Schwab Live: Trader’s Outlook for March 17, 2017: Equities remain mostly range-bound

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Weekly Market Review:

Earnings Summary

Q4 earnings season is virtually over at this point. With 99% of the companies in the SPX reporting, below are the Q4 aggregate results relative to recent quarters:  

Quarter      EPS beats        Rev beats

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

ORCL               0.69      0.62

DG                   1.49      1.41

ADBE               0.94      0.87

TIF                    1.45      1.38                 

Economics Recap:

Upside surprises:

  • PPI for Feb: +0.3% vs. +0.1% est
  • Core PPI for Feb: +0.3% vs. +0.2% est
  • NAHB Housing Market Index for Mar: 71 vs. 65 est
  • Housing Starts for Feb: 1288k vs. 1264k
  • Index of Leading Indicators for Feb: +0.6% vs. +0.5% est
  • University of Michigan Consumer Sentiment for Mar: 97.6 vs. 96.8 est

On Target:

  • CPI for Feb: +0.1% vs. +0.1% est
  • Core CPPI for Feb: +0.2% vs. +0.2% est
  • Retail Sales for Feb: +0.1% vs. +0.1% est
  • Business Inventories for Jan: +0.3% vs. +0.3% est
  • FOMC Rate Change for Mar: +0.25% vs. +0.25% est
  • Capacity Utilization for Feb: 75.4% vs. 75.4% est

Downside surprises:

  • Building Permits for Feb: 1213k vs. 1268k
  • Weekly Jobless Claims: 241k vs. 240k est
  • Industrial Production for Feb: 0.0% vs. +0.2% est

As you can see above, it was a very heavy week for economic data, and as I’ve been saying in my commentary a lot recently, “Across the economic spectrum, there's almost no data that's not at least moderately positive”. This week’s examples: the NAHB number is at a 12-year high, the year-over-year PPI is at a 3-year high, retail sales while not strong are at least positive, the quarterly average of the Consumer Sentiment number remains very near a 17-year high, and as shown in the chart below, the y/o/y CPI is now at its highest level since March of 2012.

Source: Schwab Center for Financial Research

Past performance is no guarantee of future results.


As you can see in the chart below, though virtually everyone expected the Fed to hike rates by 0.25% on Wednesday (3/15) Chair Yellen’s comments in the press conference following the meeting, were interpreted as less hawkish than some were expecting, and equities rallied. And while the SPX did not breakout to a new high, it is heading that direction. I would not be surprised to see a close above 2400 soon.

Source: StreetSmart Edge®

Past performance is no guarantee of future results.

Option Volumes:

At mid-month, the March option volume was averaging just 16.7M contracts per day. This is below the February level of 17.5M contracts per day but just above the Mar 2016 level of 16.1M contracts per day.

Open Interest:

OI Change:

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 +7.0%
  • VIX put OI was +8.4%

These data have a slight bias to the put side, which would usually be seen as moderately bullish for equities.

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

  • SPX call OI was +3.6%
  • SPX put OI was +3.9%

Since these data show very little bias to the call or put side, they are neutral for equities.

Given the neutral bias of the SPX data and how modest the VIX bias is, I see the combined Index OI Change as neutral in the near-term. The Equity OI Change shows a slight bias to the put side this week, so I see it as moderately bearish in the near-term.

OI Participation:

Index OI Participation is currently +24.9% versus 2016 levels, so I see it as bullish in the long-term.

Equity OI Participation is currently -0.5% 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 unchanged again at .39. At this time, VIX options traders are holding (long or short) 39 puts for every 100 calls on the VIX. The fact that this ratio is unchanged is not too surprising given that the VIX has remained in a rather tight range this week. With the VIX currently around 11, no change in this ratio implies that participants believe the VIX is at about the right level at the moment. This ratio remains below the 200-day SMA (simple moving average) of .41.

With VIX options traders viewing the VIX as fairly valued, I see the VIX OIPCR as neutralin the near-term for the market. Since the general trend has been about sideways for the past 4 weeks, I see it as neutral in the long-term too.

