US equity markets continue to be driven by positive earnings and economic data. Last week’s weaker than expected 4th quarter GDP data along with Tuesday’s disappointing consumer confidence was offset by Wednesday in line ADP employment report. The news also continues to focus on the future IPO of Facebook, which seems to be helping the [...]]]>
US equity markets continue to be driven by positive earnings and economic data. Last week’s weaker than expected 4th quarter GDP data along with Tuesday’s disappointing consumer confidence was offset by Wednesday in line ADP employment report. The news also continues to focus on the future IPO of Facebook, which seems to be helping the internet and technology sector. The S&P 500 Index continues to move higher driven by the S&P 500 technology index which has hit a multi-year high.
Wednesday’s better than expected ISM manufacturing index is generally highly correlated with the S&P 500 index. The ISM’s index increased to 54.1 in January from a revised 53.1. Economists surveyed had expected the January PMI to increase to 54.0. The ISM’s new orders index rose to 57.6 which is the highest reading since April 2011. The increasing level of this barometer should be positive for the S&P, but negative for implied volatility.
Meanwhile, implied volatility on the major indexes continues to trade in a tight range as fear over Europe and a potential debt default has somewhat abated. The EU continues to meet with Greece to determine the fate of private investors in Greek debt. The soft default is the most likely scenario, but any pullback by the parties involved will likely take the VIX to higher levels.
After edging higher early in the week, the VIX volatility index, which measures the implied volatility of the “at the money” strikes of the S&P 500 Index, has declined back through 20%, and is poised to test support levels near 17.5%. With the “death cross” occurring last week, were the 50-day moving average of the VIX crosses below the 200-day moving average of the VIX, downward momentum in the volatility gauge is likely to continue.
Polypore International, (NYSE:PPO), was the largest of the implied volatility movers during this current week. The stock price plunged 26% as Axiom Securities initiated coverage with a sell rating and a $26 price target. The implied index mean of PPO increased to 90%, from 69%, which is a 31% change. Implied volatility spiked to 112% before coming off, and was as low at 47% last week.
Kinder Morgan (NYSE:KMI) also experienced a large change in implied volatility this week, moving to 27% from 23% one day ago. Historical volatility on the stock is printing near 23.81, but has been as low as 17.7 using the historical range method.
Commodity implied volatility continues to be lead by natural gas Henry Hub, despite the incredible decline in natural gas prices that the market has witnessed over the past few months. Natural gas prices have broken through the 2.5 per mmbtu level, but still boasts and implied volatility level of 64%. Silver futures implied volatility is also relatively high, reflecting a level near 46%. Frozen concentrated orange juice is also high near 46.3%.
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]]>Market volatility seems to have grinded to a slow halt as investor confidence in the US equity markets grinds higher. Implied Volatility measured by the VIX volatility index edged through the 20% level late in the prior week. Stocks were on hold for the first couple of trading sessions as investors awaited some big cap [...]]]>
Market volatility seems to have grinded to a slow halt as investor confidence in the US equity markets grinds higher. Implied Volatility measured by the VIX volatility index edged through the 20% level late in the prior week. Stocks were on hold for the first couple of trading sessions as investors awaited some big cap stock earnings and the announcement from the FOMC meeting on Wednesday.
Earnings results have surprised to the upside, and have allowed US equities to push through resistance levels, that will likely target much higher levels. Better than expected earnings from Microsoft, Caterpillar, and Apple, have created a strong demand for stocks, pushing the major averages up more than 6% for 2012.
After reporting much better than expected earnings after the bell on Tuesday, Apple surged more than 7%, and experience a huge decline in IV. Near term implied volatility dropped from above 35% to below 20% post earnings. The decline puts at the money implied volatility on Apple at the lowest levels in the past 52 weeks. Historical volatility has also seen a large drop, with the range method showing a high on historical volatility of 25% and a low near 13%.
Microsoft implied volatility has also seen a large decline. The software giant has seen large institutional buying which has pushed the stock above the $29 dollars and has tested the $30 dollar level for the first time since early 2010. Implied volatility on the stock has moved below 20%, which is the lowest level in the past 2-years.
