The Prepared Mind: June 13, 2016


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

“Chance favors the prepared mind.” — Louis Pasteur

By Frank Fahey

“Chance favors the Prepared Mind.” – Louis Pasteur

“Impossible is just a word thrown around by small men who find it easier to live in the world they’ve been given than to explore the power they have to change it. Impossible is not a fact. It’s an opinion. Impossible is potential. Impossible is temporary. Impossible is nothing.” – Muhammad Ali

“The major difference between a thing that might go wrong and a thing that cannot possibly go wrong is that when a thing that cannot possibly go wrong goes wrong it usually turns out to be impossible to get at or repair.”  – Douglas Adams

On a macro level narrative for the week had little to do with price movement.  The major US indexes, with the exception of the NASDAQ 100, were essentially unchanged for the week.  On Wednesday, the indexes were flirting with all-time highs, with the S&P 500 set a 52 week closing high of 2119.12.    A low volume sell-off on Thursday on Friday left the markets essential unchanged with the S&P 500 off 1.1% from Wednesday’s close.  The story can be found in the options market and the gains in implied volatility.

European markets were decidedly negative.  The European major indexes were down for a second straight week.  The June 23 referendum on whether the UK will remain in the European Union is increasing investor nervousness and index prices.  The major fear is that BREXIT could encourage future exits from the EU.  The following chart provides a quick snapshot of European index behavior last week and for the entirety of 2016:

  Index Week 20160 YTD
UK FTSE 100 -1.50% -2.00%
France CAC -2.60% -7.10%
Germany XETRA DAX -2.70% -8.50%
Italy FTSE MIB -2.10% -20.10%
Spain IBEX 35 -3.50% -11.00%
Sweden OMX Stockholm 30 -2.30% -9.10%
Switzerland SMI -2.80% -10.20%

 

A similar chart of the major US indexes shows much stronger markets.  Here is an overview of the US market behavior last week:

Index 10-Jun Weekly Change % Weekly  2015 YTD Volatility of  Index
Dow Jones Industrials (DJIA) 17,865.34 58.28 0.33% 2.53% 14.86% (VXD)
S&P 500 (SPX) 2,096.07 (3.06) -0.15% 2.55% 17.03% (VIX)
NASDAQ 100 (NDX) 4,465.27 (42.70) -0.95% -2.87% 17.64% (VXN)
Russell 2000 (RUT) 1,164.20 2.67 0.23% 2.67% 20.19% (RVX)
S&P 100 (OEX) 926.75 (0.71) -0.08% 1.68% 15.54% (VXO)
Crude Oil (CL n6) 48.88 0.26 0.53% 31.86% 39.95%(OVX)
CBOE Volatility Index (VIX) 17.03 3.56 26.43% NA  

Data Source: OptionVue7

The story of the week was implied volatility as evidenced by the VIX and associated products.  The VIX was up every single day last week.  Generally, when the SPX goes up or is unchanged the VIX will remain steady or go down.  However, the VIX move upwards last week simultaneous with a corresponding upward move in the S&P 500.  Per Russell Rhoads of the CBOE the last time the VIX behaved in this manner was January 2013.

The VIX was up 26.43% with the shorter volatility index (VXST) up a whopping 56.58%.  The near term VIX future was up 19% and the volatility of the VIX options (VVIX) was up 31%.  These movements are in reaction to volatility events.  The volatility events on the near horizon are the coming week’s FOMC June 15announcement on interest rates and the June 23 BREXIT referendum.  Another wild card entered the equation with an increased focus on presumptive GOP nominee Donald Trump.  It was a bad week for Trump as the leaders of his own political party called him out for failing to “unify.” These multiple areas of uncertainty increased purchase activity in options as traders sought downside protection for their portfolios.

Expect volatility in domestic and international equity markets to increase as the June 23 BREXIT vote approaches.

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

Indexes Ticker 10-Jun 3-Jun Change % Change
CBOE Volatility Index VIX 17.03 13.47 3.56 26.43%
VIX June  Future (6/15/2016) VXM6 17.525 14.725 2.800 19.02%
VIX July Future (7/20/2016) VXN6 18.425 17.125 1.300 7.59%
VIX August Future (8/17/2016) VXQ6 19.325 18.075 1.250 6.92%
CBOE Short-term Volatility Index VXST 15.83 10.11 5.72 56.58%
CBOE 3 Month Volatility Index VXV 18.97 16.49 2.48 15.04%
CBOE Mid-term Volatility Index (6 month) VXMT 20.74 19.01 1.73 9.10%
VIX of VIX VVIX 103.78 79.08 24.70 31.23%
CBOE SKEW Index SKEW 133.67 125.04 8.63 6.90%
Long VIX ETP’s          
 iPath S&P 500  VIX Short Term Futures ETN VXX 14.39 13.02 1.37 10.52%
ProShares VIX Short Term Futures ETF VIXY 9.52 8.61 0.91 10.57%
 iPath S&P 500  VIX Mid-Tem Futures ETN VXZ 11.06 10.44 0.62 5.94%
Inverse VIX ETP’s          
ProShares Short VIX Short Term Future ETF SVXY 57.75 64.38 (6.63) -10.30%
Daily Inverse VIX Short Term ETN XIV 29.59 33.00 (3.41) -10.33%

Data Source: OptionVue7

When and by how much? The highlight will be the Federal Reserve monetary policy announcement on Wednesday.  The week of June 13 brings reports on U.S. industrial production and consumer prices. The Empire State and Philly Fed reports, along with the Industrial Production Report, will provide an early indication of second quarter manufacturing activity.  Analysts have reached a consensus opinion the manufacturing sector will be weak.  The week closes  Housing Starts.  Continued strength is expected in this sector.

