The Prepared Mind: October 12, 2015

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

“Chance favors the prepared mind.” — Louis Pasteur

By Frank Fahey

“It’s not how much money you make, but how much money you keep, how hard it works for you, and how many generations you keep it for.” – Robert Kiyosaki

The market has staged a very impressive rally the past 6 and half days trading days. The overall market had its best performance weekly performance in 2015. The S&P 500 is up near 7% since 1!:00 PM on Thursday October 2. The rally continued this week with gains of over 3% for the most of the broad based indexes. Small-caps led the way with The Russell 2000 (RUT) 4.38%. This was the largest one week gain for the RUT since October of 2014. One analyst noted that the delay in the Fed interest rate hike means that weak economic growth in the US and other countries pushed the equity markets higher.   Years if watching the markets have led me to discount many ex post facto explanations for market moves.

Last week, technical indicators turned universally bullish. Equity only put/call ratios are bullish. Market breadth indicators are bullish. The final bullish indicators to signal the turn were the close of the S&P 500 above 2,000 and a close of the VIX below 19. Both moved their respective charts from a bearish status to a bullish status.

 

Here is an overview of the market behavior last week:

Index 9-Oct Weekly Change % Weekly 2015 YTD Volatility of Index
Dow Jones Industrials (DJIA) 17084.49 612.12 3.72% -4.14% 16.56% (VXD)
S&P 500 (SPX) 2014.89 63.53 3.26% -2.14% 17.08% (VIX)
NASDAQ 100 (NDX) 4369.13 97.46 2.28% 3.06% 20.5% (VXN)
Russell 2000 (RUT) 1164.78 48.87 4.38% -3.31% 20.03% (RVX)
S&P 100 (OEX) 890.85 28.58 3.31% -1.93% 16.57% (VXO)
CBOE Volatility Index (VIX) 17.08 (3.86) -18.43% NA  

Data Source: OptionVue7

The VIX lost over 18% this week in response to the market rally. This loss was the fourth largest VIX downturn for 2015.The consensus support level for the VIX is at 19%. The VIX started the week over 20% and finished near 17% – firmly in bullish territory for the S&P 500. Longer term VIX related products show relative strength relative to the 30 day window for the VIX.   However, the general consensus among VIX cognoscenti ( those who know more than me) is we that the SPX and VIX price action are now bullish for the equity indexes.

 

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

Indexes Ticker 9-Oct 2-Oct Change % Change
CBOE Volatility Index VIX 17.08 20.94 (3.86) -18.43%
VIX October Future (10/21/2015) VXY5 18.175 21.075 (2.900) -13.76%
VIX November Future (11/18/2015) VXX5 18.375 20.47 (2.095) -10.23%
VIX December Future (12/16/2015) VXZ5 18.725 20.45 (1.725) -8.44%
CBOE Short-term Volatility Index VXST 14.27 19.35 (5.08) -26.25%
CBOE 3 Month Volatility Index VXV 19.85 22.6 (2.75) -12.17%
CBOE Mid-term Volatility Index (6 month) VXMT 20.52 23.05 (2.53) -10.98%
VIX of VIX VVIX 89.08 95.07 (5.99) -6.30%
Long VIX ETP’s      
iPath S&P 500 VIX Short Term Futures VXX 21.27 24.03 (2.76) -11.49%
pShares VIX Short Term Futures ETF VIXY 14.17 16.02 (1.85) -11.55%
iPath S&P 500 VIX Mid-Tem Futures ETN VXZ 11.74 12.59 (0.85) -6.75%
Inverse VIX ETP’s      
Daily Inverse VIX Short Term ETN XIV 29.01 25.94 3.07 11.84%
ProShares Short VIX Short Term Future ETF SVXY 56.88 50.75 6.13 12.08%

Data Source: OptionVue7

Following the three day weekend, the week get’s going with Small Business optimism on Tuesday.   The coming week has very few earnings reports. Retail sales are expected to show a gain in core numbers. This report will be impacted by lower gasoline prices. Manufacturing will take the lead on Thursday with the release of Philadelphia and Empire State reports followed by the Friday release of Industrial Production. Friday’s report will provide the first specific information on September’s manufacturing levels. The International calendar will be quiet. Inflation numbers will be released in the EMU, UK and China. The Middle East, Syria, Turkey and Russia are the world geopolitical wild card.

The earnings season begins to ramp up this week after Alcoa’s disappointing announcement, . The talk on the street is earnings expectations have been lowered due to a stronger dollar and weaker world economy. Earnings announcements will straddle monthly October expiration. Some announcements will occur before this expiration and others will occur after expiration.   The limited earnings announcements this week include: Johnson Johnson, Intel, JP Morgan, Bank of America, Delta Airlines, Wells Fargo, Netflix, Xilinx, Citigroup, Goldman Sachs, Google, Schlumberger, and General Electric. It is time to lay groundwork for the next earnings cycle. I will be putting on some earnings trades this week for my DiscoverOptions live trade sessions. These will be the first in the series. I will be starting with calendars. This will be an ongoing process of learning what does and does not work. I will perform a forensic audit on a losing trade to see if an alternative strategy would have worked better.

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

 

“Know what you own, and know why you own it.” – Peter Lynch
“Any jerk can have short-term earnings. You squeeze, squeeze, squeeze,

and the company sinks five years later.” – Jack Welch

 

 

 

Monday October 12:

 

US Holiday – Columbus Day – All Markets closed.