The VIX volatility index which tracks the at the money implied volatilities of the S&P 500 tested the 17.5% level, which is the lowest level since July of 2011. The lows, since prior to the summer swoon when investors experienced a second panic over the European debt crisis, where 15%, which seems to be the level traders will potentially test. With the 50-day moving average of the VIX now crossing below the 200-day moving average of the VIX, downward momentum on the implied volatility index is likely.
The Nasdaq 100 volatility index is trailing the VIX, printing a number of 19%, which is above support levels seen in July of 2011. The OVX has also seen the 50-day moving average cross below the 200-day moving average which is a sign of continued negative momentum for implied volatility.
Investors are still continuing to use the low volatility environment to hedge long portfolio positions. The skew index, is now at the upper end of the recent range, showing that out of the money puts are still in favor. Investors are still willing to pay a premium to purchase out of the money puts relative to at the money options and out of the money calls. Investors could consider using put spreads to hedge long positions. In this circumstance, and investors could purchase an at the money put and use the skew of the out of the money put to finance closer to the money puts.
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]]>Implied volatility finally began to drift lower, but still remains above support, as investors remain careful to hedge their bets in case the January effect fades quickly. Historical volatility has been printing above the implied volatility index mean of the S&P 500 Index during the recent decline. On Tuesday is pushed below printing near 15%, [...]]]>
Implied volatility finally began to drift lower, but still remains above support, as investors remain careful to hedge their bets in case the January effect fades quickly. Historical volatility has been printing above the implied volatility index mean of the S&P 500 Index during the recent decline. On Tuesday is pushed below printing near 15%, compared to the 20.5% for implied at the money volatility.
The US markets have been slowly grinding higher and some stocks which include Microsoft have rallied nearly 8% in 2012, reflecting interest by investment managers to be in the broader market. Microsoft as a large cap stock with low volatility has recently been a guide for overall investment activity.
Economic data points continue to remain positive. Last week’s worse than expected retail sales data is now just a memory. Homebuilder confidence rose to its highest level in the past 3 years. Wednesday’s producer price index was in line with expectations, and did not seem to have an effect on market sentiment prior to the bell. As China continues to show that it is moderately declining, equities and riskier assets have been outperforming.
Most investor attention had been focused on earnings which have been mixed. Financial institutions have been a relative drag despite the mixed results. Citigroup and JP Morgan released earnings and revenue which were disappointing, while Wells Fargo and Goldman Sacks beat analysts’ estimates.
The semi-conductor sector spiked on Wednesday with increasing call purchase action. Implied volatility spiked, as investors rushed into the sector. Earning are expected during the next two weeks, which is helping to drive investors expectations. Implied volatility on the SMH, which is the semi-conductors holders ETF, jumped more than 3%, to 29%, up from %26.12 in the prior week. Historical volatility jumped to 15% and 18% using a historical range method. The put call ratio on volume on the ETF is .50, which is considered neutral.
Support on the VIX volatility index continues to remain robust above the 20% support level. The 50-day moving average of the VIX is coming close to crossing below the 200-day moving average of the VIX which is know in the industry as the “death cross”. It seems to be coinciding with the “golden cross” which is also approaching in the S&P 500 index.
The RSI on the VIX is moving close to 41, which is higher than the 30 level reached the last time the VIX tested the 20% level. The MACD on the VIX is near the zero line which reflects a consolidative pattern that is showing little momentum.
Looking forward, there are a number of important earnings releases that will likely create volatility for individual stocks. Headlines from the European Union will also likely keep implied volatility elevated despite the markets slow grind higher.
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]]>US markets continued to show signs of life in the second trading week of 2012. Implied volatility continued to remain in a tight range, but refused to fall below the 20% level, which is historically elevated while markets are trending higher. At the end last week, better than expected employment data along with this week’s [...]]]>
US markets continued to show signs of life in the second trading week of 2012. Implied volatility continued to remain in a tight range, but refused to fall below the 20% level, which is historically elevated while markets are trending higher. At the end last week, better than expected employment data along with this week’s solid consumer credit, have given US investors some solid themes to trade on.
