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Frank Fahey: Market News for the Prepared Mind: 3.20–3.27.2017

March 20, 2017


“Chance favors the Prepared Mind.” – Louis Pasteur

All generalizations are dangerous, even this one.” – Alexandre Dumas fils

“If you must hold yourself up to your children as an object lesson,
hold yourself up as a warning and not as an example.” – George Bernard Shaw

“History is a vast early warning system.” – Norman Cousins

Stocks finished higher for the week. The specter of a correction – major or minor -has been a constant topic of discussion in the financial media. Market participants are presented with a litany of reason the market is “due” for a correction – Fibonacci numbers, CBOE Skew Index, low VIX, consecutive days without a 1% move in the SPX, number of days between 5% corrections, the French election in April, and Korean nuclear intentions. Listening to these admonitions can be daunting.

I acknowledge the outlier risks. These risks are a small part of the risk/reward equation. One of the most important factor in successful trading is knowing one’s response to emergency trading situations will be. I constantly ask myself “What if, what if, what if.” I always know how and where I can shut down risk. I am my own emergency first responder.

Here is an overview of the US market behavior last week and for 2017:

Index 17-Mar Change % Weekly 2016 YTD Volatility of Index
Dow Jones Industrials (DJIA) 20,914.62 11.64 0.06% 5.83% 10.33% (VXD)
S&P 500 (SPX) 2,378.25 7.00 0.30% 6.25% 11.28% (VIX)
NASDAQ 100 (NDX) 5,408.76 35.28 0.66% 11.21% 10.57% (VXN)
Russell 2000 (RUT) 1,391.50 25.86 1.89% 2.53% 14.14% (RVX)
S&P 100 (OEX) 1055.34 0.10 0.01% 6.45% 9.15% (VXO)
Crude Oil (CLK7) 49.26 0.35 0.72% -8.59% 27.45%(OVX)
CBOE Volatility Index (VIX) 11.28 (0.38) -3.26% NA

Data Source: OptionVue8

The CBOE Skew Index closed on Friday at 154.34. This is the highest closing level for the SKEW in the history of the index. The CBOE Skew Index has hit closing all time high a number of times during the current bull market run. In a nut shell, the SKEW measures the implied volatility/market pricing of deep out-of-the-money options on the S&P 500. A SKEW level of 100 in an indicator of a normal distribution of index implied volatilities. A “high” SKEW value is a shows market pricing of a large market move to the downside. In other words, the probability of outlier returns increases as the SKEW reaches higher prices.

Russell Rhoads, CBOE VIX guru sums the calculation as follows: “SKEW is calculated starting with a ratio. This ratio consists of the numerator being lower strike SPX puts and the denominator being higher strike SPX puts. For instances if the IV of the lower strike puts is 30% and the higher strike puts is 20% then the first part of the calculation is 30/20 = 1.33. This figure is then multiplied by 100 to give us the SKEW index or 1.33 x 100 results in a SKEW of 133. There are two ways for SKEW to rise, either through a higher numerator or a lower denominator. High SKEW does indicate that out of the money puts are relatively expensive, but in a low volatility environment we may get excited about an all-time high, but keep that number in a bit of context.”

SKEW monthly chart for 2011 – 2017. (Chart courtesy of Thinkorswim).

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

Indexes Ticker 17-Mar 10-Mar Change % Change
CBOE Volatility Index VIX 11.28 11.66 (0.38) -3.26%
VIX March Future (3/22/2017) VXH7 11.775 12.525 (0.75) -5.99%
VIX April Future (4/19/2017) VXJ7 13.270 14.200 (0.93) -6.55%
VIX May Future (5/17/2017) VXK7 14.225 15.125 (0.90) -5.95%
CBOE Short-term Volatility Index VXST 9.87 10.68 (0.81) -7.58%
CBOE 3 Month Volatility Index VXV 13.92 14.38 (0.46) -3.20%
CBOE Mid-term Volatility Index (6 month) VXMT 15.85 16.33 (0.48) -2.94%
VIX of VIX VVIX 78.66 80.27 (1.61) -2.01%
CBOE SKEW Index SKEW 154.34 138.99 15.35 11.04%
Long VIX ETP’s
ProShares Ultra VIX Short Term Futures ETF UVXY 16.32 18.90 (2.58) -13.65%
iPath S&P 500 VIX Short Term Futures ETN VXX 15.81 17.01 (1.20) -7.05%
ProShares VIX Short Term Futures ETF VIXY 13.19 14.18 (0.99) -6.98%
iPath S&P 500 VIX Mid-Term Futures ETN VXZ 27.53 28.45 (0.92) -3.23%
Inverse VIX ETP’s
ProShares Short VIX Short Term Future ETF SVXY 142.15 132.58 9.57 7.22%
Daily Inverse VIX Short Term ETN XIV 73.58 68.42 5.16 7.54%

Data Source: OptionVue8

The week opens with FBI Director James Comey testifying before a House committee investigating Russian activities during the 2016 presidential election. In addition, he is expected he will provide long-awaited answers and evidence on that issue and whether President Trump was indeed wiretapped. Other highlights for the week will be a litany of speeches – 12 in all – given by members of the Fed. Any of these talks have the potential to provide a market moving slip of the tongue. The House of Representatives is scheduled to vote on Thursday on an ACA replacement.

