7:00, PPI-Final Demand – 8:30, Empire State Manufacturing Survey – 6:30, Industrial Production – 9:15, Atlanta Fed Business Inflation Expectations – 10:00, EIA Petroleum Status Report – 10:30, Beige Book – 2:00.

 

International Economic: No major announcements.

 

Other: Federal Reserve Chair Janet Yellen presents semi-annual monetary report to House Financial Services Committee, in Washington – 10:00 AM, Cleveland Federal Reserve Bank President Loretta Mester speech and interview on the economic outlook, in Columbus, Ohio – 12:25 PM, San Francisco Federal Reserve Bank President John Williams outlook speech in Mesa, Arizona – 3:00 PM.

 

Optionable Earnings:

Symbol Company Name July 10 Close IV30 B/A XEPS
ASML ASML Holding NV (ADR) $99.62 34.19 B $0.90
DAL Delta Air Lines, Inc. $40.55 38.11 B $1.23
INTC Intel Corporation $28.93 32.35 A $0.51
KMI Kinder Morgan Inc $37.50 24.07 A $0.19
LVS Las Vegas Sands Corp. $54.38 35.96 A $0.61
NFLX Netflix, Inc. $670.09 50.44 A $0.32

 

 

 

Thursday July 16:

 

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

 

International Economic: EMU HICP – 5:00 AM, EMU Merchandise Trade, European Central Bank announcement – 7:45 AM.

 

 

Other: Federal Reserve Chair Janet Yellen presents semi-annual monetary report to Senate Banking Committee, in Washington – 10:00 AM.

 

Optionable Earnings:

Symbol Company Name July 10 Close IV30 B/A XEPS
ASML ASML Holding NV (ADR) $99.62 34.19 B $0.90
DAL Delta Air Lines, Inc. $40.55 38.11 B $1.23
INTC Intel Corporation $28.93 32.35 A $0.51
KMI Kinder Morgan Inc $37.50 24.07 A $0.19
LVS Las Vegas Sands Corp. $54.38 35.96 A $0.61
NFLX Netflix, Inc. $670.09 50.44 A $0.32

 

 

Friday July 17:

 

Economic: Consumer Price Index – 8:30, Housing Starts – 8:30, University of Michigan Consumer Sentiment – 10:00.

 

International Economic: No major announcements.

 

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 – 12:00 PM.

 

Optionable Earnings:

Symbol Company Name July 10 Close IV30 B/A XEPS
CMA Comerica Incorporated $48.99 24.24 B $0.74
JBHT J B Hunt Transport Services Inc $84.02 24.24 B $0.91
KSU Kansas City Southern $93.25 27.65 B $1.06
SYF Synchrony Financial $32.60 23.54 B $0.61

 

 

 

Monday July 20:

 

Economic: No major announcements.

 

 

International Economic: Germany PPI – 2:00 AM, Bank of Japan Minutes – 7:50 PM.

 

Optionable Earnings:

Symbol Company Name July 10 Close IV30 B/A XEPS
CALM Cal-Maine Foods Inc $52.30 44.88 B $1.16
HAL Halliburton Company $41.31 32.30 B $0.30
HAS Hasbro, Inc. $75.94 25.38 B $0.29
MS Morgan Stanley $38.10 24.61 B $0.73
CNI Canadian National Railway (USA) $56.48 22.92 A $0.85
IBM International Business Machines Corp. $163.85 22.50 A $3.79
ZION Zions Bancorporation $30.41 25.51 A $0.39

 

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