Surprisingly, the European markets have had little effect on the US markets. Investors are now looking for the headline that will spark the fuse that will ignite implied volatility and crater the US equity markets. Some believe US investors have Euro fatigue and that is why the current negative news is not creating further headwinds for US markets.
European Issues Affect US Markets
The Euro has declined below 1.30 toward 1.26 in the first two trading weeks of the new year. The decline of the Euro is having somewhat of a negative effect on large cap global stocks. In their recent 4th quarter report, Oracle, which usually has not problem beating earnings estimates, reported a miss which saw share prices fall nearly 14%. Oracle blamed some of the companies loss on the decline in margins in Europe, along with the rally in the US dollar. This could potentially hurt other global companies will also experienced the negative effect of a declining Euro.
The decline in implied volatility has made it difficult to find pure option plays. Investors have been selling volatility even within the currency markets. The ETF FXE (Euro Investor Trust), has declined in price along with the Euro which has been accompanied by a decline in implied volatility. Historical volatility has lead volatility lower, which could be partially accounted for by end of the year/ beginning of the year trading.
The implied volatility average has fallen from a high in October of 18%, to the current 12% level. 10% was the 52 week low for FXE implied volatility. This low in April of 2010 which coincided with the highs in US equity markets. Investors should consider keeping an eye on FXE implied volatility as it grinds toward 10%.
Nasdaq
Along with the decline in the VIX, the VXN, which is the volatility index for the Nasdaq has decline to support near the 21% level. Technology stocks have been the outperformers in 2012. Further support on the index is seen down to the 16% level, which was the low hit in both 2011 and 2010. It is unrealistic to believe that Euro Zone issues will not spill back over into the US, which makes volatility levels near 18% interesting on the technology index.
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]]>US Markets are beginning to disconnect from many of the European bourses as economic data continues to show that the US economy is gain traction which could spill over into corporate profits. In Early December, if the Euro dropped more than a big figure, the S&P 500 would decline as least a percent, and the [...]]]>
US Markets are beginning to disconnect from many of the European bourses as economic data continues to show that the US economy is gain traction which could spill over into corporate profits. In Early December, if the Euro dropped more than a big figure, the S&P 500 would decline as least a percent, and the VIX would shoot higher, pushing up implied volatility premiums. The question on many traders minds is whether the US can disconnect from Europe.
Implied volatility for the benchmark S&P 500 Index traded in a large range reflecting trepidation during times of stress throughout 2011. The VIX volatility index, which tracks the “at the money” mean of puts and calls on the S&P 500 index hit a high of nearly 48% during early August and then again in mid October. Fears over European debt and the ability of Greece, Portugal, Spain and Italy to pay their debts created the need for portfolio managers to purchase downside protection. Support on the VIX has remained near 22%, which is below the longer term 200-day moving average near 26%
Unfortunately, many of the issues that plague European sovereignty has not gone away. Europe needs a fiscal union to end overspending in many of its financially troubled countries. Creating a Eurobond and a lender of last resort will likely be the only path that could stabilize Europe. It is difficult to believe that the US will be able to forge on without help from Europe, but declining rates in China could be the impetus needed for further upside in US markets.
Economic data will likely be the main focus for US investors during the first week of the new year. Manufacturing data released on the first trading day of 2012 showed a better than expected growth. The ISM PMI increased to an index level of 53.9. Analysts estimates averaged an increase to 53.0. The employment index, a highly scrutinized sub index, increased to 55.1 in December from 51.8.
Employment will also likely be a strong driver of US capital markets. On Thursday, investors absorbed better than expected private sector employment data. According to ADP and Macro Economic Advisors private sector employment grew at 325,000 in December, compared to the 175,000 expected by economists. Historically this number has been the largest during the year, but the trajectory of growth in employment is very positive. Investors will be focusing on Friday’s BLS employment report to fully gauge the current employment situation.
