What's On Our Minds...

The over-riding characteristic of this market since the first of the year is boredom. Daily ranges are tiny, and volatility is practically non- existent. This is ironic, of course, since at the end of last year, so many traders were certain that volatility would increase dramatically once the holidays were over.

The $SPX chart is in an intermediate-term uptrend. The dominant trend line is the rising one that connects the October and November bottoms.

The equity-only put-call ratios are bullish. They have been declining for some time, with a few minor interruptions, and that is bullish for stocks.

Volatility indices ($VIX and $VXO) have continued to fall steadily for some time now. That makes them bullish indicators for stocks, too.

The mild overbought condition could potentially spur a short-term market correction within an overall intermediate-term bullish trend.

Larry McMillan

optionstrategist.com

Volatility as an asset class

iPath S&P 500 VIX Short-Term Futures (VXX) January put option implied volatility is at 67, February is at 76; below its 26-week average of 81, suggesting decreasing price movement.

CBOE VIX futures January up 1.48 to 23.68, February up 1.02 to 24.77, March up 90c to 26.15, April up 90c to 27.10, May up 85c to 27.60,  June up 70c to 28, July up 60c to 28.10, August up 50c 28.35, September up 15c to 28.75.  Visit CBOE.com for quotes.

VMware (VMW) is recently down $3.14 to $84.72 following Citigroup downgrading the company to Sell from Neutral and lowering its price target to $80 from $87. February call option implied volatility is at 34, April is at 42; compared to its 26-week average of 43.

U.S. equities are trading near thier lows of the day on concerns European countries and regulators are not coordinated to resolve liquidity and funding issues.

Cirrus Logic (CRUS) is a stock I used to trade in the pits here at CBOE.  It’s an audio chip maker and the majority of its business is with Apple (AAPL).  CRUS pre-announced better than expected 4Q profits with the official earnings announcement on January 26th.  CRUS has mostly traded in the mid-teens this past year but closed at $20.01 yesterday. 

So with the pre-announcement has earnings already been factored into the stock?  Will too many chips in Apple’s basket put fear into the stock?  So with option’s what’s your logic and what’s your trade?  A Bear Put Spread?  Or maybe Covered Calls with a target sale price to the upside?  How about selling the February Straddle at $2.80?

Once again all option strategies are good ones but it comes down to your outlook on the underlying with consideration to price and time.

Volatility as an asset class

JP Morgan (JPM) is recently down $1.04 to $35.81 in the pre-market on Q4 revenue $22.19B vs. consensus $23B. Overall option implied volatility of 34 is below its 26-week average of 40.
 
Apple (AAPL) is recently up 10c to $421.50 in pre-market-trading. January call option implied volatility is at 21, February is at 30, compared to its 26-week average of 31 into the expected release of Q1 results on January 24.
 
iShares Russell 2000® Index Fund (IWM): www.cboe.com/IWM overall implied volatility of 27 near its 26-week average. 
 
CBOE significant put volume increases;

VALE 6/16/2012 16 6K contracts
BAC 2/18/2012 6 5K
GLD 2/18/2012 156 5K 
F 4/21/2012 11 5K
XOM 1/21/2012 85 5K
BIDU 2/18/2012 110 5K
AAPL 1/13/2012 420 4K
UPL 6/16/2012 26 4K 
BAC 3/17/2012 5.5 4K

U.S. equities are mixed in the pre-market as stocks trade near six-month highs as traders adjust positions into earnings season.  Long weekend also a factor. 

JPMorgan earnings in line but guidance lowered. Earnings season kicks in next week.

Trade Deficit for November rose by $4.5B, European drop was a major factor.

Volatility as an asset class
 
VIX methodology for stocks is low to flat into quarterly results
 
VIX methodology for IBM-VXIBM at 24.62; below its 50-day moving average of 26.70.

VIX methodology for Goldman Sachs-VXGS at 42.92; below its 50-day moving average of 51.92.

VIX methodology for Apple-VXAPL at 32.16; below its 50-day moving average of 33.12.

