Schwab Live: Trader’s Outlook for June 23, 2017: Short-Lived Breakout Bows to More Consolidation

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Weekly Market Review:

Earnings Summary

Q1 earnings season is over but the results were impressive. Below are the aggregate results relative to recent quarters.

Quarter EPS beats        Rev beats

Q1 ’17               78%                  63%

Q4 ’16               73%                  53%

Q3 ‘16               72%                  55%

Q2 ‘16               72%                  53%

Q1 ’16               72%                  52%

Q4 ’15               68%                  46%

Q3 ’15               68%                  43%

Q2 ‘15               70%                  48%

Q1 ‘15               68%                  43%

Q4 ‘14               69%                  58%

Q3 ‘14               73%                  60%

Q2 ‘14               67%                  64%                 

Q1 ‘14               68%                  52%

Below are some of the higher profile companies that reported this past week.  

 

Earnings Recap

Symbol            Actual  Estimate

LEN                  0.92      0.78     

ADBE               1.02      0.95

RHT                  0.56      0.53

FDX                 4.25      3.88

KMX                 1.13      0.98

ORCL               0.89      0.78

CCL                  0.52      0.47

BBBY               0.53      0.66

 

Economics Recap

Upside surprises:

  • Existing Home Sales for May: 5.62M vs. 5.52M est
  • New Home Sales for May: 610k vs. 599k est

On Target:

  • Index of Leading Indicators for May: +0.3% vs. +0.3% est

Downside surprises:

  • Weekly Jobless Claims: 241k vs. 240k est

As you can see above, it was a very light week for economic data. While weekly jobless claims ticked up modestly this week, as you can see in the chart below, they remain very close to 44-year lows. The SPX however, might be just a bit ahead of the trend.

Schwab Center for Financial Research

Past performance is no guarantee of future results.

Technicals

The expectation for the week was that the market would trade mostly sideways to modestly lower on moderate profit taking. With the exception of the rally on Monday (6/19) that was pretty much what happened. As you can see in the chart below, following the new all-time high, the SPX immediately went back into a consolidation pattern. With the SPX only able to breakout above the 2440 level for a single day, but being rejected by that level 15 times this month, technical resistance at 2440 remains.

StreetSmart Edge

Past performance is no guarantee of future results.

Option Volumes:

As we approach month-end, June option volume is averaging 17.8M contracts per day. This is just above the May level of 17.2M contracts per day and also above the June 2016 level of 17.2M contracts per day.

Open Interest:

OI Change:

Since June monthly VIX options expired on 6/21 and SPX/SPY options expired on 6/16, all of the weekly changes are negative this week. While I’ve displayed the weekly changes below, I’ve also included the changes since Wednesday (6/21) for VIX and since Monday (6/19) for SPX/SPY.

In reviewing CBOE open interest (OI) data (where >90% of the index activity occurs), I observed the following changes over the past week:

  • VIX call OI was -26.9% (+6.4% since Wednesday)
  • VIX put OI was -38.1% (+9.1% since Wednesday)

While we have only 1 valid trading day since expiration, these data show a slight bullish bias.

In reviewing SPX data for the past week I observed the following:

  • SPX call OI was -25.5% (+5.2% since Monday)
  • SPX put OI was -25.4% (+7.1% since Monday)

Since these data reflect a slight bias to the put side, I see them as moderately bearish for equities.

In reviewing SPY data for the past week I observed the following:

  • SPY call OI was -24.3% (+7.0% since Monday)
  • SPY put OI was -22.0% (+7.1% since Monday)

Since these data reflect virtually no bias to either side, I see them as neutral for equities.

Combining the VIX, SPX and SPY data, I see the Index OI Change as neutral in the near-term. The Equity OI Change shows a small bias to the call side this week, so I see it as moderately bullish in the near-term.

OI Participation:

Index OI Participation is currently +1.7% versus 2016 levels, so I see it as neutral in the long-term.

Equity OI Participation is currently +4.8% versus 2016 levels, so I see it as moderately bullish in the long-term.

Open Interest Put/Call Ratios (OIPCR):

This week the VIX OIPCR is down 5 ticks to .24 versus .29 last week. At this time, VIX options traders are holding (long or short) only 24 puts for every 100 calls on the VIX. This drop while substantial, is being greatly exaggerated by the June monthly VIX option expiration on Wednesday (6/21). This ratio is now at a new 34-month low and well below the 200-day SMA (simple moving average) of .36.

Very low levels in this ratio usually do not result in sharp spikes in the VIX. The last time it was at this level or below was August 2014 and there was no spike in volatility until 2 months later. Therefore I see the VIX OIPCR as just moderately bearishin the very near-term for the markets. I see it as moderately bearish in the long-term.

The SPX OIPCR is up 5 ticks to 2.09 versus 2.04 last week. At this level this ratio is now at a new 18-month high and it is well above the 200-day SMA (simple moving average) of 1.84. With the SPX hitting another record early in the week, it is not surprising that the level of active hedging has increased. As a result, I see the SPX OIPCR as bearish in the near-term for the market. Since this ratio has been trending higher for 2 weeks now, I see it as moderately bearish in the long-term.

