Download the Schwab app from iTunes®Get the AppClose

  • Find a branch
To expand the menu panel use the down arrow key. Use Tab to navigate through submenu items.

Trader’s Outlook for February 23, 2018: A healthy pause in the recovery

Follow me on Twitter @RandyAFrederick. I’ll tweet interesting observations about volatility, put/call ratios, technical signals, economics, option block trades and other unusual activity.

Weekly Market Review:

Earnings Summary

Q4 earnings season is nearly over now. With 451 companies (90%) of the S&P 500 having reported so far, below are the aggregate results relative to recent quarters.

Quarter            EPS beats        Rev beats

Q4 ’17              78%                 77%    

Q3 ’17              78%                 68%    

Q2 ‘17              77%                 69%

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

MOS                0.34      0.28

HD                   1.69      1.63

WMT                1.33      1.37

NBL                  0.32      0.04

DPZ                 1.09      1.95

MGM                0.11      0.09

WAB                0.90      0.91

DISH                0.53      0.57

AAP                 0.77      0.63

CAR                 0.45      0.21

HPE                 0.34      0.22                             

Economics Recap

Better than expected:

  • Weekly (Initial) Jobless Claims: 222k vs. 233k est
  • Index of Leading Indicators for Jan: +1.0% vs. +0.8% est

On Target:

  • None

Worse than expected:

  • Existing Home Sales for Jan: 5.38M vs. 5.62M est

It was a very light week for economic data. Most notable (as shown below) was that the Weekly Jobless Claims, which ticked up slightly last week, were back down; and very near record lows again.

Source: Schwab Center for Financial Research

Past performance is no guarantee of future results.

Technicals

As I mentioned last week, “My main concern now is that perhaps the rebound is going too well. If this recovery doesn’t slow down, at the current trajectory the SPX will be back to record highs by March. If that happens, it could become vulnerable to another correction.” If you think the +19.4% gain in the SPX in 2017 was stellar, if the SPX were to continue on the same trajectory it was on for the first 4 weeks of the year, or during the first week of the correction recover, it would be on pace to gain +65% in 2018; that is simply unsustainable.   

Last week I pointed out how the $SPX correction found support very close to the 200-day Simple Moving Average (SMA) and the first few days of the recovery it found support near the 100-day SMA. Now that the rebound has slowed down a bit, it appears that the consolidation is occurring around the 50-day SMA.

Source: StreetSmart Edge®

Past performance is no guarantee of future results.

Option Volumes:

Following the correction, trading activity has settled down a bit. Aggregate option industry volume is now averaging 26.4M contracts per day. That is still above the January level of 22.8M contracts per day and well above the February 2017 level of 17.5M contracts per day.

Open Interest:

OI Change:

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

  • VIX call OI was +6.9%
  • VIX put OI was +11.3%

These data show a moderate bias to the put side, so I see them as moderately bullish this week.

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

  • SPX call OI was -9.3%
  • SPX put OI was -7.5%

These decreases are due to the February monthly contract expiration on Friday 2/16, so they are N/A this week. As a result, I also looked at only the changes since Tuesday (2/20) and observed the following:

  • SPX call OI was -0.8%
  • SPX put OI was +1.1%

These data show a modest put bias, so I see them as moderately bearish this week.

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

  • SPY call OI was -25.1%
  • SPY put OI was -14.8%

These decreases are also due to the February monthly contract expiration on Friday 2/16, so they are N/A this week. As a result, I also looked at only the changes since Tuesday (2/20) and observed the following:

  • SPY call OI was -2.3%
  • SPY put OI was +3.6%

These data show a modest put bias, so I see them as moderately bearish this week.

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 slight 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 +20.7% versus 2017 levels, so I see it as bullish in the long-term.

Equity OI Participation is currently +14.6% versus 2017 levels, so I see it as bullish in the long-term.

Open Interest Put/Call Ratios (OIPCR):

This week the VIX OIPCR is unchanged at .45 versus .45 last week. At this time, VIX options traders are holding (long or short) 45 puts for every 100 calls on the VIX. This ratio remains well above the 200-day SMA (simple moving average) of .28. This elevated level is not surprising given that the VIX has fallen less than a full point this week, and it probably implies that participants are still expecting it to fall further. Therefore I see the VIX OIPCR as moderately bullish in the very near-term for the markets. This ratio has been climbing for about 5 weeks now, so I see it as moderately bullish in the long-term.

