The Prepared Mind: September 28, 2015

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

“Chance favors the prepared mind.” — Louis Pasteur

By Frank Fahey

“And now, here to tell you everything about anything is Mr. Know-It-All.”

– Rocket J. Squirrel

 

The markets were beset by uncertainty last week. The uncertainty lead to a 1.4% decline in the broad-based S&P 500 with the small cap laden Russell 2000 down just over 4% and the tech laden NASDAQ 100 down 2.6%. Strong earnings announced y by Nike (NKE) lead to a gain for the Dow Jones Industrials on Friday and a modest loss of 0.43% for the week. Those who think they know could not come up with any one overriding reason for the weakness in the market. A multitude of reasons were offered. These reasons run the gamut from the impact on Germany’s dependence on autos from VW’s Bernie Madoff approach to mileage standards and pollution standards to the impending Fed increase in interest rates to the impact of John Boehner’s resignation to a general malaise in investor confidence.   These reasons are just a subset of those given by the financial media this week.

Technical analysts are never shy about expressing their opinions. I try to provide a synopsis of the opinions expressed by a range of analysts. The SPX price chart is bearish. The SPX broke down below its 20 day moving average last week. Equity only put/call ratios are bullish and giving buy signals. Please remember that “buy signal” is a name and not a directive to go long the market. Market breadth is reflects the uncertainty present in the markets. The general consensus among analysts is the market will be characterized by downward pressure interrupted by sudden ephemeral rallies.

Here is an overview of the market behavior last week:

Index 25-Sep Weekly Change % Weekly 2015 YTD Volatility of Index
Dow Jones Industrials (DJIA) 16314.67 (70.12) -0.43% -8.46% 21.94% (VXD)
S&P 500 (SPX) 1931.34 (26.74) -1.37% -6.20% 23.62% (VIX)
NASDAQ 100 (NDX) 4222.66 (114.46) -2.64% -0.39% 25.16% (VXN)
Russell 2000 (RUT) 1118.87 (46.94) -4.03% -7.12% 24.50% (RVX)
S&P 100 (OEX) 851.90 (9.49) -1.10% -6.22% 23.59% (VXO)
CBOE Volatility Index (VIX) 23.62 1.34 6.01% NA  

Data Source: OptionVue7

For the second straight week, market implied volatility showed a minor change. Two weeks it was down a bit; this week it showed minor gains.  The lack of a trend was reflected in the major trades reported by Russell Rhoads of the CBOE. Usually the weekly trades show a bias – bullish or bearish. The past week the trades sowed bullish and bearish biases. The consensus support level for the VIX is at 19.

 

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

Indexes Ticker 25-Sep 18-Sep Change % Change
CBOE Volatility Index VIX 23.62 22.28 1.34 6.01%
VIX October Future (10/21/2015) VXY5 22.325 21.525 0.800 3.72%
VIX November Future (11/18/2015) VXX5 21.675 20.975 0.700 3.34%
VIX December Future (12/16/2015) VXZ5 21.350 20.800 0.550 2.64%
CBOE Short-term Volatility Index VXST 22.89 21.78 1.11 5.10%
CBOE 3 Month Volatility Index VXV 24.40 23.20 1.20 5.17%
CBOE Mid-term Volatility Index (6 month) VXMT 23.55 22.90 0.65 2.84%
VIX of VIX VVIX 110.54 116.26 (5.72) -4.92%
Long VIX ETP’s      
iPath S&P 500 VIX Short Term Futures ETN VXX 25.09 24.68 0.41 1.66%
pShares VIX Short Term Futures ETF VIXY 16.72 16.42 0.30 1.83%
iPath S&P 500 VIX Mid-Tem Futures ETN VXZ 12.79 12.56 0.23 1.83%
Inverse VIX ETP’s      
Daily Inverse VIX Short Term ETN XIV 25.04 25.89 (0.85) -3.28%
ProShares Short VIX Short Term Future ETF SVXY 49.09 50.64 (1.55) -3.06%

Data Source: OptionVue7

“Cautious’ is the word for the coming week. September is the end of the third quarter. Expect pirce movement as hedge funds and portfolio managers rebalance their holdings. The coming week sees the release of two major reports – the ISM manufacturing report, out Thursday, and Friday’s U.S. employment report. The coming week is employment week. In years past this week has been a significant volatility event. This report does not have its previous impact. The focus is now on a weakening global economy and the Fed increase in interest rates. A number of the members of the FOMC will be giving talks this week. These talks will be parsed in order to divine when the timing of any Fed interest rate increase. An announcement confirming the timing of an increase in rates would provide an indication of confidence in the US economy.

Earnings will not impact the market this week. During my time as a market maker in equity pits at the CBOE, I was either trading earnings or preparing to trade earnings. It is time to start laying the groundwork for the next earnings cycle. The earnings announcement by Alcoa (AA) is considered the start of the earnings season.   Alcoa’s next announcement is on Thursday October 8 after the market closes.  The volume of earnings announcements will not ramp up until the following week. These earnings announcements will straddle October expiration. Some announcements will occur before this expiration and others will occur after expiration.