The coming week brings reports on new home sales, existing home sales, durable goods orders. The week’s highlight will be Friday’s durable goods report, offering the latest on the factory sector. Flash PMIs for the Eurozone and Japan will give a first look at data for March. Price data and all important retail sales will be released for February in the UK.

Fedex and Lennar are the only stocks announcing earnings this week which meet my criteria. For trading the announcement. This was the second straight ho-hum earnings season. It has been my experience that the post earnings behavior of individual stocks and the associated options usually show a remarkable consistency between individual earnings announcements in movement of the underlying and change in the implied volatility of the options. This consistency within individual stocks has not been apparent the past two earnings cycles. It is as if a “new normal” is being defined.

 

Advice to stimulate your imagination:

“I took a speed-reading course and read War and Peace in twenty minutes. It involves Russia.” – Woody Allen

“Man approaches the unattainable truth through a succession of errors.” – Aldous Huxley

“The sky is falling” – Chicken little

“Buy the ticket, take the ride.” – Hunter S. Thompson

 

Monday, March 20:

Economic: Chicago Fed National Activity Index – 8:30.

International Economic: Germany PPI – 3:00AM.

Other: Chicago Federal Reserve Bank President Charles Evans speaks about current economic conditions or monetary policy in live TV interview with Fox Business News’ Maria Bartiromo during “Mornings with Maria.” – 8:30AM, Chicago Federal Reserve Bank President Charles Evans will speak at New York National Association for Business Economics Luncheon followed by audience and then media Q&A in New York – 1:10PM.

 

Tuesday, March 21:

Economic: NFIB Small Business Optimism Index – 6:00, PPI – FD – 8:30, Redbook – 8:55.

International Economic: Great Britain CPI & PPI – 5:30AM, Great Britain CBI Industrial Trends Survey – 7:00, AM, Japan – Merchandise Trade – 7:50PM.

Other: Kansas City Federal Reserve Bank President Esther George speaks on the U.S. economy and the Fed at a Women in Housing and Finance event in Washington, D.C., with audience Q&A – 12:00PM, Federal Reserve Bank of Cleveland President Loretta Mester speaks on outlook and communications at the University of Richmond in Richmond, Va., with audience and media Q&A – 6:00PM, Bank of Japan Minutes – 7:50PM, Boston Federal Reserve Bank President Eric Rosengren addresses the Twelfth Asia-Pacific High Level Meeting on Banking Supervision in Bali, Indonesia –9:45PM.

 

Wednesday, March 22:

Economic: MBA Mortgage Applications – 7:00, FHFA House Price Index – 9:00, Existing Home Sales – 10:00, EIA Petroleum Status Report – 10:30.

International Economic: Japan All Industry Index – 12:30AM.

 

Thursday, March 23:

Economic: Jobless Claims – 8:30, Bloomberg Consumer Comfort Index – 9:45, New home Sales – 10:00, EIA Natural Gas Report – 10:30, Money Supply – 4;30.

International Economic: Great Britain Retail Sales – 5:30, Great Britain CBI Distributive Trades – 7:00AM.

Other: Federal Reserve Chairman Janet Yellen gives opening keynote at Federal Reserve System Community Development Research Conference in Washington – 8:00AM, Minneapolis Federal Reserve Bank President Neel Kashkari gives afternoon remarks at Federal Reserve System Community Development Research Conference in Washington – 12:00PM, Dallas Federal Reserve Bank President Robert Kaplan participates in a discussion on the economic outlook and monetary policy at the Chicago Council on Global Affairs in Chicago, with audience and media Q&A -7:00PM.

 

Friday, March 24:

Economic: Durable Goods Orders – 8:30, PMI Composite Flash – 9:45, Baker-Hughes Rig Count – 1:00PM.

International Economic: France GDP – 3:45AM, Eurozone PMI Composite Flash – 5:00AM.

Other: Federal Reserve Bank of Chicago President Charles Evans gives opening remarks at Federal Reserve System Community Development Research Conference in Washington – 8:00AM, St. Louis Federal Reserve Bank President James Bullard speaks at a Economic Club of Memphis Economic Briefing in Memphis, Tenn., with audience and media Q&A – 8:05AM, San Francisco Federal Reserve Bank President John Williams discusses a paper titled “Safety, Liquidity, and the Natural Rate of Interest” at the Brookings Institution’s Papers on Economic Activity spring conference – 8:30AM.

 

Monday, March 27:

Economic: Dallas Fed Manufacturing Survey

International Economic: Eurozone M3 Money Supply – 5:00AM.

Other: San Francisco Federal Reserve Bank President John Williams discusses a paper titled “Safety, Liquidity, and the Natural Rate of Interest” at the Brookings Institution’s Papers on Economic Activity spring conference – 1:15PM.

 

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