Frank Fahey: Market News for the Prepared Mind: 2.6-2.13.2017

February 6, 2017

‘A Scout is never taken by surprise; he knows exactly what to do when anything unexpected happens.” Robert Baden-Powell

“Imagination decides everything.” – Blaise Pascal

“Every noble acquisition is attended with its risks; he who fears to encounter the one must not expect to obtain the other.” – Pietro Metastasio

“Chance favors the Prepared Mind.” – Louis Pasteur

Major indexes hovered around unchanged at the end of Friday’s trade. The closing prices for the week did not reflect the market’s defensive posture prior to Friday. The indexes responded negatively to President Trump’s bellicose trade talk, while showing no response to Wednesday’s FOMC announcement. The percentage change for the major indexes from the Friday recovery are as follows: DJIA + 0.94%, SPX +0.58%, NDX +0.27%, RUT +1.50%, and the OEX + 0.75%.

Friday’s rally was the result of stronger than expected job growth and President Trump’s announcement he was going to investigate a roll back of Dodd-Frank regulations. The market is starting to show interday and intraday movement. The movement is generally in response to unscheduled Presidential Executive Orders, ruminations, and tweets. These responses to President Trump’s declaration are viewed by many of increased future market volatility.

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

Data Source: OptionVue8

The VIX remains under pressure. The VIX and associated products showed minimally lower volatility levels for the week. The volatility levels were significantly higher before Friday’s market rally. On Friday, the VIX was down 0.96 or just over 8%, The VIX still appears to be planted in a new. lower trading range. Puts in the S&P 500 continue to trade at historically low levels.

A review of Livevol Pro time and sales uncovered a large VIX calendar spread trading at the end of day on Thursday. The spread was 135,000 contracts. The diagonal calendar spread included the purchase of one monthly March 17C against the sale of one monthly April 21C. The price of the trade for the initiator was a 0.08 debit – March purchased @ 1.14 and April sold @ 1.06.

Two different future contracts are the underlyings for these contracts. At the time of the trade, the spread between the March future (VXH7) and the April futures contract (VXJ7) was approximately 1.30 points. This trade benefits in a run up in the price of the VIX.

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

Data Source: OptionVue8

The impact of potential executive orders will continue to overshadow a soft week for economic reports. The major reports being released is International Trade before Tuesday’s market open. The other domestic reports released this week elicit yawns for most market observers. Economic reports from Asia and Europe will focus on merchandise trade and industrial production.

The earnings season continues in full force despite earnings announcements from over 67% of S&P 500 companies. Earnings announcements are predictable volatility events providing trading opportunity. It is important to reduce the number of surprise which may occur in any trading campaign. Confirm the date and time of any company’s earnings announcement before trading any earnings announcement strategy. The most accurate source of this information is the company’s investor relations website.

The earnings highlights this week, for widely held and actively traded stocks, are Hasbro, Randgold Resources, Tyson Foods, Michael Kors, General Motors, Buffalo Wild Wings, Panera Bread, Zillow, Humana, Prudential Financial, Whole Foods Market, Cummins, Kellogg, Dunkin Brands, Regeneron, Expedia, NVIDIA, Verisign and Yelp.

I have added a scan of stocks with earnings announcements to the calendar for each day in the coming week. The scan criteria are: Closing price> $20, Implied Volatility > 25, Average daily option volume > 800 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 earning trades last week. The bid/ask spreads seemed much larger than usual. Do not force trades in illiquid markets. Data Sources for earnings: Livevol Core and OptionVue8

Advice to stimulate your imagination:

“A lot of my work is a matter of reacting to surprises in life.” – Alexander Wang

“A life spent making mistakes is not only more honorable but more useful than a life spent in doing nothing.” – George Bernard Shaw “It is an endless procession of surprises. The expected rarely occurs and never in the expected manner.” – Vernon A. Walters

Monday, February 6:

Economic: Gallup US Consumer Spending Measure – 8:30, Labor Market Conditions Index – 10:00, TD Ameritrade IMX – 12:30.

International Economic: Germany Manufacturers’ Orders – 2:00AM.

Other: Philadelphia Federal Reserve Bank President Patrick T. Harker discusses Fintech opportunities at Kona Kai Resort in San Diego, Calif – 4:30PM.

Earnings:

Tuesday, February 7:

Economic: International Trade – 8:30, Gallup US ECI – 8:30, Redbook – 8:55, JOLTS – 10:00.

International Economic: Germany Industrial Production – 2:00AM, French Merchandise Trade – 2:00.

Other: St. Louis Federal Reserve Bank President Bullard speaks about U.S. economy and monetary policy at financial forum at Washington University in St. Louis, MO., with audience and media Q&A – 9:10AM,

Earnings:

Economic: MBA Mortgage Applications – 7:00, EIA Petroleum Status Report – 10:30.

International Economic: Japan Machine Orders – 6:50PM.

Earnings:

Thursday, February 9:

Economic: Weekly Jobless Claims – 8:30, Bloomberg Consumer Comfort Index – 9:45, Wholesale Trade 10:00, EIA Natural Gas Report – 10:30, Money Supply – 4:30PM.

International Economic: China Merchandise Trade Balance, Germany Merchandise Trade – 2:00AM, Japan PPI – 6:50PM.

Other: St. Louis Federal Reserve Bank President Bullard speaks about U.S. economy and monetary policy at financial forum at Washington University in St. Louis, MO., with audience and media Q&A – 9:10AM, Chicago Federal Reserve Bank President Charles Evans speaks about current economic conditions or monetary policy at the CFA Society of Chicago Distinguished Speakers Series event in Chicago, Ill., with audience and media Q&A – 10:00PM.

Earnings:

International Economic: France Industrial Production 2:45AM, Great Britain Industrial Production – 4:30AM, Great Britain Merchandise Trade – 4:30AM.

Other: Vice Chairman of the Federal Reserve Stanley Fischer speaks at Warwick Economics Summit on Saturday February 11 in Coventry, United Kingdom, with audience Q&A – 7:30AM.

Earnings: None meeting scan criteria.

Monday, February 13: