"Chance favors the Prepared Mind." - Louis Pasteur
“Imagination decides everything.” - Blaise Pascal
“Don't follow trends, start trends.” - Frank Capra
“The average man doesn’t wish to be told that it is a bull or a bear market.
What he desires is to be told specifically which particular stock to buy or sell.
He wants to get something for nothing. He does not wish to work.
He doesn’t even wish to have to think.” - Jesse Livermore
What he desires is to be told specifically which particular stock to buy or sell.
He wants to get something for nothing. He does not wish to work.
He doesn’t even wish to have to think.” - Jesse Livermore
“The four most dangerous words in investing are 'This time it's different'.” – Sir John Templeton
Last week, the four major stock indices reached all-time highs on the same day. Small caps, large caps, and tech stocks – Russell 2000, Dow Jones, S&P 500, and Nasdaq 100– reached new highs on Monday. The last time the market rewarded us with this level of performance was on December 31, 1999 – on Y2K eve. The indexes continued to reach record highs on Tuesday and then on the Friday after Thanksgiving. The broad market is up 3% during this post-election rally. The small cap Russell 2000 is on a 15 day winning streak. It is up 15,8% over the past three weeks. Bond yields are over 3%.
It has not been a good season for pundits and talking heads. Market pundits are now starting the debate of when the Trump rally will end. I do best when I do not fight trends. The next few months will tell us if this is a second-wind rally or the blow off culmination of a seven-year-old bull market.
Here is an overview of the US market behavior last week:Data Source: OptionVue8
| Index | 25-Nov | Change | % Weekly | 2016 YTD | Volatility of Index |
| Dow Jones Industrials (DJIA) | 19,152.14 | 284.21 | 1.51% | 9.91% | 12.81% (VXD) |
| S&P 500 (SPX) | 2,213.35 | 31.45 | 1.44% | 8.29% | 12.34% (VIX) |
| NASDAQ 100 (NDX) | 4,870.02 | 61.98 | 1.29% | 5.94% | 14.39% (VXN) |
| Russell 2000 (RUT) | 1,347.52 | 32.27 | 2.45% | 18.84% | 18.13% (RVX) |
| S&P 100 (OEX) | 975.25 | 12.12 | 1.26% | 7.00% | 12.08% (VXO) |
| Crude Oil (CLF7) | 45.96 | (0.36) | -0.78% | 23.98% | 53.46%(OVX) |
| CBOE Volatility Index (VIX) | 12.34 | (0.51) | -3.97% | NA |
The recent behavior of the VIX brings to mind a common literary or cinema artifice or trope. This is a feeling we have all had while reading a book or watching a movie. It is an artifice guaranteed to raise the hair on the back of one’s neck as we wait for the silence to end. Watching the VIX last week brought this movie scene, typical of this trope, to mind.
"It's quiet...too quiet...
[Gunshot. Bullet whizzes past his head]
Now, suddenly, it's too loud. I preferred it when it was quiet." O’Malley, Red vs. Blue
I am waiting for the gunshot. The spot VIX traded below 12 for a moment last week. I am not the only trader with the feeling it is too quiet. Per Russell Rhoads. VIX guru at the CBOE, ” With spot VIX at 12.64 and the December 21st VIX futures contract at 14.50, there was a buyer of at least 30,000 VIX Dec 21st 16 Calls for 0.85 who then sold the same number of Dec 21st 22 Calls for 0.30 and a net cost of 0.55.”
My approach to the same scenario was to buy December 21st date broken wing call butterflies. My trades are a hedge to protect short premium S&P 500 iron butterflies against a short term downward move in the index. The liquidity of VIX options allow relatively ease of adjustment or rolling of positions.
A reminder: This approach is implemented by me, a veteran options trader with over 30 years experience of trading derivatives for a living. It is risky even if you know what you are doing, Do not attempt this at home unless you understand the risks and pitfalls of trading VIX options and futures.
It is quiet and unnerving. Be careful and understand the risk of any strategy you are involved in.
Here is an overview of last week for the VIX and related products:
| Indexes | Ticker | 25-Nov | 18-Nov | Change | % Change |
| CBOE Volatility Index | VIX | 12.34 | 12.85 | (0.51) | -3.97% |
| VIX December Future (12/21/2016) | VXZ6 | 14.325 | 14.975 | (0.65) | -4.34% |
| VIX January Future (1/18/2017) | VXF7 | 16.175 | 16.675 | (0.50) | -3.00% |
| VIX February Future (2/18/2017) | VXG7 | 17.175 | 17.500 | (0.32) | -1.86% |
| CBOE Short-term Volatility Index | VXST | 10.43 | 8.63 | 1.80 | 20.86% |
| CBOE 3 Month Volatility Index | VXV | 15.51 | 15.52 | (0.01) | -0.06% |
| CBOE Mid-term Volatility Index (6 month) | VXMT | 17.93 | 18.02 | (0.09) | -0.50% |
| VIX of VIX | VVIX | 82.65 | 86.40 | (3.75) | -4.34% |
| CBOE SKEW Index | SKEW | 126.27 | 126.38 | (0.11) | -0.09% |
| Long VIX ETP's | |||||
| ProShares Ultra VIX Short Term Futures ETF | UVXY | 10.57 | 11.52 | (0.95) | -8.25% |
| iPath S&P 500 VIX Short Term Futures ETN | VXX | 27.82 | 29.06 | (1.24) | -4.27% |
| ProShares VIX Short Term Futures ETF | VIXY | 23.19 | 24.20 | (1.01) | -4.17% |
| iPath S&P 500 VIX Mid-Tem Futures ETN | VXZ | 35.15 | 35.43 | (0.28) | -0.79% |
| Inverse VIX ETP's | |||||
| ProShares Short VIX Short Term Future ETF | SVXY | 85.09 | 81.46 | 3.63 | 4.46% |
| Daily Inverse VIX Short Term ETN | XIV | 43.65 | 41.84 | 1.81 | 4.33% |
Next week is employment week. The plethora of earnings related reports culminates with the release of November jobs data on Friday morning. In addition, we will see the release of the second revision of the GDP, the S&P CoreLogic Case-Shiller Home Price Index. Motor Vehicle Sales and Chain Store Sales. We’ll also get retail sales reports on Black Friday and Cyber Monday.
The Organization of Petroleum Exporting Countries (OPEC) meeting in Vienna on Wednesday. They will be attempting to negotiate the first production decrease in eight years. In the absence of a production cut, oil stocks would remain in surplus for a fourth straight year in 2017.
The earnings season is winding down this week. Confirm the date and time of a company’s earnings announcement before trading any earnings announcement strategy. The most accurate source of this information is the company’s investor relations website. I will start trading announcements this week. The earnings highlights this week for widely held and actively traded stocks are: Shoe Carnival, Thor Ind., Autodesk, Tiffany, Semtech, Guess?, Synopsys, American Eagle Outfitters, Kroger, Donaldson, Dollar General, Ulta Salon, G-III Apparel, Fred’s, Genesco, and Big Lots.
The variables for earnings announcements are: Closing price> $20, Implied Volatility > 22, Average daily option volume > 1,000 contracts. Liquidity, as determined by width of option markets and individual option contract volume, is a crucial component in successfully trading any option strategy. One of the most frustrating experiences is an inability to adjust or exit a strategy due to lack of liquidity in the market. The market uncertainty associated with the election has impacted liquidity. I found it difficult to enter trades last week. The bid/ask spreads seemed much larger than usual. Do not force trades in illiquid markets.
Remember – this is my first pass scan. I will evaluate these candidates based on my previous experience trading their earnings announcements, chart, and other historic data. Here is a list of upcoming earnings announcements meeting my first pass scan:
| Symbol | Company Name | Nov 18 Close | IV30 | B/A | AVGOPTVOL | DATE |
| MNK | Mallinckrodt PLC | $56.87 | 69.66 | BMO | 1827 | 29-Nov |
| TIF | Tiffany & Co. | $79.18 | 33.32 | BMO | 4123 | 29-Nov |
| ADSK | Autodesk, Inc. | $75.15 | 42.97 | AMC | 3523 | 29-Nov |
| NTNX | Nutanix Inc | $34.13 | 102.91 | AMC | 1531 | 29-Nov |
| SPLK | Splunk Inc | $57.65 | 48.37 | AMC | 1954 | 29-Nov |
| GLNG | Golar LNG Limited | $25.52 | 70.53 | BMO | 5647 | 30-Nov |
| PVH | PVH Corp | $109.02 | 36.39 | AMC | 1231 | 30-Nov |
| DG | Dollar General Corp. | $79.71 | 35.02 | BMO | 5491 | 1-Dec |
| KR | Kroger Co | $33.70 | 31.30 | BMO | 8926 | 1-Dec |
| AMBA | Ambarella Inc | $65.36 | 49.93 | AMC | 6650 | 1-Dec |
| FIVE | Five Below Inc | $43.10 | 48.74 | AMC | 1863 | 1-Dec |
| SWHC | Smith & Wesson Holding Corp | $23.51 | 52.13 | AMC | 4760 | 1-Dec |
| ULTA | Ulta Salon | $262.02 | 37.69 | AMC | 5595 | 1-Dec |
| WDAY | Workday Inc | $83.13 | 41.18 | AMC | 2035 | 1-Dec |
| WUBA | 58.com Inc (ADR) | $33.58 | 34.84 | BMO | 2167 | 5-Dec |
| AZO | AutoZone, Inc. | $798.05 | 25.61 | BMO | 1863 | 6-Dec |
| GWPH | GW Pharmaceuticals PLC | $116.67 | 48.17 | BMO | 3317 | 6-Dec |
| TOL | Toll Brothers Inc | $30.05 | 32.30 | BMO | 1570 | 6-Dec |
| HDS | HD Supply Holdings Inc | $39.29 | 39.72 | AMC | 1703 | 6-Dec |
| HRB | H & R Block Inc | $23.68 | 39.44 | AMC | 1321 | 7-Dec |
| LULU | Lululemon Athletica inc. | $57.91 | 49.36 | AMC | 19134 | 7-Dec |
Advice to stimulate your imagination:
“Great things are not accomplished by those who yield to trends and fads and popular opinion.” - Jack Kerouac
| “Well, you know, I was a human being before I became a businessman.” – George Soros “Don't blow off another's candle for it won't make yours shine brighter.” - Jaachynma N.E. Agu “To win the people, always cook them some savory that pleases them.” - Aristophanes |
Economic: Dallas Fed Manufacturing Survey – 10:30.