The SPX OIPCR is up 1 tick to 1.85 this week versus 1.84 last week. At this level it remains above the 200-day SMA (simple moving average) of 1.80. With this very small change, traders have mostly maintained the same level of caution over the past week. As a result, I see the SPX OIPCR as neutral in the near-term for the market. Additionally, this ratio has changed very little over the past 7 weeks, so I see it as still neutral in the long-term.

This week the normally very stable Equity OIPCR is up 2 ticks to 1.03, but this is a regular pattern we see almost every month in the days just before the monthly option expiration, which is Friday (3/17). Excluding the increase on Thursday (3/16) this ratio would be unchanged, so I see the Equity OIPCR as neutral in the near-term for the market. Since this ratio is still above the 200-day SMA of .96 I see it as also moderately bearish in the long-term.

CBOE Volume Put/Call Ratios (VPCR):

The normally volatile CBOE VIX VPCR had moved from moderately bearish to moderately bullish this week. The .90 reading on Thursday (3/16) was just barely bullish, but the current reading of .52 as I’m writing this (mid-day Friday 3/17) is neutral. Therefore I see it as neutral in the very near-term.

The CBOESPX VPCR had been mostly neutral this week. The 1.51 reading on Thursday (3/16) was neutral but the current reading of 2.35 as I’m writing this (mid-day Friday 3/17) 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 1.62 versus 1.75 last week, it is moderately bearish in the long-term.

The CBOEEquity VPCR has had a wide variety of readings this week. The .57 reading on Thursday (3/16) was moderately bullish but the current reading of .79 as I’m writing this (mid-day Friday 3/17) is moderately bearish. While intraday levels on equity options tend to decline as the day progresses, I see this ratio as moderately bearish in the very near-term. With a 5-day moving average of .64 versus .62 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):

For the first time since last December, the ISEE closed above 100 for 2 consecutive days on Wednesday (3/15) and Thursday (3/16). While this indicator has been somewhat unreliable as a volatility gauge lately, this pattern has historically been a sign of decreasing volatility. Since this gauge measures only retail opening activity and it is actually a call/put indicator, a level above 100 means that retail option traders on the ISE are trading fewer puts than calls; perhaps a sign that retail investors are becoming slightly more bullish. As a result, I see the ISEE as neutralin the near-term. Additionally, since it has closed above 100 four times since the beginning of March, and very close to 100 a few other times, I see the ISEE as also neutral in the long-term.

OCC Volume Put/Call Ratios (VPCR)

The OCC Index VPCR has been mostly on the bearish side of the line this week and at 1.30, the level on Thursday (3/16) was the highest since 3/2. Therefore I see it as bearish in the near-term. Longer-term it has been a little less bearish but still in that range, so I see it as moderately bearish in the long-term.

By contrast, the OCC Equity VPCR has been becoming more bullish during the week. With Thursday’s read at .74 I see it as moderately bullish in the near-term. This is a relatively recent trend though and the range of readings has been fairly wide over the past 3 weeks, so I see it as volatile in the long-term.


VIX Index

As of this writing (mid-day Friday 3/17) the VIX is fractionally lower around 11 or about half a point above the 31-month low set on 1/27/17. This week the 20-day historical volatility average on the VIX is only 71% versus 73% last week.

At its current level the VIX is still about 4 points below the 12-month average of 15.08. After ticking up a bit before the FOMC meeting, it eased back in the latter half of the week, I see the VIX as still neutral in the very near-term for the market. Still much closer to its 12-month lows than highs, I see the VIX as still moderately bullish in the long-term. Long-term for the VIX usually indicates days, not weeks.

Call and put prices have both been relatively stable this week. At +122 versus +128 last week, the VIX IV Gap (the average IV of VIX calls less the average IV of VIX puts) is relatively unchanged and remains neutral in the very near-term. Since a general narrowing of the price differential between calls and puts has been going on for about 6 weeks now, I see this ratio as 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 4.41 versus 4.14 last week. This increase reflects how the near-term contracts have decreased in the latter part of the week, just slightly more than the further-dated contracts.                  