 

International Economic: China – Merchandise Trade Balance, Bank of Japan Minutes – 7:50 PM.

 

Other: Atlanta Federal Reserve Bank President Dennis Lockhart speech in Orlando, Florida – 8:10 AM, Chicago Federal Reserve Bank President Charles Evans speech on monetary policy, in Chicago -10:30, Federal Reserve Gov. Lael Brainard speech on the economic outlook to NABE, in Washington – 4:30 PM.

 

Optionable Earnings: None meeting criteria.

 

Tuesday October 13:

 

Economic: Industrial NFIB Small Business Optimism Index – 6:00 AM, Redbook – 8:55.

 

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

 

Other:   St Louis Federal Reserve Bank President James Bullard speech on the economy and monetary policy, to NABE, in Washington – 8:00 AM.

 

Optionable Earnings:

Symbol Company Name Oct 9 Close IV30 B/A
ASML ASML Holding NV (ADR) $91.38 35.95 BMO
FAST Fastenal Company $39.03 27.85 BMO
JPM JPMorgan Chase & Co. $62.13 23.33 BMO
CSX CSX Corporation $29.09 30.32 AMC
INTC Intel Corporation $32.52 28.73 AMC
LLTC Linear Technology Corporation $41.79 35.03 AMC

 

 

 

Wednesday October 14:

 

Economic: MBA Mortgage Applications – 7:00, PPI – Final Demand – 8:30, Retail Sales – 8:30, Business Inventories- 10:00, Beige Book – 2:00.

 

International Economic: EMU Industrial Production – 5:00 AM.

 

Other:

 

Optionable Earnings:

Symbol Company Name Oct 9 Close IV30 B/A
DAL Delta Air Lines, Inc. $45.96 35.50 BMO
PNC PNC Financial Services Group Inc $90.97 23.15 BMO
STRP Straight Path Communications Inc $40.02 97.46 BMO
WFC Wells Fargo & Co $52.54 22.73 BMO
JBHT J B Hunt Transport Services Inc $75.35 24.93 AMC
NFLX Netflix, Inc. $114.93 76.04 AMC
XLNX Xilinx, Inc. $45.14 33.86 AMC

 

 

 

Thursday October 15:

 

Economic: Consumer Price Index – 8:30, Weekly Jobless Claims – 8:30, Empire State Manufacturing Survey – 8:30, Bloomberg Consumer Comfort Index – 9:45, Philadelphia Fed Business Survey – 10:00, EIA Natural Gas Report – 10:30, EIA Petroleum Status Report – 11:00.

 

International Economic: No major announcements.

 

Other: New York Federal Reserve Bank President William Dudley conversation on the Fed at a crossroads, in Washington – 10:30 AM.

 

Optionable Earnings:

Symbol Company Name Oct 9 Close IV30 B/A
BBT BB&T Corporation $36.91 22.99 BMO
BX Blackstone Group LP $34.01 38.26 BMO
SCHW Charles Schwab Corp $28.33 33.37 BMO
C Citigroup Inc $51.65 26.59 BMO
GS Goldman Sachs Group Inc $181.07 24.74 BMO
MTB M&T Bank Corporation $120.20 24.23 BMO
MAT Mattel, Inc. $22.33 41.77 BMO
PPG PPG Industries, Inc. $95.77 27.02 BMO
SLB Schlumberger Limited. $76.64 27.85 BMO
TSM Taiwan Semiconductor Mfg. Co. Ltd. (ADR) $22.25 31.59 BMO
UNH UnitedHealth Group Inc $116.08 26.95 BMO

 

 

Friday October 16:

 

Economic: Industrial Production – 9:15, JOLTS – 10:00, Consumer Sentiment – 10:00, Atlanta Fed Business Inflation Expectations – 10:00, Baker-Hughes Rig Count – 1:00.

 

International Economic:   EMU – HICP – 5:00 AM, EMU Merchandise Trade – 5:00 AM

 

Other:

 

Optionable Earnings:

Symbol Company Name Oct 9 Close IV30 B/A
CMA Comerica Incorporated $43.46 38.17 BMO
HON Honeywell International Inc. $101.07 22.56 BMO
KSU Kansas City Southern $98.46 28.76 BMO
STI SunTrust Banks, Inc. $39.85 23.88 BMO
SYF Synchrony Financial $32.36 28.21 BMO
GWW W W Grainger Inc $231.44 24.15 BMO

 

 

Monday October 19:

 

Economic: Housing Market Index – 10:00.

 

International Economic: Sunday night: China Industrial Production, Retail Sales, GDP – 9:30 PM.

 

Other:   Richmond Federal Reserve Bank President Jeffrey Lacker speech on the economics of early childhood education, in Richmond – 12:00 PM.

 

Optionable Earnings:

Symbol Company Name Oct 9 Close IV30 B/A
CE Celanese Corporation $66.84 35.77 BMO
HAL Halliburton Company $40.41 37.49 BMO
HAS Hasbro, Inc. $73.80 32.35 BMO
MS Morgan Stanley $32.99 27.62 BMO
SIX Six Flags Entertainment Corp $48.24 28.50 BMO
VFC VF Corp $71.33 23.76 BMO
IBM International Business Machines $152.28 25.09 AMC
SONC Sonic Corporation $24.75 41.54 AMC
ZION Zions Bancorporation $28.76 30.25 AMC

 

 

 

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