International Economic: Japan Household Spending and Unemployment Rate – 6:30PM. Japan Retail Sales – 6:50PM.
Other: Cyber Monday - Online shopping equivalent of brick and mortar Black Friday. It is one of the biggest online shopping days of the year.
Tuesday November 29:
Economic: GDP – 8:30. Corporate Profits – 8:30, Redbook – 8:55, S&P Corelogic Case-Shiller Home Price Index – 9:00, Consumer Confidence – 10:00. State Street Investor Confidence – 10:00.
International Economic: France GDP – 2:45AM, Germany CPI – 8:00AM, Japan Industrial Production – 6:50PM.
Other: Federal Reserve Vice Chair Stanley Fischer speech to The Clearing House annual conference, in New York – 7:45AM, New York Federal Reserve Bank President William Dudley delivers remarks on opportunities for economic growth in Puerto Rico, in San Juan, P.R., with Q&A – 9:15AM.
Wednesday November 30:
Economic: MBA Mortgage Applications – 7:00, ADP Employment Report – 8:15, Personal Income and Outlays - 8:30, Chicago PMI – 9:45, Pending Home Sale Index - 10:00, EIA Petroleum Status Report – 10:30, Beige Book – 2:00.
International Economic: Germany Retail Sales – 2:00AM, France PPI and CPI – 2:45AM, Germany Unemployment Rate – 3:55AM, Japan Manufacturing Index – 7:30PM, China PMI Manufacturing Index - 8:45PM.
Other: OPEC Oil Ministers meeting in Vienna. Dallas Federal Reserve Bank President Robert Kaplan discusses economic conditions, trends and the limits of monetary policy with the Economic Club of New York, with media Q&A – 8:00AM, Federal Reserve Board Gov. Jerome Powell participates in a discussion on Understanding Fedspeak at the Brookings Institution in Washington, D.C – 9:15AM, Cleveland Federal Reserve Bank President Loretta Mester gives a speech on monetary policy and economic outlook to the African American Chamber of Commerce of Western Pennsylvania in Pittsburgh, Pa., with media Q&A – 12:35PM.
Thursday December 1:
Economic: Motor Vehicle Sales, Chain Store Sales, Challenger Job-Cut Report – 8:30, Weekly Job Claims – 8:30, Gallup Good Jobs Rate – 8:30, PMI Manufacturing Index – 9:45, Bloomberg Consumer Comfort Index – 9:45, ISM Manufacturing Index – 10:00, Construction Spending – 10:00, EIA Natural Gas Report – 10:30.
International Economic: Germany PMI Manufacturing Index – 3:55AM, Eurozone PMI Manufacturing Index – 4:00AM, Eurozone Unemployment Rate – 5:00AM.
Other: St. Louis Federal Reserve Bank President James Bullard gives a talk at Commerce Bank in St. Louis, Mo., with audience and media Q&A – 9:15AM.
Friday December 2:
Economic: November Employment Situation – 8:30, Baker Hughes Rig Count – 1:00.
International Economic: Eurozone PPI – 5:00.
Other: Federal Reserve Gov. Daniel Tarullo delivers keynote speech at the Office of Financial Research's Financial Stability Conference in Washington, D.C. – 12:30PM.
Monday December 5:
Economic: Gallup US Consumer Spending Measure – 8:30, PMI Services Index – 9:45, ISM – Non-Manufacturing Index – 10:00, Labor Market Conditions Index – 10:00, TD Ameritrade IMX – 12:30.
International Economic: Eurozone PMI Composite – 4:00AM, Eurozone Retail Sales – 5:00AM
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