As of this writing (mid-day Friday 3/17), the nearest VIX futures contract (which expires on 3/22 was trading at 11.69, about half a point above the spot VIX level of 11.14. Adjusting this price for the risk premium factor (which takes into account the time until expiration), the Risk Premium Adjusted Price (RPAP) is 11.50, less than half a point above the spot price.

With an adjusted level that is less than half a point above the spot price of the VIX, futures traders are indicating that they believe the level of the VIX may be about right at the moment. 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 12.15 and 12.46 respectively. With the RPAPs of the further dated contracts just slightly higher, I see VIX futures as moderately bearish 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 moved around only a very small amount, so the VIX Hedging Effectiveness is 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 be ineffective as hedging tools in the very near-term. VIX Hedging Effectiveness is still Poor 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.

Global Review/Outlook


The most pressing issue in Asia this week is the continued nuclear aggression coming from North Korea. Secretary of State Rex Tillerson has been in Asia this week visiting Japan, South Korea and China, and this has certainly been a main topic of discussion. Some have interpreted Tillerson’s comments that the U.S is considering “all options” to mean that a pre-emptive strike against North Korea is not out of the question. Time will tell.


The big news in the Eurozone this week was that the Dutch "Trump" Geert Wilders, lost soundly to the Liberal ruling party, putting up a major speedbump in the global populist movement. Whether or not this will dampen spirits of French populist candidate Marine Le Pen is something we won’t know until the first round of the French presidential election on 4/23. Separately, German Prime Minister Angela Merkel is scheduled to meet President Trump for the first time on Friday (3/17). While the two leaders have criticized each other from a distance, President Trump is usually much more cordial during in-person meetings. It should be interesting to watch.

Economic reports for next week:

Mon 3/20


Tue 3/21


Wed 3/22

Existing Home Sales for Feb – This is a good measure of overall demand in the housing market, because it aggregates completed closings on all single family dwellings, which comprise the largest portion of the housing market. Home buying can imply economic stability, since it is often the largest single investment for any family. It can also lead trends in future durable goods purchases.

Thu 3/23

Weekly Jobless Claims - For the week ending 3/11/17, claims were down 2k to 241k after being up 20k the prior week. The 4-week moving average now stands at 237k, unchanged from the prior week. With this change, the 4-week moving average is now 3k above the 44-year low hit 2 weeks ago.    

New Home Sales Feb – 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.

Fri 3/24

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

Interest Rates

As expected, on Wednesday (3/15) the FOMC increased rates by 0.25%. This should not have surprised anyone since the futures markets had been indicating a 100% probability since 3/8/17. Immediately following the announcement, the Fed Funds Futures forecast a 13% probability of a May rate hike and a 50% probability for June. As you can see in the Bloomberg excerpts below, the May probability still stands at 13% and the June probability (the next meeting with a scheduled press conference) has increased just slightly to 53%.  

Source: Bloomberg L.P.

Past performance is no guarantee of future results.


Last week Friday (3/10) the bull market unofficially reached its 8th anniversary, so I thought it might be appropriate to show how far it has come. Since the last new high was on 3/1/17, the anniversary won’t be official until another new high is reached after 3/10. However, since that only requires the SPX to increase about 0.5% from its current level, I expect that to happen soon. As you can see in the table below, the current bull market is now 98 months (2929 days) old. The 12-month gain is +20.4% and the cumulative gain since it began on 3/10/09 has been +254.2%, making this the 2nd longest and 3rd strongest bull market since WWII.

Source: Schwab Center for Financial Research

Past performance is no guarantee of future results.

Bottom Line:

While the economic calendar is relatively light next week and there is always some risk of a pullback, indications are that any pullback is likely to be fairly shallow and would likely still represent a decent buying opportunity.

As you can see below, the majority of the indicators point to Neutral again for next week. And while the economic calendar is relatively light, with speeches scheduled from at least 7 members of the FOMC, there will be plenty of opportunities for intraday volatility. And of course, short-term traders should continue to be aware of being “trumped” at any time. 



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