The Prepared Mind: November 9, 2015

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

“Chance favors the prepared mind.” — Louis Pasteur

By Frank Fahey

“An investment in knowledge pays the best interest.” – Benjamin Franklin

The small cap heavy Russell 2000 (RUT) led the indexes with a gain of 3.51% for the week. The other major indexes showed gains of 1% to 1.5%.   Friday’s market performance was mixed with large caps showing small loss and small caps showing small gains. Friday’s October job numbers were very strong – adding a total of 271,000 jobs along with minor wage growth. The unemployment rate went down to 5% and real wages grew o.4%. These numbers exceeded economists’ expectations. A more immediate result of the better than expected numbers is the expectation the Fed will raise interest rate by 0.25% in December. The general consensus among the financial media was the increase would have no major impact on financial markets.

The bull trend continues even though the S&P 500 is showing signs of being overbought. Technical analysts are pointing to 2060, 2040, 2020 and 2000 as levels of support. I have rarely seen such consistent agreement among the analysts.   Equity put/call are still bullish despite approaching overbought levels. The VIX and associated products are still bullish. In the world of technical analysis, overbought and oversold are technical terms. Please do not take these signals as recommendations to buy or sell the market.

Here is an overview of the market behavior last week:

Index 6-Nov Weekly Change % Weekly 2015 YTD Volatility of Index
Dow Jones Industrials (DJIA) 17910.33 246.79 1.40% 0.49% 15.08% (VXD)
S&P 500 (SPX) 2099.20 19.84 0.95% 1.96% 14.33% (VIX)
NASDAQ 100 (NDX) 4707.23 60.70 1.31% 11.04% 16.36% (VXN)
Russell 2000 (RUT) 1199.75 40.68 3.51% -0.41% 18.18% (RVX)
S&P 100 (OEX) 937.57 10.83 1.17% 3.21% 13.87% (VXO)
CBOE Volatility Index (VIX) 14.33 (0.74) -4.91% NA  

Data Source: OptionVue7

 

As mentioned previously, the VIX and associated products were lower in response to higher prices and the release of the Unemployment Reprot. The unemployment Report is a good example of a predictable volatility event. This volatility event is generally characterized by lower implied volatility and uncertainty after the release of the report. Earnings announcement are another volatility event with the same impact on the implied volatility of associated options.

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

Indexes Ticker 6-Nov 30-Oct Change % Change
CBOE Volatility Index VIX 14.33 15.07 (0.74) -4.91%
VIX November Future (11/18/2015) VXX5 15.675 16.625 (0.950) -5.71%
VIX December Future (12/16/2015) VXZ5 16.475 17.325 (0.850) -4.91%
VIX January Future (1/1202015) VXF6 17.400 18.175 (0.775) -4.26%
CBOE Short-term Volatility Index VXST 12.80 14.31 (1.51) -10.55%
CBOE 3 Month Volatility Index VXV 17.45 18.40 (0.95) -5.16%
CBOE Mid-term Volatility Index (6 month) VXMT 19.13 19.84 (0.71) -3.58%
VIX of VIX VVIX 85.03 90.27 (5.24) -5.80%
Long VIX ETP’s      
iPath S&P 500 VIX Short Term Futures ETN VXX 18.04 18.83 (0.79) -4.20%
pShares VIX Short Term Futures ETF VIXY 12.00 12.53 (0.53) -4.23%
iPath S&P 500 VIX Mid-Tem Futures ETN VXZ 10.78 11.07 (0.29) -2.62%
Inverse VIX ETP’s      
Daily Inverse VIX Short Term ETN XIV 32.28 31.09 1.19 3.83%
ProShares Short VIX Short Term Future ETF SVXY 63.19 60.85 2.34 3.85%

Data Source: OptionVue7

The biggest domestic announcement of the week will be the release Retail Sales on Monday. Third quarter report of GDP and industrial production will be released for the Euro zone. China will release a number of reports including: October Merchandise Trade, CPI and PPI, Industrial Output, and Retail Sales. All these reports will be parsed for indications of the timing and magnitude of rate increases by the Fed .Fed Governors and members of the FOMC will be speaking this week. Their speeches and accompanying utterances will have the ability to move the indexes. Earnings will continue to be the important focus of the US markets. Lowered expectations for earnings have tempered downside earnings surprises.

The earning’s season is starting to slow this week with a dramatic decrease in announcements the following week. My normal source of earning announcements is down for “maintenance” this weekend. I will a list Monday 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

 

“Economics is extremely useful as a form of employment for economists.'” – JK Galbraith
“The production of too many useful things results in too many useless people.” – Karl Marx

 

 

Monday November 9:

 

Economic: Labor Market Conditions Index – 10:00, TD Ameritrade IMX – 12:30.

 

International Economic: Germany Merchandise Trade – 2:00 AM, China CPI and PPI – 8:30 PM.

 

Other: Boston Federal Reserve Bank President Eric Rosengren speech on the outlook, in Portsmouth, Rhode Island – 12:00 PM.

 

 

Tuesday November 10:

 

Economic: NFIB Small Business Optimism Index – 8:00, Import and Export Prices – 8:30, Redbook – 8:55, Factory Wholesale Trade – 10:00.

 

International Economic: China Industrial Production and Retail Sales.

 

Other: Chicago Federal Reserve Bank President Charles Evans on panel discussing government debt, in Chicago – 2:30.

 

 

Wednesday November 11:

 

Veteran’s Day = US Markets Open, Banks Closed.

 

Economic: No Major Announcements.

 

International Economic: Japan Machine Orders and PPI – 6:50 PM.

 

 

Thursday November 12:

 

Economic: Mortgage Applications – 7:00, Weekly Jobless Claims – 8:30, Bloomberg Consumer Comfort Index – 9:45, JOLTS – 10:00..

 

International Economic: Germany CPI – 2:00 AM, EMU Industrial Production – 5:00 AM.

 

Other: St Louis Federal Reserve Bank President James Bullard speech to Cato monetary policy conference, in Washington – 9:05 AM, Richmond Federal Reserve Bank President Jeffrey Lacker on panel discussing monetary policy, in Washington – 9:45, Chicago Federal Reserve Bank President Charles Evans speech on transforming communities, in Chicago – 10:15 AM, New York Federal Reserve Bank President William Dudley speech, in New York – 11:45 AM.

 

Friday November 13

 

Economic: PPI-FD – 8:30, Retail Sales – 8:30, Business Inventories – 10:00, Consumer Sentiment – 10:00, EIA Natural Gas Report – 10:30, Baker-Hughes Rig Count – 1:00.

 

International Economic: Germany GDP Flash – 2:00 AM, EMU GDP Flash – 5:00 AM, EMU Merchandise Trade – 5:00 AM.

 

Other: Cleveland Federal Reserve Bank President Loretta Mester speech on the economy and monetary policy, in Cleveland – 11: 45 AM.

 

Monday November 16:

 

Economic: Empire State Manufacturing Survey – 8:30.

 

International Economic: EMU HICP – 5:00 AM.

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