Will Industrial Production & Capacity Util. Save The Market? Weekly Market Outlook by Price Headley
mkearney
There's no need to (or even a way to) mince words here.... last week was the worst week of the year for
the market. In fact, it was the worst week since early September of last year. The S&P 500 Index (SPX)
(SPY) fell a whopping 4.3% over the prior five trading days, bringing the total pullback from the early April
peak to painful 8.9%.
There are two likely possibilities here..... either things are really, really bad, or the nosedive was a
much-needed capitulation that will finally-jump-start the bigger bullish trend again. Don't rule the
latter possibility out. The week in September of last year that was an even bigger loser than last week?
That was also the beginning of the recovery effort (even if it took two more weeks to get it going).
We're going to do the usual poking and prodding below, right after we paint the bigger economic picture.
Economic Calendar
What a week we had for economic data! In order of appearance...
Retail sales weren't good, and downright bad when you take auto sales out of the picture. Though the numbers on the table below say both regular retail sales and retail sales with automobiles were up 0.1% in
April, that's a year over year comparison. Between March and April, general merchandise store sales (the
biggest segment of the retail world) were actually down 0.1% from March. It was second month-to-month
decline in general merchandise sales in three months. This is a growing struggle, and a red flag.
Inflation? Doesn't exist. The current inflation rate is now 2.3%. That part of the reason why Gold (GLD)
has been getting crushed.
Housing starts and building permits were ok. Starts rose from 699K to 717K in April, and though
permits-issued fell from 769K to 715K, both figures are modestly getting stronger. [It takes more
than a month's worth of data to say for sure, however.]
Industrial productivity as well as capacity utilization both grew in April. This is huge! Though it
doesn't mean anything in terms of the market's short-term swings (like the current pullback), this
speaks volumes in favor of the bigger (long-term) bullish trend.
The correlation between both productivity and capacity usage with the broad market is uncanny -as long
as they are rising, so too is the market. If they're falling, so too is the market. Though they are not
leading indicators, they are stunningly accurate coincidental indicators (which we've discussed before).
Capacity Utilization and Industrial Production, vs. S&P 500
Last but not least, new and ongoing unemployment claims rolled in just about even, continuing- basically
- a sideways trend for both. It's not a red flag yet, but the lack of progress on the employment front
could have a slow, grinding ill-effect on the economic condition.
Economic Calendar
The coming week is one of the lightest weeks of the year in terms of economic data, though it will be
an important one for real estate. Existing home sales for April are expected to grow to 4.65 million,
new homes sales should be up to 340K (both are annualized figures), and we'll get an updated glimpse
of how home prices are moving... all by Wednesday.
Stock Markets
Ugly. There's no other way to describe last week. Five straight losing days, with the S&P 500 losing 4.3% of its value in the process. Yet, there's almost something relieving about the move... as if traders knew we were due, and we finally took the lumps we knew we had to take sooner or later.
It's an idea that certainly won't jive with everything you're hearing from the media's pundits. It's an idea that
may even ruffle some feathers. Yet, the reality is, trends don't last forever - the media and most investors
were assuming the worst in September based on how bad things had been since August, and missed much
of what was ultimately a 24.5% rally between then and April of this year. The point is, it's often darkest
right before dawn.
That's not to say Friday's SPX low of 1291.98 was exactly 'the' bottom. It is to say, however, that there's
a huge risk of fear driving trading decisions right now. Don't let fear blind you to the possibility that a
recovery may be materializing.
As for the details, let's just put the bullish and bearish cases on the table so we know exactly what
we're dealing with.
The bearish case:
* The 200-day moving average line (green) did NOT act as a floor; the SPX blew right under it
on Thursday and Friday.
* The CBOE Volatility Index (VIX) (VXX) is in a new uptrend.
* The 20-day moving average line (blue) has crossed under the 50-day average (purple), and
will fall under the 100-day moving average (gray) this week.
The bullish case:
* Friday's low of 1291.98 almost perfectly brushed the 38.2% Fibonacci retracement level
(based on the rally from September's low to April's high).
* While last week's selling was nasty, volume was actually pretty light.
* The short-term Arms Index - or TRIN - readings (not shown) suggest the advancers/decliners and up/down volume relationships have already reached their peak bearishness, meaning the short-term selling effort is running on fumes and that the market is ripe for a bullish reversal. [Note that the long-term TRIN readings
say there's still more downside to go... or at least some bearish pressure that needs to be burned off first.]
The two sides' arguments can be simplified by clarifying the two schools of thought here - either the momentum says there's even more selling/declines ahead, or the market's oversold condition says a rebound is nigh.
Between the two camps, we're more inclined to join the near-term bulls. The market (DIA) (QQQ) (IWM) is unusually oversold right now, but it's not a very well-backed downtrend.