The Nasdaq 100 is an interesting benchmark for implied volatility given the range of expectations for earnings. Recent disappointment from Oracle and RIMM have supplied historical volatility. The 30-day implied average of at the money volatility is down week over week to 21.05%. The 52-week range is from 43.18 and the low is 13.50. A sustained rally will take implied volatility lower, but on a relative basis volatility is trading on the lower end of the 52-week range. During the last two summers, EU debt woes took implied volatility higher, after making annual lows during the highs in stock prices in late April 2010.
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]]>Trading slowed heading into the Columbus Day weekend on Friday. After three days of gains, stock market averages ticked higher Friday morning after the Labor Department said the US economy added 137,000 new jobs in September, which 55,000 more than expected. The early advance was short-lived and the Dow Jones Industrial Average moved lower after [...]]]>
Trading slowed heading into the Columbus Day weekend on Friday. After three days of gains, stock market averages ticked higher Friday morning after the Labor Department said the US economy added 137,000 new jobs in September, which 55,000 more than expected. The early advance was short-lived and the Dow Jones Industrial Average moved lower after Fitch downgraded both Italy and Spain.
Fitch cut Italy by one notch to A+ from AA- with a negative outlook. However, this rating remains relatively high. Italy showed remarkable stability in its credit standing during the early part of the crisis and stayed at an implied A+/A1/A+ for quite some time. However, it has succumbed in recent quarters to fall to A-/A3/A- currently. Earlier this month, Moody’s cut Italy three notches to A2 and last month, S&P cut Italy by one notch to A from A+. All three agencies have a negative outlook, so further downgrades appear likely.
On the economic front, the employment report surprised to the upside, giving investors a glimmer of hope that monetary policy is helping the economy to get back on track. Nonfarm payrolls rose by 103,000 in September as the private sector added 137,000 jobs, according to the Labor Department. Expectations were for an increase of 60,000 jobs. Payrolls data for the previous two months were revised up by a total 99,000 to show 57,000 jobs were added in August and 127,000 jobs in July.
The VIX volatility index remained within the lower half of the current 48-31 range, after testing the 42% level multiple times this past week. Implied volatility is trading above the 50-day moving average near 36.5%. A break of this level will likely test the 31% level, and will coincides with an equity breakout. The VXN Nasdaq volatility index also tested support near 37%, and has further support near the 31% level.
In bullish flow, Sprint (S) shares ran to morning highs of $3.39 after CNBC highlighted items from a conference call and noted that iPhone sales will result in huge cash flow for the company. However, the stock came under pressure and was halted after an AP story indicated that the company will stop selling Clearwire (CLWR) compatible products and Reuters reported that Sprint might need to access the market to raise capital. Shares hit a low of $2.65 when trading resumed. Trading in options on the stock is brisk, with 68,000 calls and 18,000 puts traded. Meanwhile, implied volatility in the options soared 15.5 percent higher and is elevated at 112.5.
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]]>Stock market averages moved higher in a relatively quiet session Thursday. The underlying tone of trading remained positive for a third day after Euro zone equity markets rallied around news ECB officials agreed to offer more loans to troubled European banks. UK’s FTSE paced the advance with a 3.7 percent surge. In the US, the domestic economic calendar included one sole stat, which showed jobless claims increasing by 6,000 to 401K last week and in-line with expectations.
