Friday Trick or Trend

Trick or trend: Time to put the volatility trade back on as VIX drops below 17 again

Trick or trend: Time to put the volatility trade back on as VIX drops below 17 again

On Friday, August 6, the CBOE S&P 500 Volatility Index (VIX) retreated another 6.54% to 16.15. That puts the “fear index” back in the “complacency zone” where I’ve been looking to buy Call Options on the VIX in anticipation of a bounce back to the top of the current zone at 20 on the next “bad news” day. (Whatever the bad news might be.) This trade, which is not dependent on any call about a bear market or even a market correction but rather on the simple bounce from levels of extreme compliance, recommends buy the Call Option on the VIX when it breaks below !6 and then selling the Call Option when it breaks above 20.

Trick or trend: Options expiration day makes it tough to say what of today’s stock moves mean anything for the longer trend

Trick or trend: Options expiration day makes it tough to say what of today’s stock moves mean anything for the longer trend

Stock volume spiked on a quarterly event known as triple witching, when options and futures on indexes and equities expire. As of 11:45 a.m. in New York, volume on S&P 500 Index stocks was almost 50% above the average for that time of day over the past 30 sessions. The quarterly expiration usually coincides with a rebalancing of benchmarks such as the S&P 500, sparking single-day volumes that rank among the highest of the year. Howard Silverblatt, senior index analyst at S&P, told Bloombertd that the rebalancing in that index alone could force $30 billion of stock trades. More than $2 trillion of S&P 500 options and futures were scheduled to expire Friday, Goldman Sachs estimates. The increased volume today and the jump in volatility for many stocks comes after a extremely calm stretch for the stock market. Measured by the 20-day volatility, the S&P 500’s price swings dwindled to levels not seen since the start of 2020. All this makes it very hard to look at the market reaction to the Fed’s news from Wednesday and today’s price movements and say which indicate a longer-lasting trend in market direction and which are simply a reflection of technical moves by traders closing positions ahead of the expiration or in reaction to the expiration.

Trick or Trend: Will Wednesday’s data show China’s economy slowing in May from April torrid pace?

Trick or Trend: Will Wednesday’s data show China’s economy slowing in May from April torrid pace?

On Wednesday, June 16, China will release its official data on economic indicators such as industrial output and retail sales. The numbers are expected to show a slowing from April’s torrid growth but still a very healthy pace of improvement. Which would be a good thing since an over-heating Chinese economy would be one source of potential global inflation, and especially of commodity price inflation.

Trick or trend: Individual investors buy the dip; Wall Street pros beg to differ

Trick or trend: Individual investors buy the dip; Wall Street pros beg to differ

On Friday, May 14, stocks continued their bounce from the drop in the early part of the week. The Standard & Poor’s 500, for example, gained 1.49% on the day. The technology heavy NASDAq Composite climbed 2.32%. The BIG TECH heavy NASDAQ 100 gained 2.17%. The small cap Russell 2000 picked up 2.47%. Tech stocks rebounded strongly with Apple (AAPL) up 1.98% on the day; Amazon (AMZN) ahead 1.94%; Microsoft (MSFT) higher by 2.11%; and Alphabet (GOOG) gaining 2.40%. But tech stocks weren’t the biggest winners.

Trick or Trend: Today’s jobs report says the post-vaccine economy will take longer to arrive than projected

Trick or Trend: Today’s jobs report says the post-vaccine economy will take longer to arrive than projected

Just in case you need a reminder after a year when the economy slid and slid and the stock market soared and soared, the stock market isn’t the economy. And today’s weak jobs number raises some troubling questions about the speed of the post-vaccine economic recovery. I’d say that today’s jobs report raises three big questions about the economic recovery.

Trick or Trend: The secret message in the first quarter’s 6.4% GDP growth–buy stocks in the service sector for the June quarter

Trick or Trend: The secret message in the first quarter’s 6.4% GDP growth–buy stocks in the service sector for the June quarter

When it comes down to company earnings, we’re seeing a huge lag in revenue growth for companies in the service sector. Wyndham Hotels and Resorts (WH),for example, which reported first quarter results today, April 30, saw revenue fall to $303 million in the first quarter of 2021 from $410 in the first quarter of 2020. But, and I think this is the clear implication of the first quarter GDP numbers, those service companies will close that gap in the June quarter as companies open more services–Disney (DIS) opened its California theme parks today, for example–and consumers feel safer in going to theme parks or restaurants or gyms.

Trick or Trend: Remember this when trading options ahead of an earnings announcement

Trick or Trend: Remember this when trading options ahead of an earnings announcement

It may seen illogical but the time to buy Call Options betting on a better than expected earnings report from Company A, B or C, is well before (two weeks? 10 days?) the earnings report date and the time to sell is before the earnings report itself. The price of an Call Option is likely to fall on the earnings report date even if the company delivers the positive surprise you were hoping for

Trick or Trend: The stock market has a dangerous case of “earnings forecast” hubris right now

Trick or Trend: The stock market has a dangerous case of “earnings forecast” hubris right now

Based on existing analyst forecasts for earnings in all of 2021, the S&P 500 trades at almost 24 times estimates, among its highest valuations ever. To bring the multiple down to its long-term average of 16 times annual profits, companies in the gauge will have to make about 15% more than the equity researchers currently expect them to earn — in 2023.

Trick or trend: Watch the residential real estate sector come September

Trick or trend: Watch the residential real estate sector come September

The Consumer Financial Protection Bureau is warning of a deluge of foreclosures that could hit the housing market in September. As of January more than 2 million borrowers had either postpone their mortgage payments or failed to make them for at least three months, according to the bureau. Government-authorized forbearance plans begin to end in September. That means hundreds of thousands of home owners will need help getting back on track or face foreclosure on their homes.

Trick or trend: The chip shortage is getting worse–just in time for earnings reports in April

Trick or trend: The chip shortage is getting worse–just in time for earnings reports in April

Car makers have put investors on notice that a severe shortage of chips is forcing them to curtail production. Volkswagen, Toyota, and General Motors have all reported halting production due to a shortage of silicon and the companies have suspended forecasts of manufacturing volumes because of the shortage. Volkswagen, for example expects a drop in production of 100,000 cars in the first quarter. Electric car maker Nio has suspended production at its Chinese plant for 5 days due to the shortage. And the shortage looks to be getting worse.