The Prepared Mind: June 27, 2016

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

“Chance favors the prepared mind.” — Louis Pasteur

By Frank Fahey

“Artificially-elevated financial markets were at the risk of either a policy disruption or a market accident. Brexit could well turn these two risks into reality.” – Mohamed El-Erian former co-chief executive of Pimco.

“We see the odds of a UK recession within the next 12 months as now 60 per cent” – TD Securities

“The outcome clearly creates considerable short-term uncertainty”  –  Capital Securities

Brexit was the story last week.  Great Britain voted to leave the European Union on Thursday.  Major US equity indexes sold off 4% on Friday.  Friday’s sell-off erased previous gains of over 2% for the days prior to the referendum.  The effect was most apparent in international equity markets. The Nikkei was down 7.9% Friday. The DAX (Germany: -6.82%), CAC(France: -8.04%), MIB (Italy:-12.48%) and IBEX(Spain: -12.42%) were the hardest hit in Europe.

The results confounded pundits, analysts, and book makers alike.  As Joe Granville famously said, “If it is obvious, it is obviously wrong.”  Panic set in as traders and investors dealt with the unexpected.  The uncertainty associated with the exit reverberated through international equity, bond, and currency markets.  Oil weakened while gold gained in price.  Traders in the US are awaiting the 6PM Globex opening for the S&P E-Mini futures (ESU6). The Sunday evening trade in the futures is viewed by many as a precursor of Monday’s trading direction and activity.

Here is an overview of the US market behavior last week:

Index 24-Jun   Weekly Change % Weekly  2015 YTD Volatility of  Index
Dow Jones Industrials (DJIA) 17,399.86   (275.30) -1.56% -0.14% 22.71% (VXD)
S&P 500 (SPX) 2,037.30   (33.92) -1.64% -0.32% 25.76% (VIX)
NASDAQ 100 (NDX) 4,273.04   (89.80) -2.06% -7.05% 22.65% (VXN)
Russell 2000 (RUT) 1,117.56   (22.55) -1.98% -1.44% 27.13% (RVX)
S&P 100 (OEX) 900.44   (14.51) -1.59% -1.21% 223.27% (VXO)
Crude Oil (CL N6) 47.57   (0.69) -1.43% 28.32% 43.33%(OVX)
CBOE Volatility Index (VIX) 25.76   6.35 32.72% NA  

Data Source: OptionVue7

“Uncertainty” is the word for the coming week.  Movement in the VIX and associated products reflected Friday’s slide in equity indexes. Vix volatility as measured by the VVIX is at a 2016 high of 125.13.  Index SKEW is approaching a 2016 high at 142.92.    SKEW typically ranges from 100 to 150. A SKEW value of 100 means that the perceived distribution of S&P 500 log-returns is normal, and the probability of return on investment of the purchase of outlier options is negligible. As SKEW rises above 100, the left tail of the S&P 500 distribution (options with strike prices below the current S&P 500 cash price)  acquires more weight, and the probabilities of outlier returns become more significant Since an increase in perceived tail risk increases the relative demand for low strike puts.  Increases in SKEW also correspond to an overall steepening of the curve of implied volatilities.  The higher the SKEW, the greater the difference between out of the money put implied volatility versus out of the money call volatility.

