The Prepared Mind: December 21, 2015

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

“Chance favors the prepared mind.” — Louis Pasteur

By Frank Fahey

“If you’re not confused, you’re not paying attention.” – Tom Peters

Volatility continues to be a hallmark of this market. A cursory view of the week to week movement in indices (I am aware the plural of index is indices. The financial community has generally adopted usage of indexes.) belies the week’s movement in the equity markets. The week started with a 4% rally and ended with an equivalent sell-off.   The week was a test of trading patience and trading nimbleness with a heavy dose of uncertainty. What happened? The Fed increased overnight interest rates for the first time in nine years, junk bond prices crashed while several junk bond mutual funds wound down operations, oil dropped below $35 per barrel, inflation was flat and housing starts increased. The net result was the indices ended essentially unchanged. As for the whys, I do not know.

The week began with gains the result of what some technical analysts called an “oversold rally.” If we have returned to the same price point where we had an “oversold rally, might we expect yet another rally? I asked the question of my analyst friends to no avail. Their general consensus was the rally was not real because the SPX did not go above 2100. They pointed out the SPX is showing lower highs and lower lows. This bearish trend is in effect until the SPX goes over 2100. Equity only put/call ratios are giving sell signals, Market breadth is negative and is fluctuating between extreme oversold and sell signals. I am a technical analysis agnostic. I am skeptical, but I want to know what the experts say. The fact so many people subscribe to technical analysis effects their investment behavior and can become a self-fulfilling prophesy for market movement.

Here is an overview of the market behavior last week:

Index 18-Dec Weekly Change % Weekly 2015 YTD Volatility of Index
Dow Jones Industrials (DJIA) 17128.45 (136.76) -0.79% -3.90% 19.30% (VXD)
S&P 500 (SPX) 2005.52 (6.85) -0.34% -2.59% 20.7% (VIX)
NASDAQ 100 (NDX) 4509.56 (27.26) -0.60% 6.38% 21.50% (VXN)
Russell 2000 (RUT) 1116.45 (5.26) -0.47% -7.33% 20.90% (RVX)
S&P 100 (OEX) 896.02 (2.47) -0.27% -1.36% 21.21% (VXO)
CBOE Volatility Index (VIX) 20.70 (3.69) -15.13% NA  

 

The impact of the fed announcement is very apparent in the VIX and related products. Last week saw an anomaly in the across the board behavior of index volatility and index price. Individual index volatilities were down 13% to 16% while the corresponding indices were down less than 1%. It is rare to see the indices and volatility go down in concert.   The greater than expected decline in the level of the volatility indices can be directly attributed to the uncertainty removed by the Fed’s announcement.

 

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

Indexes Ticker 18-Dec 11-Dec Change % Change
CBOE Volatility Index VIX 20.7 24.39 (3.69) -15.13%
VIX January Future (1/120/2016) VXF6 20.425 21.925 (1.500) -6.84%
VIX February Future (2/17/2016) VXG6 20.575 21.575 (1.000) -4.63%
VIX March Future (3/16/2016) VXH6 20.575 19.450 1.125 5.78%
CBOE Short-term Volatility Index VXST 19.38 28.00 (8.62) -30.79%
CBOE 3 Month Volatility Index VXV 21.26 24.38 (3.12) -12.80%
CBOE Mid-term Volatility Index (6 month) VXMT 22.51 24.59 (2.08) -8.46%
VIX of VIX VVIX 118.32 131.09 (12.77) -9.74%
Long VIX ETP’s      
iPath S&P 500 VIX Short Term Futures ETN VXX 21.77 23.32 (1.55) -6.65%
ProShares VIX Short Term Futures ETF VIXY 14.49 15.49 (1.00) -6.46%
iPath S&P 500 VIX Mid-Tem Futures ETN VXZ 11.86 12.21 (0.35) -2.87%
Inverse VIX ETP’s      
Daily Inverse VIX Short Term ETN XIV 24.10 23.11 0.99 4.28%
ProShares Short VIX Short Term Future ETF SVXY 47.18 45.14 2.04 4.52%

Data Source: OptionVue7

 

The coming week will be shortened trading week. The markets will be closed on Friday the 25th for Christmas. The markets will closed at 1PM EST on Thursday the 24th. . The next two weeks will be characterized by a lack of liquidity. This lack of liquidity will magnify the impact of adverse events as traders attempt to adjust or manage positions. The market swings may be large and can be either up or down. There will be very few domestic or international economic reports. The major reports are on existing home sales, new home sales and durable goods.

The earning’s season has slowed to a crawl and will remain this way until the second week in January..    Start looking at earnings 30 days out for trading opportunities – i.e. F%5 Networks (FFIV) on Jan 20, Discover Financial Services (DFS) on Jan 21, and Goldman Sachs GS), IBM or 3M on Jan 25. The list is extensive for the next 28 to 49 days. OptionVue7 has the ability to identify stocks 30 days out with a new enhanced Earnings Search feature.   with Major earnings announcements this week include: Cintas, Neogen, Nike, Paychex, ConAgra Foods, Micron Technology and Cal Maine Foods.  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

 

We sail within a vast sphere, ever drifting in uncertainty, driven from end to end.” – Blaise Pascal

 

Monday December 21

 

Economic: Chicago Fed National Activity Index – 8:30.

 

International Economic: Germany PPI – 2:00 AM, EMU EC Consumer Confidence Flash – 10:00.

 

Earnings:

Symbol Company Name Dec 18 Close IV30 B/A
CTAS Cintas Corporation $90.52 23.92 AMC

 

 

 

 

Tuesday December 22:

 

Economic: GDP – 8:30, Corporate Profits – 8:30, Redbook – 8:55, FHFA House Price Index – 9:00, Existing Home Sales – 10:00, Richmond Fed Manufacturing Index – 10:00.

 

International Economic: No major announcements.

 

Earnings:

Symbol Company Name Dec 18 Close IV30 B/A
CAG ConAgra Foods Inc $40.63 29.36 BMO
NKE Nike Inc $130.22 34.04 AMC
PAYX Paychex, Inc. $53.35 23.22 AMC

 

 

Wednesday December 23:

 

Economic: MBA Mortgage Applications – 7:00, Durable Goods Orders – 8:30, Personal Income and Outlays – 8:30, New Home Sales – 10:00, Consumer Sentiment – 10:00, EIA Petroleum Status Report – 10:30.

 

International Economic: France GDP – 2:45 AM, Great Britain GDP – 4:30 AM, Bank of Japan Minutes – 6:50 PM.

 

Earnings:

Symbol Company Name Dec 18 Close IV30 B/A
CALM Cal-Maine Foods Inc $46.78 51.47 BMO

 

 

 

Thursday December 24:

 

NYSE Early Close – 1:00 PM.

 

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

 

International Economic: Japan CPI and Household Spending – 6:30 PM.

 

Earnings: None meeting criteria.

 

Friday December 25:

 

US Markets Closed.

 

International Economic: No major announcements.

 

Monday December 28

 

Economic: Dallas Fed Manufacturing Survey – 10:30.

 

International Economic: No major announcements.

 

Earnings: None meeting criteria.

 

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