VIX methodology for Amazon-VXAZN at 45.69; near its 50-day moving average of 44.97.
 

Sears Holdings (SHLD) is recently down 99c to $31.99 on CIT (CIT) saying it won't finance Sears loans to suppliers, WSJ reports.  January put option implied volatility is at 91, February is at 111, March is at 120; above its 26-week average of 44. Puts are more expensive than calls because shares are difficult to borrow.

Trading volume for security futures on the CBOE Emerging Markets ETF Volatility Index (VXEEM; futures ticker VXEM) was 1,106 contracts yesterday, January 11^th, (the third day of trading). www.cboe.com/VXEEM

(In contrast, the trading volume for VIX® futures was 191 contracts on March 30, 2004, its 3^rd day of trading.)

In addition, options on the VXEEM Index might be launched in future weeks, subject to regulatory approval.

VXEEM SETTLEMENT AND FUTURES VOLUME ON JAN. 11, 2012

While yesterday’s settlement value for the VXEEM Index (spot) was 29.82, the settlement value for the March 2012 futures was 34.10.

___________________Settlement___Volume

VXEEM Index spot______29.82

Feb. 2012 futures_______33.55________172  

Mar. 2012 futures_______34.10________330  

Apr. 2012  futures_______34.75________387  

May 2012  futures_______34.65________217

INTEREST IN VXEEM INDEX

Reasons for interest in the VXEEM Index include --

• High Closing Value. The high daily closing value for the VXEEM Index in 2011 was 64.10 on October 3rd, and the low daily closing value was 20.59 on April 20th (in comparison, the high and low daily closing values for the CBOE Volatility Index^® (VIX^®) in 2011 were 48.00 and 14.62, respectively).
• Large Upside Moves. The VXEEM Index had single-day upside moves of more than 30 percent on three days in 2011 -- August 4th (up 34.2%), August 8th (up 35.5%), and Nov. 25th (up 30.4%).

CORRELATIONS TABLE

• The daily moves for the VXEEM Index had a correlation of negative 0.81 versus both the EEM ETF and the S&P 500 (SPX) Index. This fact demonstrates that investors could explore the possibility of using the VXEEM as a diversification tool.

VXEEM GRAPHS

The VXEEM Index rose to higher levels that the VIX Index in late 2011.

For more information on VXEEM, please visit www.cboe.com/VXEEM

Matt Moran

Today’s significant number was the Retail Sales figure released by the Census Bureau.  This number is released in two parts – 1) Retail Sales and 2) Retail Sales excluding Autos.  A figure excluding the sale of autos is released as auto sales may be choppy and the result of incentives.  The reason for excluding automobile sales is the choppy nature of that market due to incentives.  The reason the market cares about this number is that over 60% of the Gross Domestic Product in the United States comes from consumer spending.  The monthly Retail Sales report provides insight into this significant piece of the economy. 

Today’s report showed Retail Sales climbing 0.1% in December over November.  The expectation was for a rise of 0.3% so this initially appears to be a disappointment.  However, the figures for both October and November were revised higher which makes up for the shortfall. 

Stock Mover's
 
Infosys (INFY) is recently down $5.52 to $51.38 in the pre-market following weak guidance as Oct-Dec profits increase 33%. Overall option implied volatility of 41 is above its 26-week average of 36.
 
Chevron (CVX) is recently down $1.87 to $105.90 in the pre-market after the company guided Q4 guidance lower. Overall option implied volatility of 24 is below its 26-week average of 27.
 
Williams-Sonoma (WSM) is recently down $4.68 to $34.43 in the pre-market after the company lowered Q4 outlook. Overall option implied volatility of 39 compares to its 26-week average of 42.
 
 
CBOE significant call volume increases;
 
CMCSA 4/21/2012 25 10K contracts
VALE 3/17/2012 23 10K
DELL 8/18/2012 13 7K
BAC 1/21/2012 6 6K
UPL 6/16/2012 26 4K
C 1/21/2012 30 4K 
SINA 3/17/2012 35 4K
 
U.S. equities are higher on a successful Spain bond auction. VIX is at the low end of its six-month range. Weekly Jobless claims higher and December Retail Sales disappointing may offset good Spain news.