This week and last week are the quietest weeks for earnings’ reports.  The earnings highlights this week for widely held and actively traded stocks are Motorcar Parts of America, Bob Evans Farms, Wiley &Son, Korn/Ferry, Clarcor, Oracle, Kroger, and Red Hat.  Announcement dates and times can and do change.  It is your responsibility to confirm these times.

The following table will assist you in preparing for the upcoming earnings announcement cycles.  OptionVue7 has the ability to identify stocks 30 days out with a new enhanced Earnings Search feature.  I have done a quick search 7 to 35 days forward for candidates for double calendars. I generally put on earnings double calendars anywhere from one week to thirty days in advance of the announcement.   I usually take the calendars off at the last possible moments prior to the announcement.  I make the final decision exit prior to announcement or hold through the announcement on the last trading day prior to announcement.

Here are the results of my initial scan for double calendar candidates.  You should further filter any of the stocks with your own risk/reward criteria.  This scan is available as a PDF.  Contact me a fjfahey@gmail.com if you would like it sent to you or if you would like to be removed from the distribution list.

Symbol Company Name June 10 Close IV30 B/A DATE  OPT VOL
ADBE Adobe Systems Incorporated $98.07 29.10 AMC 21-Jun 5419
LEN Lennar Corporation $47.66 26.63 BMO 21-Jun 2285
KMX CarMax, Inc $51.81 41.05 BMO 21-Jun 3800
FDX FedEx Corporation $164.11 25.25 BMO 21-Jun 8216
BBBY Bed Bath & Beyond Inc. $44.00 34.83 AMC 22-Jun 4824
RHT Red Hat Inc $78.23 34.40 AMC 22-Jun 2980
CCL Carnival Corp $48.03 29.77 BMO 23-Jun 3000
NKE Nike Inc $54.94 29.08 AMC 28-Jun 34488
MON Monsanto Company $109.99 35.66 BMO 29-Jun 21229
DRI Darden Restaurants, Inc. $68.33 25.54 AMC 30-Jun 1984
STZ Constellation Brands, Inc. $154.10 27.15 BMO 30-Jun 3405
WBA Walgreens Boots Alliance Inc $79.01 30.04 BMO 6-Jul 10575

 Data Source: OptionVue7

Monday June 13:

Economic:  No major announcements

International Economic:  

Earnings: None meeting criteria.

Tuesday June 14:

Economic:  NFIB Small Business Optimism Index – 6:00, Retail Sales – 8:30, Import and Export Prices – 8:30, Redbook 8:55, Business Inventories – 10:00 AM.

International Economic:  Great Britain – CPI and PPI – 4:30AM.

Other:  FOMC meeting begins.

Earnings: None meeting criteria.

Wednesday June 15:

Economic:  MBA Mortgage Applications – 7:00, PPI – FD 8:30, Empire State Manufacturing Survey – 8:30, Industrial Production – 9:15, EIA Petroleum Status Report – 10:30.

 

International Economic:  Bank of Japan Announcement, France CPI – 3:45AM, EMU Merchandise Trade – 5:00AM.

 

Other:  FOMC Meeting Announcement – 2:00, FOMC Forecasts – 2:00, Janet Yellen Press Conference – 2:30.

 

Earnings:

Symbol Company Name June 10 Close IV30 B/A AVGOPTVOL
CTRP Ctrip.com International, Ltd. (ADR) $41.14 55.36 AMC 11260

 

Thursday June 16

Economic:  Consumer Price Index – 8:30, Weekly Jobless Claims – 8:30,  Philadelphia Fed Business Outlook
Survey – 8:30, Current Account – 8:30, Bloomberg Consumer Comfort Index – 9:45, Housing Market Index – 10:00, EIA Natural Gas Report – 10:30, EIA Petroleum Status Report – 11:00.        

International Economic:   Great Britain Retail Sales – 4:30, EMU HICP  – 5:00AM, EMU Industrial Production – 5:00AM.

Other:   Bank of England Announcement & Minutes – 7:00AM.

 

Earnings:

Symbol Company Name June 10 Close IV30 B/A AVGOPTVOL
KR The Kroger Co $36.58 26.43 BMO 6290
ORCL Oracle Corporation $39.05 26.97 AMC 25492
SWHC Smith & Wesson Holding Corp $22.01 49.75 AMC 3229

 

Friday June 17:

Quadruple Witching – The expiration date of various stock index futures, stock index options, stock options and single stock futures.

 

Economic:  Housing Starts – 8:30, Atlanta Fed Business Inflation Expectations- 10:00, Baker Hughes Rig Count – 1:00.

International Economic:  No major announcements.

Earnings: None meeting criteria.

Monday June 20:

Economic:  No major announcements

International Economic:  No major announcements.

Earnings: None meeting criteria.

 

 

 

 

 

 

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