The Prepared Mind: December 28, 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

Equities rallied 2% – 3% during the shortened trading week. The rally was led by short covering stimulated by a 9% rally in crude oil prices. Energy stocks rallied over 5% in response to the rally in oil. The stabilization of oil prices went beyond energy stocks and also had a positive impact on materials stocks.   The Bespoke Investment Group reported that the bottom 10% performing stocks in the Russell 1000 gained over 7% last week. The bottom 2% performers in the index were up over 10% last week. Last week’s rally does not qualify as the Santa Claus Rally. The market is still down 1% for December. Market focus will soon shift from end of year balancing of portfolios to the upcoming earnings season.

Social media – blogs and forums – have been abuzz about the SPX Golden Cross. A Golden Cross occurs when a 50-day moving average moves above the 200-day moving average. According to chart gurus, this cross is an indication a new bull market move. The 200-day moving average becomes the new support level for the underlying. A Golden Cross can only be confirmed if preceded by a “Death Cross” which is when the 50-day average moves below the 200-day average. The “Death Cross” setup occurred in last August of this year. I will not be acting upon the “guidance” indicated by the occurrence of the “Golden Cross.” I will watch what happens, but I will not risk my capital or others’ capital on a strategy predicated upon the “Death Cross” and the “Golden Cross.”


Here is an overview of the market behavior last week:

Index 25-Dec Weekly Change % Weekly 2015 YTD Volatility of Index
Dow Jones Industrials (DJIA) 17552.17 423.72 2.47% -1.52% 15.65% (VXD)
S&P 500 (SPX) 2060.99 55.47 2.77% 0.10% 15.74% (VIX)
NASDAQ 100 (NDX) 4615.10 105.54 2.34% 8.87% 17.81% (VXN)
Russell 2000 (RUT) 1149.27 32.82 2.94% -4.60% 18.48% (RVX)
S&P 100 (OEX) 918.84 22.82 2.55% 1.15% 16.72% (VXO)
CBOE Volatility Index (VIX) 15.74 (4.96) -23.96% NA  

Data Source: OptionVue7


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 24-Dec 18-Dec Change % Change
CBOE Volatility Index VIX 15.74 20.70 (4.96) -23.96%
VIX January Future (1/120/2016) VXF6 18.225 20.425 (2.200) -10.77%
VIX February Future (2/17/2016) VXG6 18.825 20.575 (1.750) -8.51%
VIX March Future (3/16/2016) VXH6 19.075 20.575 (1.500) -7.29%
CBOE Short-term Volatility Index VXST 13.47 19.38 (5.91) -30.50%
CBOE 3 Month Volatility Index VXV 19.69 21.26 (1.57) -7.38%
CBOE Mid-term Volatility Index (6 month) VXMT 20.75 22.51 (1.76) -7.82%
VIX of VIX VVIX 99.88 118.32 (18.44) -15.58%
Long VIX ETP’s      
iPath S&P 500 VIX Short Term Futures ETN VXX 19.62 21.77 (2.15) -9.88%
ProShares VIX Short Term Futures ETF VIXY 13.01 14.49 (1.48) -10.21%
iPath S&P 500 VIX Mid-Tem Futures ETN VXZ 11.18 11.86 (0.68) -5.73%
Inverse VIX ETP’s      
Daily Inverse VIX Short Term ETN XIV 26.53 24.10 2.43 10.08%
ProShares Short VIX Short Term Future ETF SVXY 51.84 47.18 4.66 9.88%

Data Source: OptionVue7


The coming week will be shortened trading week. The markets will be closed on Friday January 1. The last trading day of 2015 – December 31 – will be a full trading day with closing rotations for all options series and classes. In a closing rotation, bids and offers are made by traders to line up the “fair value” of options.  This is not a trading session.  It is conducted by traders or the DPM (Designated Primary Market-maker) in that security to establish “fair” end-of-year prices. Coming week will be characterized by a lack of liquidity. In addition, funds will be buying and selling individual securities in order to rebalance the funds for the close of 2015 and the opening of 2016. This lack of liquidity, combined with rebalancing activity, 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. 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. I have done a quick search 21 to 28 days forward for candidates for double calendars. Here are the results of my initial scan:

Symbol Company Name Dec 24 Close IV30 B/A DATE
C Citigroup Inc $52.63 22.72 BMO 15-Jan
FAST Fastenal Company $41.26 24.70 BMO 15-Jan
DAL Delta Air Lines, Inc. $51.74 33.27 BMO 19-Jan
SCHW Charles Schwab Corp $33.06 28.72 BMO 19-Jan
UNH UnitedHealth Group Inc $118.69 24.31 BMO 19-Jan
IBM International Business Machines $138.54 22.34 AMC 19-Jan
NFLX Netflix, Inc. $118.16 63.41 AMC 19-Jan
BHI Baker Hughes Incorporated $47.63 58.20 BMO 20-Jan
DFS Discover Financial Services $54.80 22.87 BMO 20-Jan
GS Goldman Sachs Group Inc $182.95 22.81 BMO 20-Jan
MS Morgan Stanley $32.60 27.04 BMO 20-Jan
PRGO Perrigo Company PLC $147.70 22.37 BMO 20-Jan
FFIV F5 Networks, Inc. $97.69 38.83 AMC 20-Jan
SNDK SanDisk Corporation $75.26 24.41 AMC 20-Jan
URI United Rentals, Inc. $74.82 36.15 AMC 20-Jan
XLNX Xilinx, Inc. $47.88 34.01 AMC 20-Jan

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


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


Monday December 28


Economic: Dallas Fed Manufacturing Survey – 10:30.


International Economic: Boxing Day – Markets closed in Canada, Australia and the United Kingdom.


Earnings: None meeting criteria.





Tuesday December 29:


Economic: International Trade in Goods – 8:30 AM, Redbook – 8:55, S&P Case-Shiller HpI – 9:00, Consumer Confidence – 10:00, State Street Investor Confidence Index – 10:00.


International Economic: No major announcements.


Earnings: None meeting criteria.



Wednesday December 30:


Economic: MBA Mortgage Applications – 7:00, Pending Home Sales Index – 10:00, EIA Petroleum Status Report – 10:30, Farm Prices – 3:00PM.


International Economic: No major announcements.



Earnings: None meeting criteria.



Thursday December 31:


Last trading day of 2015. Closing rotations in all options.


Economic: Weekly Jobless Claims – 8:30, Bloomberg Consumer Comfort Index – 9:45, EIA Natural Gas Report – 10:30, Baker-Hughes Rig Count = 1:00..


International Economic: No major announcements.


Earnings: None meeting criteria.


Friday January 1:


All Markets Closed – US and International.


Monday January 4:


Economic: PMI Manufacturing Index – 9:45, ISM Manufacturing Index – 10:00, Construction Spending – 10:00, Gallup US Consumer Spending Measure – 2:00PM.


International Economic: Germany PMI Manufacturing Index – 3:55AM, EMU PMI Manufacturing Index – 4:00 AM.


Earnings: None meeting criteria.


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