I covered what the Beige Book is a little earlier today.  A little while ago the report was released stating that seven of the twelve districts are seeing modest economic growth, New York and Chicago are seeing a pickup in the pace of economic growth, Dallas and San Francisco are experiencing moderate growth and the Richmond district is seeing flat economic activity. 

Some other highlights –

       Consumer spending was higher in most districts.  

       The non-financial services sector is experiencing an increase in demand. 

       There seems to be a general expansion of manufacturing activity.

       Inflation pressures seem limited at the final goods level.

       Wage pressure is also moderate – with a few specialized sectors seeing strong growth.

       Real estate activity is steady – but already at very low levels.

       Banks were seeing some improvement in lending demand. 

       Farmers are seeing high demand for food products.

Stock Mover's
 
Textron  (TXT) is recently up $1.15 to $21.32 as the company conducting a strategic review that could include options such as spinning off parts of the company, sources say, reports Reuters.  January and February call option implied volatility of 43 is near its 26-week average of 44.
 
Lennar (LEN) is recently up $1.58 to $22.34 on better than expected Q4 orders. January call option implied volatility is at 38, February is at 33;below its 26-week average of 46.
 
SuperValu (SVU) is recently down $1.01 to $7.38 on a wider than expected Q3 loss. January call option implied volatility is at 36, February is at 39; below its 26-week average of 52.

SPDR S&P 500 ETF (SPY) is recently down 3C to $129.11 on a tight trading range of $128.52- $129.19. Overall option implied volatility of 21 is below its six-month average of 25.

Some headlines are stating that the market is waiting on release of the Beige Book which comes out this afternoon.  I’m fine with that statement, but what the heck is the Beige Book and why does the market care?

First, the nick name is the Beige Book, but the official name is the Summary of Commentary on Current Economic Conditions by Federal Reserve District.  I personally like the term Beige Book better than this.  There are 12 districts that each compiles information on economic conditions in their district.  These 12 reports are then summarized in a single document that is released in a beige binder (this is 100% a guess on my part – but probably a good assumption).

Why does the market care?  Because it tells us what’s going on in the economy, that’s why.  We’ll watch at 1:00 central and blog again this afternoon about the Summary of Comm… ah - Beige Book.

Stock Mover's
 
Croc (CROX) is recently up 86c to $16.85 following the company increasing its revenue outlook. Overall option implied volatility of 54 is below its 26-week average of 62.
 
Urban Outfitters (URBN) is recently down $4.61 to $24.75 in pre-open trading following the resignation of its CEO. Overall option implied volatility of 36 is below its 26-week average of 44.
 
Youku.com (YOKU) is recently up $1.41 to $18.30 in pre-market trading on Youku signing content deal with Twentieth Century Fox. Overall option implied volatility of 74 is below its 26-week average of 101.

CBOE significant put volume increases;
 
JPM 1/21/2012 36 11K contracts
BAC 1/21/2012 6.0000 10K
GS 1/21/2012 95 6K
C1 1/21/2012 4 5K
F 1/19/2013 10 4K
BAC 1/13/2012 6 4K
TXT 1/21/2012 20 3K
AAPL 1/13/2012 420 3K
 
CBOE Volatility Index-VIX at low end of five-month range.
 
U.S. equities are mixed to lower on a weaker Euro and concerns of a German economic growth slowdown.

I have to admit, while I have been expecting the VIX to return to normalcy, I have been shocked at the speed at which it moved down.  I have been writing for some time that I expect the VIX to fall down and fall down hard.  We wrote about how in December we were expecting the VIX to dive based on how the futures were priced.  Even so, I didn't think VIX would be threatening 20 by the first week of January.