On the other hand, with hysteria being cranked up to maximum levels, traders may well be nudged into more selling early this week... even if it's the wrong decision. Besides, we're not quite all the way to all the technical floors [see the weekly chart below] that would best spur a bounce. For that reason, it may be wise to not try and catch a falling knife -- let's wait for some confirmed bullishness before taking that trading plunge.
SPX & VIX - Daily
Just for a little added perspective, here's the weekly chart of the S&P 500, which as was noted above actually bolsters the bullish argument.
On this weekly version we can see how the index is at or near a major Fibonacci retracement line. It's also on this chart we can see the S&P 500 is just a hair away from a key Bollinger band (at 1280) that has played a support role before. Between it, the 200-day average line at 1282, and the Fibonacci line at 1288, there's a pretty potent 'zone' of support for the market here. It may just take a few days for that support to get traction.
SPX & VIX - Weekly
Trade Well,
Price Headley
BigTrends.com
SPX Weeklys Options (1) Record Volume Day, (2) More Than 50% in Annual Gross Premiums? by Matt Moran
mkearney
Here is an update on S&P 500® (SPXSM) WeeklysSM options www.cboe.com/SPXW:
- 1. RECORD VOLUME DAY
On Friday, May 18, the SPX Weeklys options experienced trading volume of 283,751 contracts, an all-time record high volume. Below are the top 10 days for SPX Weeklys options volume:
1. 5/18/2012 283,751
2. 8/4/2011 223,247
3. 8/8/2011 221,180
4. 8/5/2011 182,908
5. 5/4/2012 181,777
6. 8/26/2011 178,588
7. 10/27/2011 177,203
8. 4/26/2012 169,975
9. 4/5/2012 167,873
10. 6/2/2011 154,669
2. COULD SPX WEEKLYS OPTIONS GENERATE GROSS PREMIUMS OF MORE THAN 50% PER YEAR?
A 12-page paper by Russell Investments entitled “Capturing the Volatility Premium through Call Overwriting” (December 2010) (available at www.cboe.com/benchmarks) explored the BXM Index and other SPX systematic call overwriting strategies, and noted that:
“ … Exhibit 6 compares the 15-year historical annual premiums received by rolling weekly, monthly, quarterly, and annual ATM options. This historical data shows that shorter term options maximize the total amount of premium received on an annual basis. A one week tenor option rolled four times per month has generated more than 2.0x the premium of a one month tenor option rolled once per month. … This helps make clear that close to the money strategies with short tenors have consistently generated a higher level of gross income. … That said, it is important to note that short tenor strategies increase the probability of capping the upside in any given period. This is the result of the increased probability of paying an exercise cost when these shorter dated ATM options expire in-the-money. …”
Here a couple of cautionary notes re: gross premiums for a strategy of selling Weeklys covered call options:
(a) The transaction costs for selling Weeklys options every week of the year could be significant;
(b) The net returns from a covered call strategy could be negative, and usually are less than the gross premium received. (For a comparison regarding SPX monthly gross premiums received for the BXM Index, please see Exhibit 13 of the paper by Hewitt EnnisKnupp entitled “The CBOE S&P 500 BuyWrite Index (BXM) - A Review of Performance” (2012) (available at www.cboe.com/benchmarks)).
3. CURRENT AVAILABILITY
The SPX Weeklys options now available --
- were listed May 17th and
- will expire on May 25th.
http://www.cboe.com/micro/weeklys/availableweeklys
4. MORE ON SPXW AND SPXPM OPTIONS
SPX Weeklys options trade on CBOE with PM-settlement and are listed under the root ticker symbol "SPXW", and are commonly included in SPX (traditional) options chains which are AM-settled.
Key features of SPX Weeklys options --
> LARGE CONTRACT SIZE WITH A $100 MULTIPLIER (ten times larger than SPY options);
> CASH-SETTLEMENT;
> EUROPEAN-STYLE EXERCISE;
> SEVEN TRADING DAYS (trading in SPX Weeklys options begins on Thursdays and generally ends on the Friday of the following week).
Separately, the C2 Options Exchange lists S&P 500 Index options with PM settlement, under the ticker symbol SPXPM, that expire on the same Friday of the month as traditional SPX options that trade on CBOE.
Matt Moran
CBOE
Weekly Commentary by Lawrence G. McMillan
mkearney
The $SPX chart has turned bearish, with the breaking of the 1340 support level.
However, it is oversold in that it is more than 4 standard deviations below
its 20-day moving average, which is currently at about 1370.
Equity-only put-call ratios remain on sell signals, but they are so
high on their charts that they are in an oversold state, too.
The breadth indicators have now reached extremely oversold levels,
but they are also on sell signals.
Volatility indices ($VIX and $VXO) have started to move higher this week,
and $VIX finally has broken out of its trading range on the upside.
The move above 21 is bearish for stocks, so the $VIX chart is bearish at this time.
In summary, nearly all indicators are on sell signals. Oversold conditions are calling for
a short-term, but perhaps strong, rally. But true buy signals will take a while to form.
Larry McMillan
optionstrategist.com