This week the normally very stable Equity OIPCR is unchanged at 1.02 this week. Since this ratio remains near the high end of its recent range, I see the Equity OIPCR as still moderately bearish in the near-term for the market. Given that this ratio is still above the 200-day SMA of .99 and it has been in that range for a while, I see it as moderately bearish in the long-term too.

CBOE Volume Put/Call Ratios (VPCR):

The normally volatile CBOE VIX VPCR has been in moderately bearish territory all week. While the .35 reading on Thursday (6/22) was moderately bearish, the current reading of .17 as I’m writing this (mid-day Friday 6/23) is bearish. Since this ratio tends to increase as the day progresses, I see it as moderately bearish in the very near-term.

The CBOESPX VPCR has been decidedly bearish this week. The 1.82 reading on Thursday (6/22) was moderately bearish, but the current reading of 2.32 as I’m writing this (mid-day Friday 6/23) is bearish. Additionally, the volume put/call ratio on Wednesday (6/21) was 2.87, the most put-biased since 8/24/15; a day the SPX dropped 77 points. While these ratios do tend to fall as the day progresses, I see this ratio as bearish in the very near-term. With a 5-day average of 2.01 versus 1.85 last week, it is also bearish in the long-term.

In complete contrast, the CBOEEquity VPCR has been mostly on the bullish side this week. The .50 reading on Thursday (6/22) was moderately bullish but the current reading of .84 as I’m writing this (mid-day Friday 6/23) is moderately bearish. Since intraday levels on equity options tend to decline as the day progresses I see this ratio as neutral in the very near-term. With a 5-day moving average of .61 versus .69 last week, it remains neutral in the long-term.

Since volume based put/call ratios are very reactive and very short-term in nature, near-term usually means just a day or two, while long-term is more like a week.

ISE Retail Sentiment Index (ISEE):

This week the ISEE closed just barely above 100 on Wednesday and Thursday. This is a bit unusual since this is only the 4th time this has happened this year. Unfortunately, market action following the previous 3 occurrences was rather mixed, so this probably doesn’t tell us much. Since this gauge measures only retail opening activity and it is actually a call/put indicator, a level around 100 means that retail option traders on the ISE are trading about an equal number of puts as calls. Given the intraday level at the time of this writing is also 100, I see the ISEE as neutral in the near-term. I see the ISEE as neutral in the long-term.

OCC Volume Put/Call Ratios (VPCR)

The OCC Index VPCR has been moderately bullish, neutral and moderately bearish this week, so I see it as volatile in the near-term. Over the past 3 weeks it has also been mostly moderately negative, so I see it as still moderately bearish in the long-term.

Similarly the OCC Equity VPCR has been both moderately bearish and moderately bullish this week, so I see it as also volatile in the near-term. Longer-term it has been mostly on the moderately bearish side, so I see it as still moderately bearish in the long-term.

Volatility:

VIX Index

As of this writing (mid-day Friday 6/23) the VIX is down fractionally near 10.18. This week the 20-day historical volatility average on the VIX is just 67% versus 102% last week. The VIX has closed below 12 every day for the past month.

At its current level the VIX is about 2 points below its 12-month average of 12.82. Given historical market performance during times when the VIX was in this range, I see the VIX as moderately bullish in the very near-term for the market. I see it as also moderately bullish in the long-term. Long-term for the VIX usually indicates days, not weeks.

This week call prices and put prices have fallen modestly. At +130 versus +156 last week, the VIX IV Gap (the average IV of VIX calls less the average IV of VIX puts) is slightly lower, but it remains in the range of neutral in the very near-term. This ratio is also still neutral in the long-term. Keep in mind, this tends to be one of the earliest indicators I discuss in this blog, and it can also change directions very quickly.

VIX Futures

At the moment, the difference between the sum of the 3rd and 4th month futures and the 1st and 2nd month futures is 3.71 versus 3.50 last week. This modest increase is mostly due to the June monthly contract expiration on Wednesday (6/21).                    

As of this writing (mid-day Friday 6/23), the nearest VIX futures contract (which expires on 6/28) was trading at 10.70, less than a point above spot VIX level of 10.09. Adjusting this price for the risk premium factor (which takes into account the time until expiration), the Risk Premium Adjusted Price (RPAP) is just 10.49, less than half a point above the spot price.

With an adjusted level that is less than half of a point above the spot price of the VIX, futures traders are indicating that they believe the level of the VIX is unlikely to change much in the next few days. Therefore I see VIX futures as neutral in the near-term for the market. The RPAPs of the next two closest monthly futures contracts are 11.08 and 11.07 respectively. With the RPAPs of the further dated contracts both only about a point above the spot VIX, I see VIX futures as neutral in the long-term for the SPX.

Since VIX futures are typically much less reactive to current market conditions than the VIX index, near-term for VIX futures usually means a few days, while long-term means a couple of weeks.

