Schwab Live: Trader’s Outlook for April 21, 2017: Technical resistance stymies equity recovery
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Weekly Market Review:
Q1 earnings season is ramping up nicely, and the results are quite good. With 94 companies (18%) of the S&P 500 having reported so far, below are the aggregate results relative to recent quarters.
Quarter EPS beats Rev beats
Q1 ’17 81% 71%
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.
Symbol Actual Estimate
NFLX 0.40 0.37
UAL 0.41 0.38
UNH 2.37 2.17
JNJ 1.83 1.77
BAC 0.42 0.35
HOG 1.05 1.02
GS 4.23 5.34
KATE 0.05 0.07
LRCX 2.80 2.57
IBM 2.38 2.35
BLK 4.89 4.89
MS 1.01 0.90
ABT 0.48 0.43
CSX 0.51 0.44
AXP 1.34 1.27
EBAY 0.49 0.48
QCOM 1.34 1.19
BK 0.80 0.80
DHI 0.60 0.59
VZ 0.95 0.96
V 0.86 0.79
GE 0.21 0.17
HON 1.66 1.63
- Building Permits for Mar: 1260k vs. 1240k est
- Industrial Production for Mar: +0.5% vs. +0.4% est
- Index of Leading Indicators for Mar: +0.4% vs. +0.3% est
- Existing Home Sales for Mar: 5.71M vs. 5.58M est
- NAHB Housing Market Index for Apr: 68 vs. 70 est
- Housing Starts for Mar: 1215k vs. 1256k est
- Capacity Utilization for Mar: 76.1% vs. 76.2% est
- Weekly Jobless Claims: 244k vs. 242k est
As you can see above, this was a relatively light week for economic data but even those reports that disappointed weren’t too far off the mark. I continue to believe the current soft patch we have seen in economic data will be relatively shallow and brief.
As you can see in the chart below, despite the French elections still to come on Sunday (4/23) the anxiety reflected in last week’s rising VIX index and falling SPX has only partially dissipated. Friday (4/21) is a critical day as the SPX has already closed above the 2351 support line, but it must still break above the 50-day SMA (simple moving average) (yellow line) to end the pullback. If that happens, the pullback will have been less than 3% from the 3/1 high and quite short in duration. If it does not, traders may want to consider waiting for at least two consecutive up days before adding equity exposure.
Source: StreetSmart Edge®
Past performance is no guarantee of future results.
As the April monthly options expiration approaches (on 4/21) option volume is averaging just 16.0M contracts per day. This is just below the March level of 16.8M contracts per day and just below the March 2016 level of 16.1M contracts per day.
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 -27.6%
- VIX put OI was -44.5%
The sharp declines in these data reflect the expiration of the April monthly VIX options on Wednesday (4/19) and are therefore N/A this week. That said, the changes for Thursday’s trades only have a very heavy call bias, which would typically imply a lot of anxiety and are therefore very bearish short-term for equities. I suspect this is probably related to the upcoming French elections on Sunday (4/23).
In reviewing SPX data for the past week I observed the following:
- SPX call OI was +4.4%
- SPX put OI was +3.3%
Since these data reflect very little bias I see them as neutral for equities.
In reviewing SPY data for the past week I observed the following:
- SPY call OI was +5.9%
- SPY put OI was +6.5%
Since these data also reflect very little bias I see them as neutral for equities.
The very heavy call bias in VIX options for Thursday’s session only, combined with a net neutral bias in the SPY and SPX net out to an Index OI Change of moderately bearish in the near-term. The Equity OI Change shows a very slight bias to the put side this week, so I see it as also moderately bearish in the near-term.
Index OI Participation is currently +12.9% versus 2016 levels, so I see it as bullish in the long-term.
Equity OI Participation is currently +3.5% versus 2016 levels, so I see it as neutral in the long-term.
Open Interest Put/Call Ratios (OIPCR):
This week the VIX OIPCR is down 10 ticks to .33 versus .43 last week. At this time, VIX options traders are holding (long or short) only 33 puts for every 100 calls on the VIX. The fact that this ratio is down sharply, even following the April contract expiration, indicates that participants are actively hedging ahead of an event, and that event is likely the first round of the French elections on Sunday (4/23). This ratio is now at a 3-month low and it is well below the 200-day SMA (simple moving average) of .40. For comparison purposes, it hit a low of .29 just before the US elections last November and .36 just before the Brexit referendum last June.
While the VIX has come down nearly 2 full points from where it peaked intraday on Monday (4/17) participants are clearly concerned that a surprise in the French elections could result in another volatility spike. Therefore I see the VIX OIPCR as bearishin the very near-term for the markets. Since the general trend of this ratio prior to the April expiration had been modestly higher for the past 6 weeks, I see it as still moderately bullish in the long-term.