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

Indexes Ticker 24-Jun 17-Jun Change % Change
CBOE Volatility Index VIX 25.76 19.41 6.35 32.72%
VIX July Future (7/20/2016) VXN6 22.650 20.075 2.575 12.83%
VIX August Future (8/17/2016) VXQ6 22.125 20.475 1.650 8.06%
VIX September Future (9/21/2016) VXU6 22.025 20.925 1.100 5.26%
CBOE Short-term Volatility Index VXST 30.71 22.00 8.71 39.59%
CBOE 3 Month Volatility Index VXV 23.93 21.31 2.62 12.29%
CBOE Mid-term Volatility Index (6 month) VXMT 23.55 22.06 1.49 6.75%
VIX of VIX VVIX 125.13 115.72 9.41 8.13%
CBOE SKEW Index SKEW 142.92 137.94 4.98 3.61%
Long VIX ETP’s          
 iPath S&P 500  VIX Short Term Futures ETN VXX 16.92 15.58 1.34 8.60%
ProShares VIX Short Term Futures ETF VIXY 11.14 10.31 0.83 8.05%
 iPath S&P 500  VIX Mid-Tem Futures ETN VXZ 11.41 11.26 0.15 1.33%
Inverse VIX ETP’s          
ProShares Short VIX Short Term Future ETF SVXY 43.06 52.05 (8.99) -17.27%
Daily Inverse VIX Short Term ETN XIV 22.00 26.63 (4.63) -17.39%

Data Source: OptionVue7

Brexit, Brexit, and still Brexit.  Everything else is still secondary to Thursday’s decision by British voters to exit the EU.  Market uncertainty will continue as the EU, the European Central Bank, the Bank of England, the U.S. Fed and world banking weigh in on the impact of the results.    The prediction of the results was a major fail by political and financial analysts.  The future impact upon the global economy and the economies of individual countries is an unknown.  It will be a quiet week for domestic economic reports.  The Employment Situation report gets bumped off its usual first Friday of the month schedule to July 8 due to Independence Day.  This should add some volatility to the following week. The week of June 27 the release of the S&P/Case-Shiller Home Price Index, and the Purchasing Managers’ Index (PMI) for services and manufacturing.

It will be a more robust week for international economic reports.  manufacturing PMIs for June will be posted in Europe, Asia and the U.S. German unemployment and retail sales will provide an snapshot of the German economy.  Japan will release end of month data for unemployment, retail sales, industrial production and household spending for May will be reported.

The announcement of earnings for Alcoa Inc.(AA) is generally accepted as the start of earnings season.  The number or earnings announcements will increase this week as the market approaches the “historic” harbinger for the quarterly earnings season. Alcoa will announce earnings on Thursday July 7.  It is time to start preparing for trading these announcements.  The earnings highlights this week for widely held and actively traded stocks are Nike, Factset Research, Worthington Industries, General Mills, Monsanto, Unifirst, Paychex, Darden Restaurants, Micron Technology McCormick & Co., Constellation Brands, and ConAgra Foods.

Do not ignore market volatility when constructing earnings or any other types of strategies.  An earnings announcement is a volatility event.  The addition of a second volatility event – in this case market uncertainty from the Brexit vote – can lower the probability of a profitable outcome.  At times, the best strategy is to do nothing.

