"Chance favors the Prepared Mind." - Louis Pasteur
“Imagination decides everything.” – Blaise Pascal
“Success breeds complacency. Complacency breeds failure.Only the paranoid survive.” Andy Grove
The NASDAQ 100 and the S&P 500 closed at all-time highs on Friday. The Dow Jones Industrials are flirting with a record close. The NASDAQ 100 was a laggard for the first six months of 2016. In the past month, the technology laden NDX has risen nearly twice as fast as the Dow Jones Industrials and the S&P 500. The gains for the week occurred on Friday after the second consecutive strong monthly employment report. The strength in the equity indexes was reflected in two year closing lows for CBOE’s VIX which measures the expected volatility of the S&P 500 as implied by options in the SPX. Friday’s closing low in the VIX was the lowest since the summer of 2014.
Here is an overview of the US market behavior last week:
| Index | 5-Aug | Wkly Change | % Weekly | 2016 YTD | Vol of Index |
| Dow Jones Industrials (DJIA) | 18,543.53 | 111.29 | 0.60% | 6.42% | 10.56% (VXD) |
| S&P 500 (SPX) | 2,182.87 | 9.27 | 0.43% | 6.80% | 11.39% (VIX) |
| NASDAQ 100 (NDX) | 4,782.34 | 55.07 | 1.16% | 4.03% | 13.77% (VXN) |
| Russell 2000 (RUT) | 1,229.03 | 9.19 | 0.75% | 8.39% | 16.14% (RVX) |
| S&P 100 (OEX) | 966.92 | 5.17 | 0.54% | 6.09% | 10.56% (VXO) |
| Crude Oil (CL U6) | 41.98 | 0.60 | 1.45% | 13.25% | 41.50%(OVX) |
| CBOE Volatility Index (VIX) | 11.39 | (0.48) | -4.04% | NA |
In 1961 hit “Limbo Rock”, Chubby Checker famously asked the question “How low can you go?” In the case of the VIX the answer appears to be not much lower. The major volatility indexes close at the lower end of their historic trading ranges. The percentage changes in these indexes and the VIX futures are lower are lower as the time horizon is moved further out. The VIX measures market expectations of 30-day future volatility. The VXST compresses the time horizon to 9 days. This nine-day measure of future volatility is more susceptible to the daily vagaries of the spot or cash VIX.
As we move forward I would counsel traders to heed my mishearing of Chubby’s advice. I have always heard the lyrics as “Jack be nimble, Jack be quick” rather than “Jack be limbo, Jack be quick.” Volatility moves are ephemeral and of quickly revert to a mean. Be nimble. Be quick.
Here is an overview of last week for the VIX and related products:
| Indexes | Ticker | 5-Aug | 29-Jul | Change | % Change |
| CBOE Volatility Index | VIX | 11.39 | 11.87 | (0.48) | -4.04% |
| VIX August Future (8/17/2016) | VXQ6 | 12.875 | 13.825 | (0.950) | -6.87% |
| VIX September Future (9/21/2016) | VXU6 | 15.325 | 16.425 | (1.100) | -6.70% |
| VIX October Future (10/19/2016) | VXV6 | 17.575 | 18.025 | (0.450) | -2.50% |
| CBOE Short-term Volatility Index | VXST | 9.18 | 10.01 | (0.83) | -8.29% |
| CBOE 3 Month Volatility Index | VXV | 15.14 | 15.42 | (0.28) | -1.82% |
| CBOE Mid-term Volatility Index (6 month) | VXMT | 17.59 | 17.88 | (0.29) | -1.62% |
| VIX of VIX | VVIX | 85.23 | 90.84 | (5.61) | -6.18% |
| CBOE SKEW Index | SKEW | 130.60 | 128.25 | 2.35 | 1.83% |
| Long VIX ETP's | |||||
| ProShares Ultra VIX Short Term Futures ETF | UVXY | 22.03 | 25.35 | (3.32) | -13.10% |
| iPath S&P 500 VIX Short Term Futures ETN | VXX | 9.52 | 10.18 | (0.66) | -6.48% |
| ProShares VIX Short Term Futures ETF | VIXY | 31.63 | 33.80 | (2.17) | -6.42% |
| iPath S&P 500 VIX Mid-Tem Futures ETN | VXZ | 9.72 | 9.83 | (0.11) | -1.12% |
| Inverse VIX ETP's | |||||
| ProShares Short VIX Short Term Future ETF | SVXY | 70.05 | 65.72 | 4.33 | 6.59% |
| Daily Inverse VIX Short Term ETN | XIV | 35.78 | 33.69 | 2.09 | 6.20% |
Data Source: OptionVue7
A lack of domestic and international economic releases will do little to break the market doldrums. The most important economic news will be the release of US retail sales of Friday. China will release numbers economic data for July including merchandise trade balance, consumer and producer price indexes, industrial production and retail sales. Great Britain and Germany will be releasing post-Brexit (June) numbers for industrial production and merchandise trade. Consensus is building among analysts that a FOMC September rate hike is inevitable.
