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:
Q2 earnings season is mostly over now. With 465 companies (94%) of the S&P 500 reporting, below are the aggregate results relative to recent quarters. As you can see, it has been a very strong quarter.
Quarter EPS beats Rev beats
Q2 ‘18 84% 72%
Q1 ‘18 81% 74%
Q4 ’17 78% 76%
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%
Q4 ‘13 65% 61%
Q3 ‘13 66% 53%
Q2 ‘13 66% 54%
Q1 ‘13 66% 46%
Below are some of the higher profile companies that reported this week.
Symbol Actual Estimate
HD 3.05 2.84
A 0.67 0.63
M 0.70 0.50
CSCO 0.70 0.68
WMT 1.29 1.22
MSG -1.90 -1.99
JCP -0.38 -0.05
AMAT 1.20 1.17
NVDA 1.94 1.85
JWN 0.95 0.85
DE 2.59 2.74
Better than expected:
- NFIB (National Federation of Independent Businesses) Optimism Index for Jul: 107.9 vs. 106.8 est
- Empire Manufacturing Index for Aug: 25.6 vs. 20.0 est
- Nonfarm Productivity for Q2: +2.9% vs. +2.4% est
- Unit Labor Costs for Q2: -0.9% vs. 0.0% est
- Retail Sales for Jul: +0.5% vs. +0.2% est
- Core Retail Sales for Jul: +0.6% vs. +0.3% est
- Weekly (Initial) Jobless Claims: 212k vs.217 k est
- Leading Economic Indicators for Jul: +0.6% vs. +0.5% est
- Import Prices for Jul: 0.0% vs. 0.0% est
- Business Inventories for Jun: +0.1% vs. +0.1% est
- NAHB Housing Market Index for Aug: 67 vs. 67 est
Worse than expected:
- Export Prices for Jul: -0.5% vs. +0.2% est
- Industrial Production for Jul: +0.1% vs. +0.4% est
- Capacity Utilization for Jul: 78.1% vs. 78.3% est
- Housing Starts for Jul: 1168k vs. 1256k est
- Building Permits for Jul: 1311k vs. 1316k est
- University of Michigan Consumer Sentiment for Aug: 95.3 vs. 97.8 est
It was a relatively heavy week for economic data and the results were very mixed. There were several strong reports worth mentioning such as Nonfarm Productivity (which hit a 3½-year high) and Initial Jobless Claims (which remain very near a 48-year low). But this week I’d like to highlight the NFIB Small Business Optimism Index which (as you can see in the Bloomberg chart below) hit a 34-year high.
Despite the ongoing trade disputes with China, Canada, Mexico and the Eurozone, and despite what some large businesses and manufacturers are saying, small businesses have indicated that they have generally not been impacted. According to the US Census Bureau, about half of all people with jobs work for small businesses. Most small businesses are still planning to hire, expand, and invest for further growth; all of which is consistent with the record low trend in initial jobless claims. As I’ve mentioned a few times in recent months, labor shortages are a much bigger problem than a lack of jobs for most companies.
Source: Schwab Center for Financial Research
Past performance is no guarantee of future results.
Last week the indicators pointed to a moderately bearish and volatile week ahead. While the monthly option expiration (8/17) is sometimes at least partially responsible for higher volatility, this week it was likely only a minor factor. With sizeable down days on Monday (8/13) and Wednesday (8/15) and substantial up days on Tuesday (8/14) and Thursday (8/16), that the market was expected to be “a bit more volatile” was indeed an understatement.
Perhaps more importantly, this week was a good reminder that no matter what the indicators are telling us, a single tweet or news story can immediately change the momentum in a very big way. Through Wednesday the markets were behaving as expected until the news broke on Thursday morning that China would be sending a delegation of trade officials to Washington later this month to try to resolve the escalating trade/tariff conflict. That sparked the largest single-day gain in the SPX in over 3 weeks. Indicators can only tell us what traders are doing, and perhaps why they are doing it; they cannot anticipate unexpected news.
That even a modicum of optimism on trade relations could spark such a sharp rally is indicative of the strength of the economy and that these trade conflicts are likely the single largest factor holding the markets back. After this week’s activity, I see no reason to alter my outlook for the long-term, that the SPX will generally progress near the long-term trend (light blue line) and probably hit a new high around the beginning of October; if not before. Keep in mind, as shown by the channel bordered by the pink lines below, since markets tend to move in stair-steps, any time the near-term rally gets too far above (below) the long-term trend, the risk of a pullback (rally) will be present.
Source: Schwab StreetSmart Edge®
Past performance is no guarantee of future results.