Overall market action now has a wait and see feel heading into key monthly jobs data Friday morning. Economists expect to see the US economy adding 83K new jobs in September and the unemployment rate holding steady at 9.1 percent. The Dow Jones Industrial Average is up 183 points ahead of the data and the tech-heavy NASDAQ added 46. CBOE Volatility Index (.VIX) edged down 1.56 to 36.25, which coincides with the 50-day moving average
SPDR Financials (XLF) adds 39 cents to $12.29 and the Oct 10 – 13 risk-reversal trades at 6 cents, 90411X, while the Nov 10 – 13 risk-reversal trades at 19 cents, 90411X. The four-way spread probably rolls a position opened one month ago. Shares are down about 3 percent since that time and the bullish combo is being rolled to November. Oct 13 calls on the fund have now traded 171,000 contracts and also includes a recent buyer of 10,000 at 14 cents, 12,500 for 13 cents, and 20,000 at 13 cents. Earlier, a 55,500 contract block of Dec 14 calls was bought on the financial ETF at 18 cents per contract. 450,000 calls and 295,000 puts traded on the fund Thursday, which is about double the usual. Implied volatility in XLF options is down 7 percent to 48.5 and now a far cry from the highs above 70 seen two months ago.
In bearish trade, EBAY adds 62 cents to $31.17 and is on a three-day 10.8 percent run higher. Some investors apparently see the strength as an opportunity to write April 35 calls on the stock. The top trade is a 4,453-contract block at $2.35 on ISE and an opening seller, according to data from the exchange. 18,321 now traded against 592 in open interest. A total of 30,000 calls and 5,900 puts traded on Ebay Thursday.
Ahead of the employment number, Monster Worldwide (MWW) moved higher and 4,065 Nov 8 calls traded on the online employment solutions company. The flow includes a multi-exchange sweep of 2,200 contracts at 75 cents when the market was 65 to 75 cents. 100 percent of the volume has traded at the ask and open interest is only 50 contracts. Sentiment data reflects at a firm buyer.
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]]>The VIX volatility index ran directly into resistance and failed to puncture the 48% recent highs after climbing toward 46% early in the trading session. The VIX moved lower by 11%, to close the trading session near 44%. Support on the volatility index is seen near the 50-day moving average near 35%. This came despite investors initially selling stocks and moving out of riskier assets.
In economic news, Factory Orders declined by 0.2% from the prior month to $451.05 billion, according to the Commerce Department. Economists surveyed had predicted that orders wouldn’t change in August. July orders rose 2.1% and June orders fell 0.4%. In a positive sign, capital investment on equipment by U.S. businesses climbed. Non-defense capital goods orders excluding aircraft rose by 0.9%. The category of orders serves as an indicator of the confidence businesses have in the economy. This is on the heels of a slightly better than expected ISM manufacturing number released on Monday.
Excluding transportation, factory orders fell 0.2% in August, after rising 0.6% in July. Orders in August for capital goods rose 4.0%, driven up by non-defense. Defense capital goods orders fell. Excluding defense orders, overall factory orders in August decreased 0.2%, after surging 2.3% in July.
Investors again were focused on Europe. The Euro group meeting came and went without providing any clarity about how to reduce the tensions in the euro zone debt market. In fact, it is more likely that meeting injected more uncertainty by delaying the final decision for the Greece aid tranche for at least another month and hinting at a greater investor role for Greece by considering to increase the size of their haircuts.
A modest rally in stocks came as FOMC Chairman Ben Bernanke address congress. Federal Reserve Chairman Ben Bernanke told U.S. lawmakers Tuesday that while the central bank was ready to do more to help a U.S. economy Congress and the White House should take steps to aid a persistently weak recovery. The Chairman urged U.S. lawmakers to do more to help the economy, which would work in tandem with monetary policy to enhance growth. The chairman stated that “Monetary policy can be a powerful tool, but it is not a panacea for the problems currently faced by the U.S. economy”. Stocks later rallied nearly 2% into the close.
Sprint Nextel (S) implied volatility was higher amid heavy trading in the options on the phone company. Shares touched new 52-week lows of $2.25. Meanwhile, 92,000 calls and 29,000 puts traded on Sprint. The top trade is a 10,000-contract block of January 4 puts sold at $1.60. Jan 2.5 calls are the most actives, with 22,216 traded and 85 percent trading at the ask. The flow includes some Jan 2.5 – 4 call spreads, which seems to be bullish trading on the stock. Meanwhile, implied volatility in the options on the stock is rallying 31 percent to 122 and beyond the 52 week highs set Monday.