Turn Up the Volume

As we wind down the dog days of summer, the usual complaints are heard daily about markets:  volatility is low, the markets don’t move, volume is pathetic, the action is too thin to trade.  Well, I can certainly understand the concern, and with a VIX settling in just under 14% for nearly two months, that is indicative of a sleepy market.  We are trained to believe the markets are vulnerable to downside when participants show complacency, and that has certainly been the case since the ‘Brexit’ vote.

What has been truly remarkable about the market rising to new heights is the level of volume, which can be characterized as extremely weak.  Just last week, the Nasdaq 100 clocked in at the lowest volume day ever for a full session, just under 10 million shares traded.  The average level of volume for the biggest indices (SPX, Russell 2K and Dow Industrials has been declining steadily, the 50 day moving average for instance has not had an uptick in several months, and only when the market was declining.

So, the conventional wisdom is that as markets make new highs, more money should be coming in, right?  Not necessarily, and frankly if that were the case it would scare me right out of the markets.  We like to see what is known as a ‘wall of worry’, healthy skepticism that keeps most out of the markets.  If everyone was ‘all in’, there would be nothing left but sellers, and prices would go down as supply started to exceed demand.  The common belief is ‘money chases money’, and that is mostly correct.  However, when the ‘last group’ of buyers steps in then what happens next – a world of hurt.

We like to see high volume surges after big price drops, where players have basically given up.

Back in 1998/99 there was a persistent bid in the markets and into the year 2000.  The Nasdaq was up a staggering 80% over a four month period as money was coming into the markets from all corners of the earth.  Nobody wanted to be left at the altar, but when it was all over there was blood everywhere.  Not many were left standing, and that included short sellers who got blitzed when the markets ran them over (most of them) before the crash ensued.

Lastly, the markets are set up to make most everyone look foolish (or in a bad light).  Following the crowd may feel good at times but it is not how the money is made (generally).  If we find big volume at the highs then watch out below, because a fall is going to happen – fast.

BigTrends.com Weekly Market Outlook – August 29, 2016

Unable to resist the weight of its 9% gain since its late-June low, the S&P 500 (SPX) (SPY) finally started to buckle last week. The index only lost 0.68% for the five-day span, but that was the worst weekly performance since June, and could end up serving as the profit-taking excuse some traders have been waiting for.

We’ll look at the matter in more detail after a closer look at last week’s and this week’s economic numbers. They matter more than usual now, with the prospect of rising interest rates on the table.

Economic Data

The economic news dance card was pretty light last week (though we’ll make up for it this week). In fact, the only items of real interest were last month’s home sales data and a confirmation of the Q2 GDP growth data we heard last month.

As for home sales, new-home sales soared to a multi-year high pace of 654,000 units. Meanwhile, sales of existing homes fell to a pace of 5.39 million. Between the two, overall home sales continue to march forward. Note that home sales may be held back by a sheer lack of inventory. New home inventory fell to a multi-year low of 4.3 months.

New and Existing Home Sales Chart

Source: Thomson Reuters

As for GDP growth, as was calculated with the first round of data, the economy grew by 1.1% last quarter. The data will go through one more revision before it’s set in stone, but it’s not likely to change much if it hasn’t already.

GDP Growth Chart

Source: Thomson Reuters

Everything else is on the following grid:

Economic Calendar

Source: Briefing.com


Weekend Review – VIX Futures and Options – 8/22 – 8/26

VIX rose a whopping 20% last week, although that is a jump off a pretty low base.  This was in response to the S&P 500 dropping only 0.68%.  Note the curve didn’t replicate the VIX move since the futures were already discounting higher volatility.  Stated another way, the steep contango dissipated a bit as spot VIX narrowed the spread with the nearer dated futures.

VIX Table


Weekend Review – Russell 2000 Options and Volatility – 8/22 – 8/26

The Russell 2000 (RUT) widened the 2016 performance lead on the Russell 1000 (RUI) last week.  RUT rose 0.11% while RUI was down 0.67%.  For the year RUT is up 8.99% while RUI is up around 6.17%.  What is sort of missed is the relative performance since February’s lows.  RUT has gained 29.8% while RUI is up only 19.5% since the market bottomed earlier this year.

