Frank Fahey: Market News for the Prepared Mind: 4.24-5.1.2017

April 24, 2017

“Chance favors the Prepared Mind.” – Louis Pasteur

“Diplomacy is the art of saying ‘Nice doggie’ until you can find a rock.” – Will Rogers

“I accept chaos, I’m not sure whether it accepts me.” – Bob Dylan

“For diplomacy to be effective, words must be credible – and no one can now doubt the word of America.”
George W. Bush

“You can’t overlook the volatility, but you don’t let it push you around in the market” – Boone Pickens

Concerns about the upcoming French election dominated market conversations this past week. Global unease, combined with a lack of movement in implementing Trump’s business friendly domestic agenda, have led to increased wariness among market participants. I am having difficulty balancing my overall bearishness with the fact that major US indices remain within a few percentage points of all-time closing highs.

Every single pull-back for the past 9 months has been a buying opportunity. Picking a market bottom runs contrary to my trading discipline. As options trader, I can construct neutral to bearish strategies which are relatively benign to the upside. I will continue with a trading style based on a discipline based on thirty years of trading experience.

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

Data Source: OptionVue8

The VXST, the CBOE Short-Term Volatility Index, closed showing classic price behavior before a defined volatility event. The volatility event appears to be the first stage of the French presidential election. The VXST rose 34% last week, while the VIX declined just over 8%, The difference between the VIX and the VXST is the options used by each to calculate the value of the respective indexes. The time period for the VXST is 9 days, while the time period for the VIX can range from 36 to 63 days

The VXST calculation uses the next two consecutive SPX option series that have at least one day remaining until expiration.  These two expiration series are combined to calculate a nine day expected volatility outlook.   VXST is the first volatility measure to use SPX Weeklys in the calculation. The value for VIX is determined by combining the next two monthly (third Friday) SPX option expiration series that have at least eight days remaining until expiration.  The result of this calculation is a thirty-day implied volatility measure.

The VXST is farm more susceptible to near term volatility events. Other near-term volatility events in addition to the French election include a budget deal needed to preclude a government shutdown, renewal of the effort s to repeal and replace the Affordable Healthcare Act, and the Wednesday release of President Trump’s tax cut plan.

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

Data Source: OptionVue8

The initial focus of the week will be the first round of the French presidential election. Corporate earnings announcements will be a constant for the next three weeks. The impact of the results should be quickly superseded by concerns about passage of a new US spending bill. The Wednesday announcement of President Trump’s new income tax plan has the ability to move the market. The last week of April brings reports on housing as well as durable goods, and finishes off with the first estimate of first-quarter U.S. GDP growth. The following week is employment week. Political fireworks will continue to be the wildcard in play.

First quarter earnings announcement will continue the next three weeks. 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: Coca-Cola, Caterpillar, Corning Galss, Eli, Lilly, McDonald’s, 3M, US Steel, Procter Gamble, Pepsico, Amgen, PayPal, UPS, Amazon, Google, Starbucks, General Motors, and Exxon Mobil.

Advice to stimulate your imagination:

It’s a cruel and random world, but the chaos is all so beautiful.” – Hiromu Arakawa

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

““I will undoubtedly have to seek what is happily known as gainful employment,
which I am glad to say does not describe holding public office.” – Dean Acheson

“The world is still a weird place, despite my efforts to make clear and perfect sense of it.”
– Hunter S. Thompson

Monday, April 24:

Economic: Chicago Fed National Activity Index – 10:30, Dallas Fed Manufacturing Survey – 10:30.

International Economic: Results of the first part of the French presidential election.

Other: Minneapolis Federal Reserve Bank President Neel Kashkari to discuss “Opportunity and Inclusive Growth Institute, TBTF” at The 6th Annual Fink Investing Conference at UCLA Anderson in Los Angeles, California with audience Q&A – 11:30AM, Minneapolis Federal Reserve Bank President Neel Kashkari to discuss “Opportunity and Inclusive Growth Institute, TBTF” at Claremont McKenna College in Claremont, California with audience Q&A – 3:15PM.

Earnings:

Tuesday, April 25:

Economic: Redbook – 8:55, FHFA House Price Index – 9:00 AM, S&P Corelogic Case-Shiller HPI – 9:00, Eew Home Sales – 10:00, Consumer Confidence – 10:00, Richmond Fed Manufacturing Index – 10:00, State Street Investor Confidence Index – 10:00.
International Economic: No major Announcements.

Earnings:

Wednesday, April 26:

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

International Economic: Bank of Japan Announcement, Japan All Industry Index – 12:30 Index – 12:30. China Industrial Profits – 9:30PM.

Earnings:

Thursday, April 27:

Economic: Weekly Jobless Claims – 8:30, Durable Goods Orders – 8:30, International Trade in Goods – 8:30, Bloomberg Consumer Confidence – 9:45, Pending Home Sales Index – 10:00, EIA Natural Gas Report – 10:30, Kansas City Fed Manufacturing Index – 11:00, Money Supply – 4:30.

International Economic: Eurozone Economic Sentiment – 6:00AM, Germany CPI – 9:00AM, Japan CPI, Household Spending and Unemployment Rate – 7:30, Japan Industrial Production and Retail Sales – 7:50PM

Other: European Central Bank Announcement – 7:45AM.

Earnings:

Friday, April 28:

Economic: GDP – 8:30, Employment Cost index – 830, Chicago PMI – 9:45, Consumer Sentiment – 10:00, Baker Hughes Rig Count – 1:00.

International Economic: Germany Retail Sales – 2:00, France PPI – 2:45AM.

Other: Federal Reserve Board of Governor Lael Brainard to discuss “Fintech and the Future of Finance” at the Kellogg School of Management at Northwestern University conference in Evanston, Illinois with audience Q&A 1:15PM, Philadelphia Federal Reserve Bank President Patrick Harker gives a speech on “How STEM Can Get You Anywhere” at the X-STEM Symposium in Washington, D.C., with audience Q&A – 2:00PM.

Earnings:

Monday, May 1:

Economic: Personal Income and Outlays – 8:30, Gallup Consumer Spending Measure – 8:30, PMI Manufacturing Index – 9:45, ISM Manufacturing Index – 10:00, Construction Spending – 10:00.

International Economic: Bank of Japan – Minutes 8:50.

Earnings:

 

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