The earnings season is slowing down. It will remain an active week for earnings announcements. Unfortunately, the lack of liquidity in the major markets is continuing in the options markets for companies announcing earnings. I had difficulty entering earnings trades last week. There is a lack of option volume and width of options markets has made it difficult to enter and exit trades. Markets seem to be wider than in previous earnings cycles. The net result is I am putting on earnings plays closer to the earnings announcement. I am now including average option volume in my calendar of upcoming announcements. This information is a first pass indicator of option liquidity. The liquidity should increase as the announcement approaches.
There will be many opportunities to trade earnings this week. The beginning of this earnings cycle has been disappointing. Strategies which have worked for specific stocks over the past few years have not been working. The behavior of individual stocks has changed dramatically. I am reminded by an old saying form Alex Jacobsen: “All options strategies work. No option strategy works all the time.”
Double calendars are not working. This strategy requires movement in the underlying towards the strike price of either the out-of-the-money put calendar or call calendar. I performed a forensic audit of my recent earnings trades to see what I could have done differently. In every single case, an iron butterfly or iron condor would have made money. The lack of post announcement movement in stocks has been dramatic this quarter. The TSLA at-the-money straddle indicated an expected next day movement of nearly $20 in the stock. Tesla was virtually unchanged after its earnings announcement. This lack of movement is a radical departure from the response to Tesla earnings in previous years.
The earnings highlights this week for widely held and actively traded stocks include: Computer Sciences, Allergan, Dean Foods, Tyson Foods, Rackspace Hosting, Mylan, Walt Disney, Fossil, Cinemark, Coach, Scripps, Ralph Lauren, Perrigo, Michael Kors, Avnet, NVIDIA, Nordstrom, Kohl’s, Macy’s, and JC Penney.
I have an expanded initial scan for earnings play candidates over the next month. 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 for additional scans.
Advice to stimulate your imagination:
“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 August 8:
Economic: Labor Market Conditions Index - 10:00, TD Ameritrade IMX – 12:30.
International Economic: German Industrial Production – 2:00AM, China CPI and PPI – 9:30PM,
Earnings:
| Symbol | Company Name | Aug 5 Close | IV30 | B/A | AVGOPTVOL |
| AGN | Allergan plc | $253.45 | 28.58 | BMO | 23093 |
| TSN | Tyson Foods, Inc. | $73.56 | 29.29 | BMO | 4828 |
| WB | Weibo Corp (ADR) | $33.86 | 53.78 | BMO | 1665 |
| HTZ | Hertz Global Holdings Inc | $46.42 | 55.75 | AMC | 4749 |
| RAX | Rackspace Hosting, Inc. | $26.55 | 49.88 | AMC | 2211 |
| SINA | SINA Corp | $55.95 | 40.15 | AMC | 1843 |
| BID | Sothebys | $31.84 | 40.03 | AMC | 2184 |
| TWLO | Twilio Inc | $40.59 | 80.22 | AMC | 3163 |
Tuesday August 9:
Economic: NFIB Small Business Optimism Index – 9:00, Productivity and Costs - 6:30, Redbook – 8:55, Wholesale Trade – 10:00.
International Economic: Germany Merchandise Trade - 2:00AM, Great Britain Industrial Production – 4:30AM, Great Britain Merchandise Trade – 4:30AM. Japan Machine Orders – 7:50PM, Japan PPI – 7:50PM.
Other: Markets closed in Singapore.
Earnings:
| Symbol | Company Name | Aug 5 Close | IV30 | B/A | AVGOPTVOL |
| AER | AerCap Holdings N.V. | $35.84 | 41.20 | BMO | 1432 |
| CHTR | Charter Communications Inc | $236.99 | 28.63 | BMO | 5380 |
| LNG | Cheniere Energy, Inc. | $41.24 | 39.37 | BMO | 8642 |
| COH | Coach Inc | $41.40 | 36.15 | BMO | 4036 |
| FOSL | Fossil Group Inc | $29.54 | 74.98 | BMO | 2208 |
| GWPH | GW Pharmaceuticals PLC- ADR | $95.40 | 40.52 | BMO | 1612 |
| HCP | HCP, Inc. | $38.50 | 28.16 | BMO | 1198 |
| HRI | Herc Holdings Inc | $35.40 | 58.24 | BMO | 1096 |
| IONS | Ionis Pharmaceuticals Inc | $36.63 | 62.46 | BMO | 2891 |
| MYL | Mylan NV | $48.55 | 36.81 | BMO | 8692 |
| SAGE | SAGE Therapeutics Inc | $43.23 | 70.21 | BMO | 1238 |
| VRX | Valeant Pharmaceuticals Intl | $22.24 | 85.44 | BMO | 93411 |
| CYBR | Cyberark Software Ltd | $56.36 | 53.68 | AMC | 1381 |
| XON | Intrexon Corp | $27.68 | 72.19 | AMC | 2790 |
| MDVN | Medivation Inc | $63.73 | 32.75 | AMC | 8772 |
| SCTY | SolarCity Corp | $24.38 | 55.06 | AMC | 29660 |
| W | Wayfair Inc | $47.55 | 73.21 | AMC | 1656 |
| YELP | Yelp Inc | $31.93 | 73.99 | AMC | 6508 |
Wednesday August 10:
Economic: MBA Mortgage Applications – 7:00, JOLTS – 10:00, EIA Petroleum Status Report - 10:30.
International Economic: Japan Tertiary Index – 1:30AM, France Industrial Production – 2:45AM.
Earnings:
| Symbol | Company Name | Aug 5 Close | IV30 | B/A | AVGOPTVOL |
| JD | JD.Com Inc(ADR) | $21.37 | 43.22 | BMO | 23092 |
| KORS | Michael Kors Holdings Ltd | $49.67 | 50.49 | BMO | 10010 |
| PRGO | Perrigo Company PLC | $92.24 | 40.71 | BMO | 3795 |
| RL | Ralph Lauren Corp | $94.27 | 39.43 | BMO | 3550 |
| SLW | Silver Wheaton Corp. (USA) | $29.16 | 47.63 | BMO | 21519 |
| CTRP | Ctrip.com International, Ltd. | $42.94 | 40.78 | AMC | 9397 |
| SHAK | Shake Shack Inc | $38.80 | 51.55 | AMC | 2110 |
Thursday August 11:
Economic: Weekly Jobless Claims – 8:30, Import and Export Prices – 8:30, Bloomberg Consumer Comfort Index – 9:45, EIA Natural Gas Report – 10:30.
International Economic: China Industrial Production and Retail Sales – 1:30AM.
Other: Markets closed in Japan.
Earnings:
| Symbol | Company Name | Aug 5 Close | IV30 | B/A | AVGOPTVOL |
| BABA | Alibaba Group Holding Ltd | $84.75 | 28.37 | BMO | 85166 |
| KSS | Kohl's Corporation | $38.85 | 45.88 | BMO | 5043 |
| M | Macy's Inc | $33.69 | 42.82 | BMO | 19489 |
| RGLD | Royal Gold, Inc (USA) | $85.05 | 41.18 | BMO | 2372 |
| JWN | Nordstrom, Inc. | $42.00 | 47.94 | AMC | 8786 |
| NVDA | NVIDIA Corporation | $57.23 | 48.30 | AMC | 23615 |
| YY | YY Inc (ADR) | $38.57 | 39.09 | AMC | 3970 |
Friday August 12:
Economic: Retail Sales – 8:30, PPI-FD – 8:30. Business Inventories – 10:00, Consumer Sentiment – 10:00, Baker Hughes Rig Count – 1:00.
International Economic: Germany – CPI – 2:00Am, Germany GDP Flash - 2:00AM, Italy GDP – 5:00AM, EMU GDP Flash - 5:00AM, EMU Industrial Production – 5:00AM.
Earnings: No earnings announcements meeting scan criteria.
Monday August 15:
Economic: Empire State Manufacturing Survey – 8:30, Housing Market Index – 10:00.
International Economic: No major announcements.
Earnings: No earnings announcements meeting scan criteria.
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