Livevol(R) Pro (www.livevol.com)

Currently, SPX option IV (LiveVol's equivalent of the VIX) is trading at about a 6% premium to realized volatility (which is just over 12%, the white line).  This is far greater than the historical assumption of 2% that most believe is priced into options.  So what does this mean?  One of 3 things:

1.  The VIX is going to stay the same and realized volatility is going to uptick incrementally by 2-4%

2.  The VIX is going to drop another 2-4%

Or

3.  The two will meet in the middle with SPX moving a little bit more and the VIX dropping.

For the VIX to really catch a rally, we would need to see the market move more than the index is currently pricing in for several days in a row.  Right now, the index assumes the SPX will move about 1.25% a day, we would need the SPX to move more like 2% in order for us to make a big move over 25 anytime soon.

So what has caused this massive drop in SPX option implied volatility?  A massive drop in realized volatility.  Let’s remember, for the VIX to justify being over 30%, the S&P 500 needs to move about 1.9% a day in realized volatility.  When was the last time we saw the SPX move that much?  December 20th...over 2 weeks ago!  In fact, looking at realized volatility over the last 10 days, the VIX could be dropping a lot lower next week:

Traders have very short memories,  It was less than half a decade ago that the VIX was trading near 12% and the thought of a VIX of 20 seemed downright shocking.  If the market does indeed rally,  that 2% move needed for the VIX to pop to 30 is going to become harder and harder to get to.  Keep an eye on earnings this week, if they are positive, the market is primed to break out higher and should break 1300.00.

Read more at Option Pit’s Option Mentoring and Education Blog

Mark Sebastian

http://www.optionpit.com

The unofficial start to earnings season comes four times a year when the aluminum producer Alcoa (AA – 9.44) releases their numbers.  This occurred last evening after the market closed. 

There are a couple of reasons AA gets so much love when they release their earnings.  First, the company tends to be the first Dow Jones Industrial component to release their earnings.  Beyond that, the overall stock market tends to pay close attention to what this company has to say as their business prospects are a good indication for the overall global economy. 

hhgregg (HGG) is recently down $1.63 to $11.50 after the company lowered its FY12 EPS view to $1.05-$1.15 from $1.26-$1.41. January put option implied volatility is at 74, February is at 78, April is 72; above its 26-week average of 61.
 
Cirrus Logic (CRUS) is recently up $2.38 to $19.34 on the company seeing Q4 revenue $105M vs. consensus $98.49M. January call option implied volatility of 45, February is 49; below its 26-week average of 58.
 
WebMD (WBMD) is recently down $10 to $26.73 following the resignation of its CEO, the termination of talks with potential buyers and the company seeing Q4 results between the low-end and midpoint of its previous guidance.  January call option implied volatility is at 79, February is at 61; above its 26-week average of 47.
 
CBOE Volatility Index-VIX down 49c to 20.58; below its 50-day moving average of 27.60

A nice week for stocks last week, with the S&P 500 advancing 1.6%, and making the third weekly higher high.  It couldn't have come at a more needed time (for the bulls) either, as some doubts about the overall uptrend were starting to develop.

We'll poke and prod how it all panned out on a second, and take a look at why we're generally bullish in the bigger picture even though we're getting a little concerned in the near-term.  First though, let's run down some of the key economic numbers.

Economic Calendar

Pretty big week last week, especially when it comes to jobs, or lack thereof.

The best news was the unemployment rate fell from 8.7% to 8.5%.  Simultaneously, nonfarm private payrolls jumped from a 120K in November to a 212K increase in December.  The number jives with the 325K new jobs that ADP said were created last month.  Say what you want about the U4, U5, and U6 numbers – this is legitimate progress.  We still need to see closer to 400K new jobs added each month to consider it 'strong' growth, but this is something to build on.

By the way, new and ongoing unemployment claims fell again last week as well.  Everything else is on the grid below.

Economic Calendar

As for the coming week, it's not quite as earth-shattering, but there's some stuff worth noting.

For instance, Monday morning the Consumer Credit levels for November will be out.  The pros are looking for a $7.0 billion increase, extending a pretty impressive swelling of the total amount of money borrowed in the U.S.