At mid-month, August aggregate option industry volume is averaging 19.1M contracts per day. That is above the July level of 17.8M contracts per day and also above the August 2017 level of 17.2M contracts per day.
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 +11.6%
- VIX put OI was +14.3%
Since these data are slightly put-biased, I see them as moderately bullish this week.
In reviewing SPX data for the past week I observed the following:
- SPX call OI was +1.2%
- SPX put OI was +7.2%
Since these data are put-biased, I see them as moderately bearish this week.
In reviewing SPY data for the past week I observed the following:
- SPY call OI was +5.5%
- SPY put OI was +9.1%
Since these data are somewhat put-biased, I see them as moderately bearish this week.
Combining the VIX, SPX and SPY data, I see the Index OI Change as moderately bearish in the near-term. The Equity OI Change shows very little bias this week, so I see it as neutral in the near-term.
Index OI Participation is currently -14.0% versus 2017 levels, so I see it as moderately bearish in the long-term.
Equity OI Participation is currently +2.7% versus 2017 levels, so I see it as neutral in the long-term.
Open Interest Put/Call Ratios (OIPCR):
This week the VIX OIPCR is up 2 ticks to .35 versus .33 last week. At this time, VIX options traders are holding (long or short) 35 puts for every 100 calls. This ratio is now the same as the 200-day SMA (simple moving average) of .35. It is quite surprising that this ratio is up this week despite a very wide intra-day range in the VIX (12.82 – 16.86), and it likely implies that traders are not expecting any VIX increases to be sustained. Therefore I see the VIX OIPCR as moderately bullish in the very near-term for the markets. I see it as still neutral in the long-term.
This week the SPX OIPCR is up 11 ticks to 1.99 versus 1.88 last week. This is a rather sharp increase for a single week and implies that institutional traders (who trade most of the SPX contracts) are actively moving to protect the downside. This is a 5-month high for this ratio and at this level it is now above the 200-day SMA (simple moving average) of 1.94. Therefore I see the SPX OIPCR as bearish in the near-term for the market. Since it has also been rising for about 3 weeks I see it as moderately bearish in the long-term.
The normally very stable Equity OIPCR is down 1 tick this week to .96 versus .97 last week. Since this ratio remains only a few ticks above its lowest level in several months, I see the Equity OIPCR as neutral in the near-term for the market. It remains moderately bullish in the long-term for now.
CBOE Volume Put/Call Ratios (VPCR):
Despite a volatile VIX this week, the normally volatile CBOE VIX VPCR has been surprisingly neutral. The .44 reading on Thursday (8/16) was neutral, but the current reading of .25 as I’m writing this (mid-day Friday 8/17) is bearish. As a result, I see it as moderately bearish in the very near-term.
The CBOE SPX VPCR has been on the bearish side all week. The 1.80 reading on Thursday (8/16) was moderately bearish, and the current reading of 1.78 as I’m writing this (mid-day Friday 8/17) is moderately bearish. While intraday levels tend to decline as the day goes on, I see it as moderately bearish in the very near-term. With a 5-day average of 2.18 versus 1.50 last week, it is also moderately bearish in the long-term.
The CBOE Equity VPCR has been mostly neutral this week. The .60 reading on Thursday (8/16) was neutral, but the current reading of .91 as I’m writing this (mid-day Friday 8/17) 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 .65 versus .64 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):
The ISEE has closed above 100 in all 4 sessions this week. 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 more call than puts. Since it closed at 130 on Thursday (8/16) and the intraday level at the time of this writing is 254, I see the ISEE as bullish in the near-term. Since this ratio has closed above 100 in 11 of the last 13 sessions, I see the ISEE as moderately bullish in the long-term.
OCC Volume Put/Call Ratios (VPCR)
The OCC Index VPCR has been moderately bearish all week. Therefore I see it as moderately bearish in the near-term. It has also been bearish or moderately bearish in 12 of the last 15 sessions, so I see it as also moderately bearish in the long-term.
The OCC Equity VPCR has been pretty much all over the map this week. As a result, I see it as volatile in the near term. Additionally, it has been in a very wide range over the past 3 weeks too, so I see it as also volatile in the long-term.
Cboe Volatility Index (VIX)
As I mentioned in the OIPCR section above, the VIX has been pretty volatile this week. The intra-day top to intra-day bottom range was more than 4 points. However, at the time of this writing, things have settled down quite a bit and once again the VIX is back close to its long-term statistical mode of about 12.50; which I consider “normal’ volatility. The 20-day historical volatility is 120% this week versus 99% last week. Despite a volatile start to the week, at its current level, I see the VIX as still moderately bullish in the very near-term for the market. Now just slightly above its post-February correction lows, I see it as neutral in the long-term.