The SPX OIPCR is unchanged at 1.95 this week. At this level it remains well above the 200-day SMA (simple moving average) of 1.82. With no change this week, traders have not increased hedging in the SPX index, despite the VIX hedging mentioned above. This implies that while a spike in volatility might be expected, a large downturn in the SPX is not. As a result, I see the SPX OIPCR as neutral in the near-term for the market. Additionally, this ratio has been moving mostly sideways for the past 4 weeks now, so I see it as still neutral in the long-term.
This week the normally very stable Equity OIPCR is up 1 tick to 1.01 versus 1.00 last week. At this level, this ratio remains about where it has been for a large part of the last 4 weeks. A slight uptick just before the monthly expiration is also not uncommon in this ratio, so I see the Equity OIPCR as neutral in the near-term for the market. While this ratio is still above the 200-day SMA of .97, is has been quite stable, so I see it as still neutral in the long-term.
CBOE Volume Put/Call Ratios (VPCR):
The normally volatile CBOE VIX VPCR had been in bearish territory this week. The .29 reading on Thursday (4/20) was bearish, but the current reading of .49 as I’m writing this (mid-day Friday 4/21) is neutral. While this ratio has moderated, even placing more weight on the intraday level puts it in the category of moderately bearish in the very near-term.
The CBOESPX VPCR has provided a wide variety of readings this week. The 1.52 reading on Thursday (4/20) was neutral but the current reading of 2.39 as I’m writing this (mid-day Friday 4/21) is quite bearish. Putting more weight on the most recent data, I see this ratio as bearish in the very near-term. With a 5-day average of 1.52 versus 1.90 last week, it is neutral in the long-term.
By contrast, the CBOEEquity VPCR had been completely neutral all week. The .68 reading on Thursday (4/20) was neutral but the current reading of 1.06 as I’m writing this (mid-day Friday 4/21) is bearish. While intraday levels on equity options tend to decline as the day progresses I would be surprised to see this ratio fall below .73, which is the threshold for getting into neutral territory. Therefore, I see this ratio as moderately bearish in the very near-term. With a 5-day moving average of .62 versus .57 last week, it is 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):
While it closed just above 100 on Monday (4/17) the ISEE closed below 100 in each of the last 3 sessions. Additionally, as of this writing (mid-day Friday 4/21) it is well below 100. Since this gauge measures only retail opening activity and it is actually a call/put indicator, a level below 100 means that retail option traders on the ISE are trading fewer calls than puts. Given the current trend, I see the ISEE as moderately bearishin the near-term. Since this index has closed below 100 in 8 of the last 9 sessions, I see the ISEE as volatile in the long-term.
OCC Volume Put/Call Ratios (VPCR)
The OCC Index VPCR has been surprisingly in modestly bullish territory this week, and with Thursday’s close of .87 I see it as moderately bullish in the near-term. Longer-term it has been neutral to moderately bullish in 10 of the last 12 sessions, so I see it as neutral in the long-term.
By contrast, the OCC Equity VPCR has moved from moderately to fully bearish this week. With Thursday’s read at 1.01 I see it as bearish in the near-term. It has also been mostly in moderately bearish territory over the past 3 weeks, so I see it as moderately bearish in the long-term.
As of this writing (mid-day Friday 4/21) the VIX is up about half a point near 15. This week the 20-day historical volatility average on the VIX is 86% versus 79% last week. While the VIX had been down more than 2 full points earlier in the week, it has ticked back up as option expiration and the French elections neared.
At its current level the VIX is still about 2 points above its YTD average and more than a point above its 12-month average of 13.67. As a result, I see the VIX as moderately bearish in the very near-term for the market. While the VIX has been somewhat elevated for the past 9 sessions, I see it as still neutral in the long-term. Long-term for the VIX usually indicates days, not weeks.
Interestingly enough, call prices have come down slightly and put prices have moved mostly sideways this week. At -52 versus -50 last week, the VIX IV Gap (the average IV of VIX calls less the average IV of VIX puts) is little changed. Contrary to many of the other indicators, when this gap is positive it is bullish in the very near-term. Since this general narrowing of the price differential between calls and puts has lasted almost 2 weeks now, I see this ratio as moderately bullish 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.
At the moment, the difference between the sum of the 3rd and 4th month futures and the 1st and 2nd month futures is 1.71 versus -0.38 last week. This increase reflects not only the expiration of the April VIX contract on Wednesday (4/19) but also how much lower the May contract is priced than the April.
As of this writing (mid-day Friday 4/21), the nearest VIX futures contract (which expires on 4/26) was trading at 14.00, not quite a point below the spot VIX level of 14.73. Adjusting this price for the risk premium factor (which takes into account the time until expiration), the Risk Premium Adjusted Price (RPAP) is 13.73, about a point below the spot price.