With the VIX still near record lows and little changed this week overall, VIX Hedging Effectiveness remains Poor in the near-term. At the moment, this means that options on the VIX (and possibly other volatility-related products) are showing very little sensitivity to market volatility, and would probably not be very effective as hedging tools in the very near-term. VIX Hedging Effectiveness has also dropped to Poor in the long-term.

VIX Hedging Effectiveness is a manner of measuring the magnitude of VIX moves relative to the magnitude of SPX moves in the opposite direction. When the VIX is highly reactive, VIX related products can serve as potentially effective hedging tools, when the VIX is not very reactive, traditional hedging techniques may be a better choice.

Global Review/Outlook

Europe

UK Prime Minister May, put forth a proposal this week to the European Council, that would allow current EU nationals who have lived in the UK for more than 5 years to remain under a classification of “‘UK settled status”; essentially giving them equal rights to British citizens. This proposal was described by German Chancellor Merkel as "a good start".

Asia

The big news this week for China was Tuesday’s announcement that mid-next year, MSCI (Morgan Stanley Capital International) will gradually begin to include 222 Chinese A-share (Mainland traded) equities in its Global Emerging Markets index. This is something Chinese investment officials had sought for the past 4 years and it was finally approved.

Economic reports for next week:

Mon 6/26

Durable Goods Orders for May – This is a key measure of consumer and industrial spending trends and often causes market swings if it misses estimates.

Tue 6/27

Conference Board Consumer Confidence for Jun – There are several other confidence measures, such as the University of Michigan Consumer Sentiment, and they don’t always agree. Gasoline prices and stock market performance tend to have the biggest impact on these measures.  

Wed 6/28

Pending Home Sales Index for May – This report measures actual contracts signed, whereas existing sales (reported last week) measures actual closings, so this one is slightly more forward looking. This one will usually only affect the market adversely if it comes in very low.

Thu 6/29

Weekly Jobless Claims - For the week ending 6/17/17, claims were up 3k to 241k after being down 7k the prior week. The 4-week moving average now stands at 243k, up 1k from the prior week. With this change, the 4-week moving average is now 9k above the 44-year low hit 16 weeks ago.    

GDP for Q1 – This is the third estimate (Final) for Q1 and since this data is now 3 months old, any revision is likely to be ignored by the markets. You’ll recall that the second (Preliminary) report in Q1 showed +1.2%. 

Fri 6/30

Personal Income & Spending for May – These reports use data from the monthly employment report to gauge income from wages and salaries. Personal income is also sometimes used to forecast future consumer spending.

Personal Consumption Expenditures (Core PCE) for May – PCE includes durable goods and nondurable goods which are directly influenced by the retail sales reports; and services. This is the Fed’s preferred inflation gauge.

Chicago PMI for Jun – This report is a gauge of business conditions within manufacturing and service firms in the Chicago area. A reading above 50 indicates expansion and a reading below 50 indicates contraction.

University of Michigan Consumer Sentiment for Jun – This is the Final report for Sep. At 94.5, the mid-month report was down from the prior month.

Interest Rates

After increasing to about 21% on Monday (6/19), the Fed Funds Futures probability of a September rate hike (the next meeting with a scheduled press conference) has moved back down to 16%; the same level as last week. This came, after Chicago Fed President Charles Evans suggested on Monday evening that the Fed consider reducing its balance sheet in lieu of a September rate hike and then consider a December rate hike instead. This also had the effect of boosting the December probability from 37% to 43%.

Bloomberg L.P.

Past performance is no guarantee of future results.

Outlook:

Since the SPX hit yet another new high on Monday (6/19), I have updated the bull market cycles chart again. As you can see below, the current bull market is now 3023 days long and is +262.7% since it started on 3/10/09. Additionally, it is +3.7% so far in its 9th year (since 3/10/17).

Schwab Center for Financial Research

Past performance is no guarantee of future results.

Bottom Line:

Despite a new SPX high on 6/19, indicators are starting to show warning signs that a potential pullback may be looming.

As you can see below, there were quite a few changes in the sentiment indicators this week, but the overall net effect was simply more disagreement. With a few weeks until Q2 earnings season begins and a relatively light economic calendar next week (except for perhaps Friday’s PCE report) political events are likely to remain center stage again.

The recent one-day SPX high on 6/19 is starting to look like it may have been a technical “blow-off” top, leaving the 2440 resistance line intact. The indications for next week are that it will likely be Moderately Bearish and more Volatile.

Composite Market Sentiment

 

 

Past performance is no guarantee of future results. 

Key:

OI = Open Interest

OIPCR = Open Interest Put/Call Ratio

VPCR = Volume Put/Call Ratio

IV = Implied Volatility

+ means this indicator has changed in a bullish direction from the prior posting.

– means this indicator has changed in a bearish direction from the prior posting.

+/ – means this indicator has changed bi-directionally; i.e. last week was either Volatile, N/A or Breakout.

 

 

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Important Disclosures

Past performance is no guarantee of future results. 

Schwab does not recommend the use of technical analysis as a sole means of investment research. Past performance is no guarantee of future results. Investing involves risks, including loss of principal. Hedging and protective strategies generally involve additional costs and do not assure a profit or guarantee against loss.