On a week-over-week basis, VIX call prices have risen and VIX put prices have fallen. At +124 versus +47 last week, the VIX IV Gap (the average IV of VIX calls less the average IV of VIX puts) is quite a bit higher. While earlier in the week it would have been different, at this level it is still neutral in the very near-term. It remains neutral in the long-term too. 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 +2.48 versus +2.73 last week. This slightly lower reading is mostly due to the near-dated contracts increasing in price slightly more than the farther-dated contracts.
As of this writing (mid-day Friday 8/17), the nearest VIX futures contract (which expires on 8/22) was trading at 13.47, more than a half point above the spot VIX level of 12.88. Adjusting this price for the risk premium factor (which takes into account the time until expiration), the Risk Premium Adjusted Price (RPAP) is 13.25, less than a half point, but still above the spot price.
With an adjusted level that is slightly above the spot price of the VIX, futures traders are indicating that they believe the VIX could increase slightly early next week. Therefore I see VIX futures as moderately bearish in the near-term for the market. The RPAPs of the next two closest monthly futures contracts are 13.48 and 13.29 respectively. With the RPAPs of the further dated contracts both only about a half point above the spot price, 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 covering more than a 4 points range this week, the VIX Hedging Effectiveness is now Good in the near-term. At the moment, this means that options on the VIX (and possibly other volatility-related products) are showing at least some sensitivity to market volatility, and might be at least somewhat effective as hedging tools in the very near-term. VIX Hedging Effectiveness is Moderate 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.
Turkey is located in an interesting spot; essentially right between Europe and the Middle East. While not a member of the European Union, Turkey’s currency (lira) problems have taken their toll on several European countries and a handful of European banks with Turkish exposure. The euro currency has fallen about 2.5% against the dollar, and an index that tracks European banks lost about 7% over the past week. As the week progressed however, the lira rebounded a bit as Turkey announced that it won’t implement capital controls, but instead will focus on controlling inflation and reducing the current account deficit. Time will tell whether or not these reforms actually come to pass.
The ongoing trade skirmish with the US has caused some significant damage to the Chinese yuan. Not only has it fallen about 8% against the dollar over the past 3 months, it has pushed the Shanghai Shenzhen stock index into bear market territory. Already in a decline since late January, the broad market index is now -25% below its peak. While a weaker yuan does help offset the impact of US-imposed tariffs to some extent by making Chinese exports cheaper, sharp declines could portend deeper problems. On the plus-side, an announcement on Thursday that the US and China would be back at the negotiating table sometime mid-next week sparked a sharp rally, possibly signaling what could happen to US markets if/when these issues finally get resolved.
Economic reports for next week:
Existing Home Sales for Jul – 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.
Weekly Jobless Claims - For the week ending 8/11/18, claims were down 2k to 212k after being down 5k the prior week. The 4-week moving average now stands at 216k, up 1k from the prior week. With this change, the 4-week moving average is now just 2k above the 48-year low set on 5/12/18.
New Home Sales for Jul – 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.
Durable Goods Orders for Jul – This is a key measure of consumer and industrial spending trends and often causes market swings if it misses estimates.
This was another quiet week for the FOMC and again there were few changes in the Fed Funds Futures. As you can see below, the probability of a 3rd rate hike on September 26th (red box) remains 100%. The probability that the hike will be +0.25% is now 92% (yellow box), versus 94% at this time last week, and the probability that it will be +0.50% is just 8% (green box) versus 6% at this time last week.
Source: Bloomberg L.P.
Past performance is no guarantee of future results.
Earnings and economics are likely to take a back seat to geopolitics again. And while the SPX is now much closer to its longer-term trend, downside risks remain in the short-term.
As I mentioned in the Technicals section above, that the slightest bit of optimism on relations with China could spark such a sharp rally on Thursday (8/16), probably illustrates just how strong the US economy is. Should actual progress (not just rumors of progress) come to pass, the SPX could easily surpass the old high hit on 1/26/18. At 2,873, that target is a mere 30 points (+1.0%) above the current SPX level.
In an almost complete reversal from last week when negative geopolitics (China, Russia, and Turkey specifically) drove volatility higher, this week positive geopolitics (China) brought volatility back down towards normal levels again (see Asia section above).
As you can see below, the past week’s volatility created a very wide range of disagreement among the indicators, but the balance of the shorter-term indicators remains solidly on the negative side. When considering that the economic calendar is light and earnings season is essentially over, the overall outlook for next week remains Moderately Bearish and also likely Volatile; at least for the first half of the week.
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 Volatile, N/A or Breakout.