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 24 Close IV30 B/A DATE  OPT VOL
WBA Walgreens Boots Alliance Inc $85.06 32.76 BMO 6-Jul 12766
FAST Fastenal Company $45.56 30.61 BMO 12-Jul 2275
YUM Yum! Brands, Inc. $85.90 31.94 AMC 13-Jul 8941
JPM JPMorgan Chase & Co. $64.05 34.22 BMO 14-Jul 55659
C Citigroup Inc $44.46 40.13 BMO 15-Jul 79553
USB U.S. Bancorp $42.23 29.23 BMO 15-Jul 9737
PNC PNC Financial Services Group $86.67 32.03 BMO 15-Jul 1693
WFC Wells Fargo & Co $47.91 30.33 BMO 15-Jul 35120
NFLX Netflix, Inc. $91.66 55.95 AMC 16-Jul 134956
CALM Cal-Maine Foods Inc $41.67 37.28 BMO 16-Jul 1850
IBM International Business Machines $155.35 30.45 AMC 16-Jul 26256
LLTC Linear Technology Corporation $47.66 25.60 AMC 17-Jul 1252
ISRG Intuitive Surgical, Inc. $661.32 32.33 AMC 17-Jul 1681
GS Goldman Sachs Group Inc $152.66 33.91 BMO 17-Jul 25473
KSU Kansas City Southern $91.12 34.36 BMO 17-Jul 1625
HOG Harley-Davidson Inc $46.86 35.64 BMO 17-Jul 6232
AAPL Apple Inc. $96.10 26.95 AMC 17-Jul 548033
CMA Comerica Incorporated $44.48 42.11 BMO 17-Jul 3373
MSFT Microsoft Corporation $51.91 32.85 AMC 17-Jul 92810
VMW VMware, Inc. $62.15 45.54 AMC 17-Jul 8106
BHI Baker Hughes Incorporated $47.17 40.91 BMO 17-Jul 3360
YHOO Yahoo! Inc. $37.78 38.27 AMC 17-Jul 58720
ILMN Illumina, Inc. $146.59 38.97 AMC 17-Jul 2104
LVS Las Vegas Sands Corp. $46.16 37.02 AMC 18-Jul 16730
QCOM QUALCOMM, Inc. $55.55 34.51 AMC 18-Jul 26037
NEM Newmont Mining Corp $35.39 49.42 BMO 18-Jul 14455
FFIV F5 Networks, Inc. $121.44 39.56 AMC 18-Jul 2146
HAL Halliburton Company $45.84 35.88 BMO 18-Jul 20605
BLK BlackRock, Inc. $356.85 30.24 BMO 18-Jul 1015
PII Polaris Industries Inc. $85.10 37.59 BMO 18-Jul 1488
CRUS Cirrus Logic, Inc. $40.98 51.36 BMO 18-Jul 1915
DAL Delta Air Lines, Inc. $38.31 44.31 BMO 18-Jul 33820
DFS Discover Financial Services $54.28 30.84 BMO 18-Jul 1886
UNP Union Pacific Corporation $88.54 28.28 BMO 19-Jul 11035
SWKS Skyworks Solutions Inc $67.21 44.95 AMC 19-Jul 7760
V Visa Inc $78.23 27.60 AMC 19-Jul 26181
UAL United Continental Holdings Inc $45.17 47.12 BMO 19-Jul 12473
WHR Whirlpool Corporation $178.80 35.30 BMO 19-Jul 2228
SLB Schlumberger Limited. $79.59 29.03 BMO 19-Jul 18044
SBUX Starbucks Corporation $56.13 29.02 AMC 19-Jul 29196
NUE Nucor Corporation $50.50 33.48 BMO 19-Jul 3892
ALK Alaska Air Group, Inc. $59.14 37.32 BMO 19-Jul 1528
AN AutoNation, Inc. $48.73 34.93 BMO 19-Jul 1100
BBT BB&T Corporation $36.95 32.18 BMO 19-Jul 2233
BIIB Biogen Inc $238.62 43.00 BMO 19-Jul 7800
CBI Chicago Bridge & Iron Company $36.88 42.74 AMC 19-Jul 1915
CHKP Check Point Software Technologies $81.98 28.20 BMO 19-Jul 1498
CMG Chipotle Mexican Grill, Inc. $408.89 48.41 AMC 19-Jul 18274
COF Capital One Financial Corp. $65.60 34.67 AMC 19-Jul 4624
BK Bank of New York Mellon Corp $41.54 33.81 BMO 19-Jul 3479
LUV Southwest Airlines Co $39.59 37.60 BMO 19-Jul 7617
MJN Mead Johnson Nutrition CO $88.61 28.31 BMO 19-Jul 1660
MXIM Maxim Integrated Products Inc. $37.89 28.90 AMC 19-Jul 1664
JCI Johnson Controls Inc $44.99 26.29 BMO 20-Jul 1649
TXT Textron Inc. $38.42 32.52 BMO 20-Jul 1361
VFC VF Corp $65.03 26.03 BMO 20-Jul 1505
STI SunTrust Banks, Inc. $43.21 35.68 BMO 20-Jul 1678
ABBV AbbVie Inc $61.31 27.98 BMO 20-Jul 17672

Data Source: OptionVue7

 

Advice to stimulate your imagination:

 

“Live everyday as if it were your last because someday you’re going to be right” – Muhammad Ali

 

“Inflation is as violent as a mugger, as frightening as an armed robber

and as deadly as a hit man.” –  Ronald Reagan
“You should never make predictions, especially about the future.” – Samuel Goldwyn

Monday June 27

Economic:  International Trade in Goods – 8:30, PMI Services Flash – 9:45, Dallas Fed Manufacturing Survey – 10:30.