The SPX OIPCR is up 3 ticks to 1.95 versus 1.92 last week. This small uptick is a bit surprising given that the SPX has fallen nearly 30 points this week, and it may be implying that participants are comfortable with the consolidation. Still, at this level this ratio remains well below the 200-day SMA (simple moving average) of 2.05. Therefore, I see the SPX OIPCR as only neutral in the near-term for the market. Since this ratio has been moving mostly sideways for 3 weeks, I see it as neutral in the long-term.

The normally very stable Equity OIPCR is unchanged at .97 versus .97 last week. This unchanged reading implies that equity option traders have pretty much maintained (but not increased) hedging positions (i.e. long puts). I see the Equity OIPCR as neutral in the near-term for the market. It is still neutral in the long-term.

CBOE Volume Put/Call Ratios (VPCR):

The normally volatile CBOE VIX VPCR has been mostly neutral this week. The .57 reading on Thursday (2/22) was neutral, and the current reading of .78 as I’m writing this (mid-day Friday 2/23) is also neutral. Therefore I see it as neutral in the very near-term.

The CBOE SPX VPCR has been moderately bearish this week. The 1.80 reading on Thursday (2/22) was moderately bearish but the current reading of 2.05 as I’m writing this (mid-day Friday 2/23) is moderately bearish. While this ratio tends to fall as the day progresses it is unlikely to fall enough, so I see it as moderately bearish in the very near-term. With a 5-day average of 1.70 versus 1.62 last week, it is moderately bearish in the long-term.

The CBOE Equity VPCR has been mostly neutral this week. The .63 reading on Thursday (2/22) was neutral but the current reading of .85 as I’m writing this (mid-day Friday 2/23) is moderately bearish. While intraday levels on equity options tend to decline as the day progresses, I see it as moderately bearish in the very near-term. With a 5-day moving average of .60 versus .62 last week, it is also 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 has been mostly 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 more puts than calls. But with an intraday level at the time of this writing of 78, I see the ISEE as moderately bearish in the near-term. Since this ratio has closed below 100 in 11 of the last 15 sessions, I see the ISEE as moderately bearish in the long-term.

OCC Volume Put/Call Ratios (VPCR)

This week the OCC Index VPCR has been mostly moderately bearish, so I see it as moderately bearish in the near-term. It has been moderately bearish in 7 of the last 9 sessions too, so I see it as moderately bearish in the long-term.

Likewise, this week the OCC Equity VPCR has also been mostly moderately bearish, so I see it as also moderately bearish in the near-term. However, unlike the index ratio, it has been all over the place over the past few weeks, I see it as still volatile in the long-term.

Volatility:

CBOE Volatility Index (VIX)

While intraday volatility has calmed down just a bit this week, the VIX index has drifted only modestly lower; down less than a full point over the first 3 sessions of the week. This week, the 20-day historical volatility average remains very elevated at 354% versus 351% last week. As of this writing (mid-day Friday 2/23) the VIX is down 0.80 to around 17.40. While the VIX has fallen over 18 points in the past 2 weeks, it is still well above its pre-correction lows, and at this level I see the VIX as still moderately bearish in the very near-term for the market. For now, it remains volatile in the long-term.

On a week-over-week basis, VIX call prices have risen modestly, while put prices have fallen modestly, which implies that participants may not be expecting the VIX to fall much further. At +7 versus -70 last week, the VIX IV Gap (the average IV of VIX calls less the average IV of VIX puts) is up a bit but at this level remains moderately bullish in the very near-term. I see it as now 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 -0.79 versus -0.55 last week. This very modest increase is due to the flattening in the backwardation of the futures contracts as they head back towards their normal contango state. Backwardation means VIX futures prices are lower in the distant months than in the nearest month. This is uncommon and typically only occurs when there is a very sharp spike in near-term volatility.                 

As of this writing (mid-day Friday 2/23), the nearest VIX futures contract (which expires on 2/27) was trading at 17.60, very close to the spot VIX level of 17.40. Adjusting this price for the risk premium factor (which takes into account the time until expiration), the Risk Premium Adjusted Price (RPAP) is 17.32, just below the spot price.

With an adjusted level that is just below the spot price of the VIX, futures traders are indicating that they believe the VIX is likely to stay pretty close to its current level over the next few trading 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 16.32 and 15.27 respectively. With the RPAPs of the further dated contracts both below the spot VIX, 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.