RUT RUI Performance


Happy VIX-entines Day

The funniest part of my last post was the quote from my last sentence, “…VIX, which I doubt will stay the same every minute from here on out…” because it has basically stayed right where it was at the time of that writing more than a month ago.  Spanning 11-13 that day set the tone for the next month, since that’s all it’s done ever since (with the exception of a toe dipped in 14 yesterday), for the next 25 trading days. (*And excepting today as I’ve been sitting here writing this, seeing the return of the fourteens with a vengeance.)

Loathe I am to write a post in which I don’t have anything interesting to report, but I’ll do it anyway.  Maybe some will find it interesting how uninteresting a job I’ve done when there was fruit ripe for the picking but I somehow didn’t see it.  I can’t hit the ball out of the park every time, and this time I simply swung and missed, so let’s get down to the disappointing details:

To sum up the trades, I did a lot of attempted top-picking in SVXY and came home with a basket full of nothing.  But the trying was fun while it lasted.  I color-coded my basic three trades in the chart above.  Let’s start with the red:


The Weekly Options News Roundup – 8/26/2016

Options Strategy ‘Put’ In Perspective
WSJ.Traders in the S&P 500 Index option pit at CBOE in June.  Photo: Getty Images

Pension funds are increasingly beginning to use the CBOE S&P 500 PutWrite Index (PUT) as an efficient means to garner income while providing a “cushion” from volatility during market downturns. The PUT strategy is designed to sell a sequence of one-month, at-the-money, S&P 500 Index puts and invest cash at one- and three-month Treasury Bill rates.

“In Scramble for Yield, Pension Funds Will Try Almost Anything” – Ben Eisen and Aaron Kuriloff, The Wall Street Journal

For more information on the CBOE S&P 500 PutWrite Index, visit www.cboe.com/PUT.

WHITE PAPER: “An Analysis of Index Option Writing With Monthly and Weekly Rollover”
White Paper Link: http://bit.ly/2cfLjIN 

 VIX FIX: Volatility Making Moves  
Fed Day came and went.  Fed Chair Janet Yellen hinted that a raise in interest rates “has strengthened” in recent months, with a potential hike coming as soon as September.  However, it was further comments later in the day from some of her colleagues about additional future rate hikes that created a strong reaction from the market.   The VIX Index, which had dipped to around 12 in the morning, spiked to near 15 in the afternoon. The next FOMC meeting is September 20-21.  Stay tuned.

“Capstone Bases Bets on Volatility” – Michael Shari, Barron’s

“How Yield Chasers Could Be Pushing Down Volatility” – Jon Sindreu, Wall Street Journal

“Volatility Index has one of its Biggest One-Day Gains Since Brexit” – Fred Imbert, CNBC

“Buy Volatility Ahead of a Jam-Packed ‘Policy Month,’ Says BAML” – Luke Kawa and Blaise Robinson, Bloomberg News

“Focus on VIX Futures Shorts Hides the Real Story” – Saqib Iqbal Ahmed, Reuters

“Stocks: Another Sign the Market is Way Too Quiet” – Ben Levisohn, Barron’s

“It Really is Very Quiet” – David Keohane, Financial Times

“Market’s Tight Range Signal Sharp Move” – Michael Kahn, Barron’s

“Dow Jones Industrial Average Falls; VIX Stages Biggest Jump Since Brexit” – Josh Selway, Schaeffer’s Investment Research

“The Market is About to Get a Serious ‘Shock’” – Bob Bryan, Business Insider

“How to Hedge Against a Potential VIX Pop” – Todd Salamone, Schaeffer’s Investment Research

“VIX Shorts Near Extremes: Time to Protect Your Investments?” – Michael Lebowitz, See It Market.com

“Market Anticipating More Volatility”
Bob Pisani
Air Date: 8/26/16

Earnings Next Week – 8/29 – 9/2

Next week we have a small list, but it’s an interesting one as several of the companies reporting have recently had a big move or just regularly experience a lot of volatility around earnings.  As always the data below is based on the last three years of earnings results unless the ticker is in italics.  The columns show the biggest rally, biggest drop, average move, and what the stock did last quarter in reaction to earnings.