With an adjusted level that is a point below the spot price of the VIX, futures traders are indicating that they believe the level of the VIX could drop in the next few days. Therefore I see VIX futures as moderately bullish in the near-term for the market. The RPAPs of the next two closest monthly futures contracts are 13.30 and 12.34 respectively. With the RPAPs of the further dated contracts also trending lower, it appears that the futures traders expect volatility to continue to trend lower. Therefore I see VIX futures as moderately bullish 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.
This week volatility has been moving a little more than we’ve seen recently, perhaps due to geopolitical events. AS a result, the VIX Hedging Effectiveness is back to Moderate in the near-term. At the moment, this means that options on the VIX (and possibly other volatility-related products) are showing some sensitivity to market volatility, and would probably be at least somewhat effective as hedging tools in the very near-term. VIX Hedging Effectiveness is also Moderate in the long-term too.
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.
The rise in government and corporate bond yields in China has led some to predict that liquidity problems are likely in the near future. In Japan, the Yen has continued to strengthen against the Dollar, now hitting its highest levels since November 2016. The latest news from North Korea is that China has its missile-capable bombers and “high alert” in an effort to show the US it is ready to respond immediately to any hostile actions from North Korea.
The big news in Europe this week was British Prime Minister Theresa May’s call for an early election on June 8. She reportedly wants to ensure political stability in Britain while Brexit negotiations are ongoing over the next two years, and feels this is the best way for that to happen. Additionally, the much anticipated first round of the French elections will occur on Sunday (4/23) and is at least partly responsible for the uptick in volatility and edgy markets we’ve seen in the past 2 weeks.
Economic reports for next week:
Case-Shiller Home Price Index for Feb – This index measures the change in the average prices of single-family, residential real estate across a broad section of 20 major cities in the US.
New Home Sales for Mar – This report measures sales activity of newly constructed homes and other single family dwellings, and is generally considered less important than building permits since it is more of a trailing report.
Conference Board Consumer Confidence for Apr – 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.
Durable Goods Orders for Mar – This is a key measure of consumer and industrial spending trends and often causes market swings if it misses estimates.
Weekly Jobless Claims - For the week ending 4/15/17, claims were up 10k to 244k after being down 1k the prior week. The 4-week moving average now stands at 243k, down 4k from the prior week. With this change, the 4-week moving average is now 9k above the 44-year low hit 8 weeks ago.
Pending Home Sales Index for Mar – 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.
GDP for Q1 – This is the first estimate (Advance) for Q1 and the consensus seems to be in the range of +0.5%, which would be well below the +2.1% final for Q4 and even less than the +0.8% for Q1 2015.
Employment Cost Index for Q1 – This is a measure of payroll compensation costs, which is typically the largest cost of doing business. Wage inflation is important because of its potential impact on profit margins. Wages tend to rise when labor demand exceeds labor supply.
Chicago PMI for Apr – 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 Apr – This is the Final report for Apr. At 98.0, the mid-month report was up from 96.9 at the end of March.
The odds of a June rate hike decreased from 66% on Wednesday (4/5), to just 44% on Wednesday (4/19) following weaker than expected CPI and PPI reports that week. As you can see below, this week they have picked back up a bit, but still not to where they were 3 weeks ago. A key report that will likely result in a large increase or decrease will be the Core PCE (Personal Consumption Expenditures) report which is due next week Monday (5/1), as that is the inflation gauge most watched by Fed Chair Janet Yellen.
Source: Bloomberg L.P.
There are two key market moving events looming on the horizon that traders should keep an eye on next week. The first round of the French Presidential elections on Sunday 4/23), in which a strong showing by populist candidate Marine Le Pen, could cause volatility spikes in Europe and the US. While the French election process is different than the process in the US, this event is likely to impact the overnight futures before the open on Monday morning (4/24). Additionally, the first look at Q1 GDP on Friday (4/28), which could be as low as +0.5%; that would be the weakest quarter in 3 years. While there is a historical pattern for Q1 to be the weakest of the year and also subject to higher revisions, a result that weak will likely cause a negative reaction in the market before the open on Friday, and bring President Trump’s highly optimistic GDP growth forecasts into question again.
While encouraging comments on tax reform from Treasury Secretary Steven Mnuchin, combined with news that a new healthcare reform bill may be in the works lifted markets on Thursday (4/20), optimism quickly waned on Friday as reality came back to the forefront. Next week could be another bumpy ride.
As you can see below, the majority of the changes in the indicators were in a negative direction this week, and with 9 of them on the short-term side in the purple, the consensus for next week is Moderately Bearish. Additionally, with a few indicators on the bullish side, the VIX rising and many of the put/call ratios turning more cautious ahead of the French elections on Sunday, I think a secondary outlook of Volatile is warranted. I expect the two most volatile periods to be the open on Monday and the open on Friday (due to the Q1 GDP report).
Past performance is no guarantee of future results.
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 N/A or Breakout.
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