With the VIX back down and the SPX back up this week, the VIX Hedging Effectiveness is Good in the near-term. At the moment, this means that options on the VIX (and possibly other volatility-related products) are showing moderate sensitivity to market volatility, and might be effective as hedging tools in the very near-term. VIX Hedging Effectiveness is Good 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

The French Finance Authority said this week that derivatives on cryptocurrencies fall under the authority of the recently enacted MiFID II regulations and will soon face tough new leverage caps, reporting and conduct standards across Europe. Separately, minutes of the January ECB (European Central Bank) meeting showed a slightly more hawkish tone, leading to renewed speculation about when monetary easing may cease.

Asia

After a week’s long holiday, Chinese equity markets rebounded on higher inflation expectations and a slightly weaker yuan. Separately, Chinese trade officials said they would retaliate if tariffs proposed by Commerce Secretary Wilbur Ross, on steel and aluminum imported to the US, are imposed. The 24% tariff was originally proposed by American steel companies and President Trump has indicated he supports it.

Economic reports for next week:

Mon 2/26

New Home Sales for Jan – 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.

Tue 2/27

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

Conference Board Consumer Confidence for Feb – 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 2/28

GDP for Q4 – This is the second estimate (Preliminary) for Q4 and the consensus seems to be that GDP will be downgraded to about +2.5%. You’ll recall that the first (Advance) report in Q1 showed +2.6%. 

Chicago PMI for FebThis 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.

Pending Home Sales Index for Jan – 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 3/1

Personal Income & Spending for JanThese 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 Jan – 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.

Weekly Jobless Claims - For the week ending 2/17/18, claims were down 7k to 222k after being up 6k the prior week. The 4-week moving average now stands at 226k, down 2k from the prior week. With this change, the 4-week moving average is now just 1k above the 44-year low set on 2/3/18.  

ISM Manufacturing Index for Feb - The Institute of Supply Management (ISM) Manufacturing Index tracks economic data from companies in the manufacturing sector. An increasing value is usually perceived as bullish for equities because it implies that profits in the manufacturing sector are on the rise.  

Construction Spending for Jan – Construction spending measures new overall construction activity. This report can predict future activity in housing and commodities, which can be a sign of economic growth.

Fri 3/2

University of Michigan Consumer Sentiment for Feb – This is the Final report for Feb. At 99.9, the mid-month report was up sharply from 95.7 the prior month.

Interest Rates

Interest rates rose and equity markets sold off a bit on Wednesday (2/21) following the release of the minutes from the Fed’s January meeting, but both recovered again on Thursday (2/22). While already at 100% for March, the outlook for interest rates increased modestly for the later meetings (as shown by the green boxes). The probability of a June rate hike remained at about 60%, but it increased from 35% to 36% for September and from 20% to about 22% for December. Interestingly though, the probability that the Fed will hike rates by 0.5% instead of just 0.25% on March 21st (red box) held steady at about 12% this week.

Note that each of these probabilities assumes that a hike occurred at the previous one, so if any of the hikes don’t occur, the probability of a hike at the next meeting typically goes up substantially.

.Source: Bloomberg L.P.

Past performance is no guarantee of future results.

Outlook:

Last week I stated, “…the market looks like it could be back to new highs by October”. My main concern now is that perhaps the rebound is going too well. If this recovery doesn’t slow down, at the current trajectory the SPX will be back to record highs by March. If that happens, it could become vulnerable to another correction.

Bottom Line:

While the volatility has settled down a bit this week, it is nowhere near levels we saw before the correction. Despite the nearly 6% rebound in the SPX, risks remain historically elevated and the possibility that the rebound has been a bit too quick is growing. Given there were more downgrades than upgrades within the indicators, but still a lot of disagreement, the outlook for next week is Neutral overall, but also likely still Volatile. Remember, volatile means big swings should still be expected in either direction; so stay alert.  

Source: Schwab Center for Financial Research

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.

Schwab has tools to help you mentally prepare for trading

Learn more >

Talk trading with a Schwab specialist anytime.
 
Call 888-245-6864
M-F, 8:30am - 9:00pm EST

Get 500 Commission-Free Online Equity and Options Trades for Two Years

Learn More >

(0218-8E7E)

Thumbs up / down votes are submitted voluntarily by readers and are not meant to suggest the future performance or suitability of any account type, product or service for any particular reader and may not be representative of the experience of other readers. When displayed, thumbs up / down vote counts represent whether people found the content helpful or not helpful and are not intended as a testimonial. Any written feedback or comments collected on this page will not be published. Charles Schwab & Co., Inc. may in its sole discretion re-set the vote count to zero, remove votes appearing to be generated by robots or scripts, or remove the modules used to collect feedback and votes.