We'll get new and continuing unemployment claims on Thursday as usual; both are expected to be basically flat with the prior week's numbers.  However, we'll also get some monster news on Thursday…. December's retail sales.  Was holiday shopping as potent as it needed to be to rekindle the economic revival?  The forecasters are looking for a 0.4% increase, with or without automobiles.  Anything above or below that will likely mean fireworks of some sort.  Be ready.

Finally, on Friday we'll get the first (of three) January readings of the Michigan Sentiment Index. It looks like we're in for a modest improvement from 69.9 to 71.0, extending the modest uptrend for a fifth straight month.

S&P 500

In the introductory comments we noted the market was sending us something of a mixed message…. the outlook varied with the timeframe.  It wasn't an effort to be coy; stocks really are at a short-term crossroads, but have already dropped a major longer-term hint.  Let's start with the latter idea first.

For the long-term bulls, you'll be glad to know the S&P 500 has set up shop above the 200-day moving average line (green) after a string of higher lows. T hough still a little wobbly, the SPX is also managed to make higher highs.

There's still something of a short-term vulnerability though – the ceiling around 1287 (dashed), and the upper Bollinger band at 1297.  Both could halt the uptrend, if not for the long haul, at least in the short run.  In fact, it would be odd if the S&P 500 didn't at least pause somewhere around there.

At the same time, while the VIX's downtrend is broadly bullish for stocks, i t's also getting uncomfortably close to its own lower Bollinger band at 18.4.  As we've seen lately, the VIX hasn't been able to touch its lower band line without pushing up and off of it… which is hurting stocks.  Overall the VIX is still in a long-term downtrend, but it's getting to an extreme in the short run – at a point in time when the S&P 500 is poised to encounter known ceilings.  It doesn't bode all that well for anyway needing some immediate bullishness.

Like we said above though, the bullish crosses of all the key moving averages say the long-term undertow is better.  In other words, we're in a "buy on the dips" environment as long as any of the key support levels hold up.  Take a look, but keep reading.

S&P 500 – Daily

While we're seeing the S&P 500 firm up, even more compelling is the reality that all the indices are making bullish progress.  In fact, all the indices are making the same important bullish progress.

This is an update of the same chart we showed you a week ago, of the Dow, NASDAQ, and the S&P 500.  As we said then, all the major market indices have been getting squeezed into a wedge (framed in orange), which was setting up the potential for big fireworks.  It wasn't until this past week, however, that the triangle shapes were broken in a bullish manner.  The implications are more than encouraging. 

More than that, in all three cases the index in question cleared key horizontal resistance lines.

Dow Jones Industrials, S&P 500, and NASDAQ – Daily

This still doesn't completely pull the fat out of the fire, because none of the indices have really been tested outside of their wedges; will these buyers hold their ground?  It may take a few days to know for sure.  This much is for sure though… this is the best shot the market's had at a true recovery in a long time.

Trade Well,

Price Headley
BigTrends.com

Tiffany (TIF) is recently down $4.91 to $62.03 in pre-market trading into the company cutting FY EPS view to $3.60-$3.65 from $3.70-$3.80. Overall option implied volatility of 37 is below its 26-week average of 42.

Cirrus Logic (CRUS) is recently up $1.70 to $18.67 in pre-market trading on the company seeing Q4 revenue $105M vs. consensus $98.49M. overall option implied volatility of 53 is below its 26-week average of 58.

Alcoa (AA) is recently up 21c to $9.63 in the pre-market on line Q4 results and generally negative outlook. Overall option implied volatility of 46 is above its 26-week average of 44.

CBOE significant put volume increases;
 
MU 2/18/2012 6 17K contracts
AEO 2/18/2012 12 5K
BAC 1/21/2012 6 4K
AA 1/13/2012 9 4K
INHX 1/21/2012 22.5 4K 
YHOO 7/21/2012 14 4K
AAPL 1/13/2012 420 4K 
MSFT 1/21/2012 27.5 3K
NFLX 1/13/2012 90 3K

U.S. equities are higher on a better tone in Europe.
 