International Economic:  No major announcements.

Other:

Earnings: None meeting criteria.

Tuesday June 28:

Economic:  GDP – 8:30, Corporate Profits – 8:30, Redbook 8:55, S&P Case-Shill HPI- 9:00, Consumer Confidence – 10:00, Richmond Fed Manufacturing Index – 10:00, State Street Investor Confidence – 10:00

International Economic:  Japan Retail Sales – 7:50PM.

Other:

Earnings:

Symbol Company Name June 24 Close IV30 B/A AVGOPTVOL
CCL Carnival Corp $49.36 40.05 BMO 2956
NKE Nike Inc $54.12 31.68 AMC 27348

Wednesday June 29:

Economic:  MBA Mortgage Applications – 7:00, Personal Income and Outlays – 8:30, Pending Home Sales Index – 10:00, EIA Petroleum Status Report – 10:30, Farm – Prices – 3: 00.

International Economic: EMU EC Economic Sentiment – 5:00AM.

Other:  Federal Reserve Chairman Janet Yellen will speak on a panel with Bank of England Gov. Mark Carney, ECB President Mario Draghi, and Brazil Central Bank Gov. Alexandre Tombini at an ECB central banking conference, in Sintra, Portugal – 9:30AM.

 

Earnings:

Symbol Company Name June 24 Close IV30 B/A AVGOPTVOL
GIS General Mills, Inc. $66.77 22.22 BMO 4772
MON Monsanto Company $109.15 39.60 BMO 21426
CAG ConAgra Foods Inc $47.91 32.67 BMO 3307

Thursday June 30:

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

International Economic:  Germany Retail Sales – 2:00, France – CPI & PPI 2:45AM, Germany Unemployment Rate – 3:55AM, Japan CPI, Household Spending, Unemployment Rate –  7:30PM, China PMI Manufacturing Index – 9:45PM, Japan PMI Manufacturing Index – 10:00.

Other:   St. Louis Federal Reserve Bank President James Bullard speech to Society of Business Economists annual dinner, in London – 2:00PM.

Earnings:

Symbol Company Name June 24 Close IV30 B/A AVGOPTVOL
STZ Constellation Brands, Inc. $155.99 30.26 BMO 4140
DRI Darden Restaurants, Inc. $67.98 29.24 AMC 1872
PAYX Paychex, Inc. $56.29 22.76 AMC 1950

Friday July 1:

Economic:  Motor Vehicle Sales, PMI Manufacturing Index – 9:45, ISM Manufacturing Index – 10:00, Construction Spending – 10:00, Baker Hughes Rig Count – 1:00.

International Economic:  Germany PMI Manufacturing Index 3:15AM, Great Britain PMI Manufacturing Index – 4:30AM, EMU Unemployment Rate – 5:00AM.

Other:  Cleveland Federal Reserve Bank President Loretta J. Mester speech on the economic outlook and monetary policy followed by audience Q&A at EEFC event in London – 11:00AM.

Earnings: None meeting criteria.

Monday July 4

US Holiday – Independence Day – US markets closed.

International Economic:  EMU PPI – 5:00AM.

Earnings: None meeting criteria.

Tuesday July 5:

Economic:  Gallup US Consumer Spending Measure – 8:30, Gallup US ECI – 8:30, Factory Orders – 10:00. ISM Non-Manufacturing Index – 10:00.

Other:  New York Federal Reserve Bank President William Dudley takes part in Binghamton Chamber of Conference roundtable discussion in Binghamton, New York – 2:30PM.

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

Earnings: None meeting criteria.

 

 

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