The limited earnings announcements this week include: Cal Maine Foods, Costco, Paychex, McCormick & Co, and Micron Technology. It is time to lay groundwork for the next earnings cycle. 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 and confirm earnings dates with the individual company’s investor relations department. The October and November monthly expirations encompass over 90% of the 3nd 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 the previous 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 > 200 contracts. Once again, it is your responsibility to confirm these earnings dates. The date and time of earnings announcements can and do change.

Advice to stimulate your imagination:

 

“Chance favors the Prepared Mind.” – Louis Pasteur

“It is not certain that everything is uncertain.” – Blaise Pascal
Any jerk can have short-term earnings. You squeeze, squeeze, squeeze,

and the company sinks five years later. – Jack Welch

 

 

 

Monday September 28:

 

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

 

International Economic: No major announcements.

 

Other: New York Federal Reserve Bank President William Dudley interviewed by the Wall Street Journal – 7:45 AM, Chicago Federal Reserve Bank President Charles Evans speech on monetary policy, in Milwaukee – 1:30 PM, San Francisco Federal Reserve Bank John Williams speech to UCLA Anderson Forecast conference, in Los Angeles – 5:00PM.

 

Optionable Earnings:

Symbol Company Name Sept 25 Close IV30 B/A
CALM Cal-Maine Foods Inc $57.14 49.12 BMO

 

 

Tuesday September 29:

 

Economic: Rebook – 8:55, S&P Case-Shiller Home Price Index – 9:00, Consumer Confidence – 10:00, State Street Investor Confidence Index – 10:00, Farm Prices – 3:00 PM.

 

International Economic: EMU-EC Economic Sentiment – 5:00 AM, Germany CPI – 8:00 AM, Japan Industrial Production and Retail Sales – 7:50 PM.

 

Other:   Atlanta Federal Reserve Bank President Dennis Lockhart speech in speech in Montgomery, Alabama -7:00.

 

Optionable Earnings:

Symbol Company Name Sept 25 Close IV30 B/A
FGP Ferrellgas Partners, L.P. $21.20 36.76 BMO
WBA Walgreens Boots Alliance Inc $85.75 31.49 BMO
CUDA Barracuda Networks Inc $27.30 64.99 AMC
DMND Diamond Foods, Inc. $33.65 49.70 AMC

 

 

 

Wednesday September 30:

 

Economic: MBA Mortgage Applications – 7:00, ADP Employment Report – 8:15, Chicago PMI – 9:45, EIA Petroleum Status Report – 10:30.

 

International Economic: France PPI – 2:45, Germany Unemployment Rate – 3:55 AM, EMU Unemployment Rate – %:00 AM, China PMI Manufacturing Index – 9:35 PM.

 

Other: End of Third Quarter. Federal Reserve Chairman Janet Yellen opening remarks to St. Louis Fed community banking conference – 2:00 PM, Federal Reserve Gov Lael Brainard speech to St. Louis Fed community banking conference – 7:00 PM.

 

Optionable Earnings: None meeting criteria.

 

 

Thursday October 1:

 

Economic: Motor Vehicle Sales, Challenger Job-Cut Report 7:30, Weekly Jobless Claims – 8:30, Gallup US Payroll to Population – 8:30, PMI Manufacturing – 9:45, Bloomberg Consumer Comfort Index – 9:45, ISM Manufacturing Index – 10:00, Construction Spending – 10:00, EIA Natural Gas Report – 10:30.

 

International Economic: Emi PMI Manufacturing Index – 4:00 AM, Japan Unemployment Rate – 7:30 PM.

 

Other: San Francisco Federal Reserve Bank John Williams outlook speech, in Salt Lake City, Utah – 2:30 PM.

 

Optionable Earnings: None meeting criteria.

 

 

Friday October 2:

 

Economic: September employment Situation – 8:30, Factory Orders – 10:00, Baker-Hughes Rig Count – 1:00.

 

International Economic:  Germany Retail Sales – 2:00 AM, EMU PPI – 5:00.

 

Other: Boston Federal Reserve Bank President Eric Rosengren opens Boston Fed’s macroprudential monetary policy conference in Boston – 8:30 AM, Minneapolis Fed President Narayana Kocherlakota discusses paper co-authored by Boston Fed’s Rosengren on whether Fed should have ternary mandate, in Boston – 9:00 AM, Cleveland Fed President Loretta Mester discusses paper on micro and macroprudential supervisory controls authored by former BOE deputy governor Paul Tucker, in Boston – 11:00, Federal Reserve Vice Chair Stanley Fischer speech to Boston Fed conference – 12:00 PM, St Louis Federal Reserve Bank President James Bullard speech to Shadow Open Market Committee, in New York -1:00 PM.

 

Optionable Earnings: None meeting criteria.

 

 

Monday October 5:

 

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 PM.

 

International Economic: EMI PMI Composite – 4:00 AM.

 

Other:

 

Optionable Earnings: None meeting criteria.

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