The Buffett Put Trade – 2Q2016 Update

Each quarter Berkshire Hathaway, like all investment firms, files their holdings with the SEC.  Most people scramble to see what stocks Warren Buffett has been adding to his portfolio.  I usually scramble as well, but I’m looking for something hardly discussed in the dozens of pages that make up Berkshire Hathaway’s 10-Q.  I go looking for an update on what I commonly call The Buffett Put Trade.  Back in April I wrote an explanation of what this trade is all about.  You can check that out here A Buffett Put Trade Refresher

The short version is that between 2004 and 2008 Berkshire Hathaway entered into a few dozen over the counter option trades.  They sold at the money puts on four broad based equity market indexes: the S&P 500, FTSE 100, Euro Stoxx 50, and Nikkei 225.  These trades resulted in Berkshire taking in a total of $4.5 billion in premiums.  The chart below shows the monthly performance for each of these indexes since Berkshire began entering into these trades in through the end of the second quarter of 2016.

Buffett Price Charts

Source: Bloomberg 


BigTrends.com Weekly Market Outlook – Tug Of War Continues

For the second week in a row, stocks were content to simply drift sideways…. the result of opposing factors simultaneously weighing on investors’ mind. From one direction stocks are being buoyed by low interest rates that could linger for a while, while from the other direction the market’s high valuations may be keeping a lid on things. The bulls are technically winning the war, but it’s a marginal victory and the tide could turn quite easily.

We’ll weigh the odds in a moment. Let’s first take a closer look at last week’s and this week’s economic announcements, which will set the tone for whatever the market’s got in store.

Economic Data

We got a fair amount of economic news last week, but only three items were of real interest.

The first of those three was Tuesday’s consumer inflation update, rounding out the prior week’s producer price inflation report. Like the PPI figure, the CPI figure was even more tepid than expected, rolling in flat versus forecasts for 0.2% growth. Core CPI was only up 0.1%, versus expectations for 0.2% growth. The annualized versions of the data below indicate a stable if not slumping inflationary environment, meaning the Fed still has time and room to wait on a rate hike.

Inflation Chart


Source: Thomson Reuters

Housing starts were up just a bit, and building permits slowed. Both remain on broad uptrends though.

Housing Starts and Building Permits Chart


Source: Thomson Reuters

Finally, last week’s biggest news was the report on July’s capacity utilization and industrial productivity. Both were up, and by more than expected. This is a much-needed reversal of the capacity utilization downtrend, and a nice rekindling of what had become stagnant productivity.  The correlation between these two data sets and the stock market (and market earnings) is strong, even if only for the long haul.

Industrial Productivity, Capacity Utilization Chart

Source: Thomson Reuters

Everything else is on the following grid:

Economic Calendar


Source: Briefing.com More

Buying a Breakout, Selling Breakdowns

When a stock makes a big breakout or breakdown on some very heavy turnover, it catches the market’s attention. We often feel regret and that we are late to the party, and that if we decide to jump on board then the stock will reverse course. That is the psychological negative of not understanding momentum, for it is at these moments that the best opportunity for gain often lie ahead.

Stocks move over time, often long periods of time – yet our minds constantly think in the moment. This is a divergence that is often costly and closes our minds to great chances to make gains. We look for participation from institutions to support stock prices, for without that sponsorship and liquidity there is little chance for stocks to rise.

Likewise, when a stock gets belted and big money is fleeing, these are often great times to jump on board and ride the stock lower. Distribution is not an event, it happens over time.

Let’s take a look at an example. Sanchez Energy, a small-sized natural gas name broke out recently on very heavy turnover. The one day move on Aug 8 was the biggest in months, at one point up over 33% on the session. It backed away from the highs, nearly tagging the early June highs around 9 bucks. The stock surged so much during that day in such a short period of time it was nearly impossible to catch up to it. The next day saw no follow-through, BUT volume was substantially weaker – indicating strong hands were still holding, and the low from the big surge was not tagged.

The following days saw the stock moving sideways to higher, and this past week has the stock lifting above that intraday high and into levels not seen since April. The stock continues to be strong is not giving back any ground at all.

So, is it too late? As a momentum trader, I would have to say no it is not. And while you may have to hold your nose buying after such a strong price move, let’s remember we don’t care where a stock has been, rather we care where it is going. If buyers are still engaged (remember, institutions move slowly into stocks, not all at once) and demand is strong, then we should see prices continue. The best stocks don’t often give you a chance to get in, Sanchez Energy has barely given you that, but keep an eye on the next modest pullback – it may be your opportunity to catch it before it runs again.