CBOE Volatility Index-VIX closed at 21.06, 10-day moving average is 22.05, 50-day moving average is 27.70.

Volatility as an asset class

Theravance (THRX) is recently down $6.61 to $13.61 after its experimental drug Relovair failed to beat a competing drug in a study. February put option implied volatility of 77 is above its 26-week average of 69.
 
Dendreon (DNDN) is recently up $1.39 to $13.74 following last week’s Q4 update and better than expected Provenge outlook. January 12 and 14 calls are active on total option volume of 65K contracts. January call option implied volatility is at 110, February is at 100; above its 26-week average of 87.

S&P 100® Options with American-style exercise (OEX) is recenlty up .70 to 581.28. January put option implied volatility is at 17, February is at 21; April is at 23, suggesting larger outer month price movement. www.cboe.com/OEX.

As January Goes... so goes the rest of  the year.  That is just one of three anecdotes this week, the other two being the end of the Santa Claus rally and the first five days of January (so goes the month).  Wednesday was the end of the Santa Claus rally and it appeared to be a successful one, up about 2% on the SPX 500, while the first five days of January (not complete, Monday Jan 9 will be the end) is up nearly that much. 

Mind you, a great deal of the gains came on the gap higher following the three day holiday.  In fact, the markets barely moved from that close until the end of the week.  As we embark on another earnings season, the price action becomes that much more anxious.

Speaking of earnings, we’ll start to see how the 4th quarter looked starting next week.  If the recent sentiment is any indication we’re likely to see some very good results but with the usual disappointments.  I believe estimates to be far to low (bar set easy). 

This could be the floor for stocks, at least through the first quarter.  Perhaps there is some separation of the US from Europe (oh, I don’t really believe that…and neither should you).   With 2011 in the rear-view mirror it’s time to see stock prices catch up company performance.

Charts are starting to become more constructive.  The technical picture is improving as well.  One thing to notice is the separation of leaders and laggards.  This is a positive development.  Last year saw the markets correlate highly with stocks, rendering stock picking a useless exercise. 

Remember those days last year when the market would tank and it seemed everything went with it?  Today we see some leaders such as retail, restaurants, rails, industrials, select energy…while some laggards include coal, steel, other energy, some financials and technology.  A bifurcated market is okay to have, then we rotate as time moves on (as long as the money stays in equities).

Last quarter was pretty good for us trading through earnings, and I plan to have some trade ideas on the website through the entire season

Bob Lang is the Founder of option trading newsletter Explosive Options

The stock market finally was able to take advantage of the favorable
seasonal pattern and break out to the upside.  It is now imperative that
$SPX take out the October highs at 1293.  It would be bearish if $SPX
closes back below 1260.

Equity-only put-call ratios remain on buy signals.

Market breadth (advances minus declines) has been acceptable
but not strong.  This is a potential problem, and is one of the few
negative divergences.

The volatility indices ($VIX and $VXO) have been in bullish
downtrends for some time, and those trends persist.

In summary, the upside breakout and the confluence of bullish
indicators should be enough to propel this rally higher for a while.

Larry McMillan
optionstrategist.com

Volatility as an asset class:
 
VIX methodology for Amazon (VXAZN) at 44.60, above its 10-day moving average of 43.72.
 
VIX methodology for Google (VXGOG) at 32.06 near its 10-day moving average of 32.03.
 
VIX methodology for Apple (VXAPL) at 30.07; below its 10-day moving average of 31.05.
 
CBOE Volatility Index-VIX closed at 20.62, 10-day moving average is 22.06, 50-day moving average is 27.87.
 
 
CBOE significant put volume increases;
 
BAC 1/21/2012 6 7K contracts
AAPL 1/6/2012 420 6K
KITD 4/21/2012 10 5K 
BAC 5/19/2012 8 5K 
NFLX 1/6/2012 85 4K
FMCN 1/21/2012 17.5 3K 0
VRX 1/21/2012 45 3K
MSFT 1/21/2012 27.5 2K
CHK 7/21/2012 22 2K
 
U.S. equities are mixed as European stocks trade lower.