Weekend Review – VIX Futures and Options – 8/15 – 8/19

VIX dropped a little as the equity market did a whole lot of nothing last week.  We retired the August contract on the open Wednesday morning and September took over as the front month.  With time to go to expiration (this is actually a five-week cycle) everyone seemed to notice the steep contango again.  What is interesting below is the behavior of the curve beyond October.  November and beyond gained a little ground despite all the contracts moving up in the pecking order of expirations.

VIX Curve Table


Weekend Review – Russell 2000 Options and Volatility – 8/15 – 8/19

Sometimes I over personify the financial markets and when I saw that the Russell 2000 (RUT) easily extended the lead over the Russell 1000 (RUI) this week an Olympic themed situation popped into my head.  I saw the Russell 2000 as Usain Bolt giving a thumbs up as it easily moved farther ahead of the Russell 1000.  For the week RUT gained 0.60% while RUI was actually down by 0.01% which places the 2016 lead for RUT at just over 2% (8.88% vs. 6.86%).

RUT RUI Performance


The Weekly Options News Roundup – 8/19/2016

The Weekly News Roundup is your weekly recap of CBOE features, options industry news and VIX Index and volatility-related articles from print, broadcast, online and social media outlets.

Markets Get Social Powers
CBOE has partnered with Social Market Analytics (SMA) in the development of a suite of indexes that harness predictive signals from Twitter traffic to generate different “S-Factors” that gauge investor stock sentiment.  On Monday, the CBOE-SMA Large Cap Index (SMLC Index), the first in the series, was launched. The SMLC Index tracks the performance of a hypothetical strategy, which on a daily basis buys an equally weighted portfolio of 25 stocks with higher SMA S-Scores.

“Tweet Trades: CBOE Launches Benchmark Index Based On Social Media Sentiment” – Phil Rosenthal, Chicago Tribune

“CBOE, SMA Launch Social Media Sentiment Indexes” – Joanne Faulkner, Waters Technology

“CBOE Releases Its First Social Media-Based Sentiment Benchmark” – Aziz Abdel-Qader, Finance Magnates

“CBOE Launches First In Series of Social Media-Based Strategy Benchmark Indexes” – Mike Fox, Leap Rate

“New CBOE Indices to Focus On Social Media Metrics” – James Langton, Investment Executive

CFE Receives Singapore’s Seal of Approval
The CBOE Futures Exchange (CFE) recently received approval from the Monetary Authority of Singapore (MAS) designating it as a Registered Market Operator in the country.  This provides investors in that region with more direct access to VIX futures products as hedging tools in portfolios.

“CBOE Gets MAS Nod for VIX Futures” – Julie Aelbrecht, FOW

“CBOE Futures Exchange Granted Registered Market Operator Approval In Singapore” – HedgeWeek

“CBOE Futures Exchange Officially Approved In Singapore” – Mike Fox, LeapRate

VIX FIX: Volatility No Go  
CNBCBlogMarkets are ending the week lower as rumors circle that a September interest rate hike may now be on the table.  Markets have remained within a narrow trading range for most of the month, and as earning season comes to an end, all eyes are on the Fed.  The VIX mirrors this subdued market sentiment, as it failed to breach the 15 level this  month.  As the Fed meeting approaches and the U.S. presidential elections draw close, volatility could awake from its slumber.

“Some Traders Betting Wall Street’s ‘Fear Gauge’ Will Double In a Month” – Akane Otani, Wall Street Journal

“Call Buyers See a Market Plunge In September” – Steven M. Sears, Barron’s

“Investors Grab a Ride On the Fear Gauge” – Dan McCrum, Financial Times

“The Curious Incident of Volatility In Three Months’ Time” – Jon Sindreu, Wall Street Journal

“Don’t Fear the Eerie Calm In U.S. Stocks” – Nir Kaissar, Bloomberg

“Indicator of The Week: Does a Low VIX Mean It’s Time to Buy Options?” – Rocky White, Schaeffer’s Investment Research

“VIX, Volatility ETFs Reveal an Overly Complacent Market” – Max Chen, ETF Trends

“Why Investors Are Ignoring Warnings About Stocks” – Adam Shell, USA Today

“Does the Record-Setting Stock Rally Have Legs?” – John Kimelman, Barron’s

“Dean Curnutt Makes the Case For an Even Lower VIX”
Bloomberg Surveillance
Air Date: August 16, 2016

“Still Seeing Continuation of Sector Trends”
Bob Pisani
CNBC’s Closing Bell
Air Date: Tuesday, August 16, 2016