Retail sales fell by 1.3% in May from April, the Commerce Department reported this morning. Economists surveyed by Bloomberg had projected a 0.8% month over month drop. The month to month drop in retail sales was the first drop in month to month sales since February. Retail sales still grew a very solid 23% year over year as the economy continued its recovery from the pandemic recession of 2020.
As of the close on Monday, June 4, the major stock indexes were treading water waiting to here what, if anything, the Federal Reserve might say after the Wednesday meeting of its interest-rate-setting body, the Open Market Committee. (No one really expects the Fed to actually do anything about the monthly schedule for bond purchases or about changing the benchmark interest rate now set at 0% to 0.25%.) The Standard & Poor’s 500 was up 0.18% but the Dow Jones Industrial Average was off 0.25%. The NASDAQ Composite was up 0.74% but the small cap Russell 2000 was lower by 0.54%.
Yesterday the Standard & Poor’s 500 hit its first new all-time high since early May as investors and traders bought into the reassurance from the Federal Reserve that the 5% year over year increase in the Consumer Price Index was merely a temporary jump in inflation. Today, with the weekend immediately ahead and the June 16 meeting of the Fed’s interest-rate setting Open Market Committee looming on Wednesday, June 16, nobody wanted to get much further ahead of actual news from the central bank.
The CBOE S&P Volatility Index (VIX) dropped 8.9% on Friday, June 4, to 16.44. It’ up just slightly today to 16.73 (up 1.89%) as of 2 p.m. New York time. That’s, in my opinion, an extremely low reading on the fear index considering how many potentially market moving volatility events we’ve got ahead of us over the next six months. (For a list see my Special Report: 5 picks and 5 hedges for a falling market.) So today, June 7, I’m adding another Call Option on the ViX to my Volatility Portfolio.
The U.S. economy added 559,000 jobs in May, the U.S. Labor Department reported this morning. That was well above the 266,000 job additions initially reported for April (revised today to 278,000 for the month). That’s enough to damp worries that the post-vaccine recovery is about to stall. But the May total was well below the 675,000 projected by economists. That’s enough of a miss to allay fears that the economy is about to overheat and that inflation is about to spike. So not too cold and not too hot. Just right.
Employment numbers today suggest that we could get a Goldilocks May job report tomorrow. The ADP Research employment survey said U.S. private employers added 742,000 jobs in May. That’s the most in seven months. But it is slightly below the 850,000 projected by economists surveyed by Bloomberg.
Today’s installment includes one hedge (on the ViX) and one stock pick (Lam Research.) Now if you’ve been following along with the logic that I’ve laid out in this Special Report, you know that stocks face months of potential volatility around the Fed’s June 16 meeting (What will the Fed say about ending its $120 billion in monthly bond purchases?), the August global central bankers confab in Jackson Hole (Will the Fed use the occasion, as it has done in the past, to indicate a coming change in interest rate policy?), the Fed’s September 22 meeting (Will the Fed be content to say nothing with the next “important” meeting not until December?) and then the central bank’s December 15 meeting.) That’s a large number of occasions that could set the stock market to worrying again. And then, of course, there’s OPEC and the price of oil, the battle over the recently announced Biden budget, the continued logjam on infrastructure spending, and fact that the pandemic is still running at full speed in countries such as India (and who knows what the return of cold weather and forced winter “togetherness” will do to infection rates in the developed economies of the northern hemisphere.) At 16.74 on the VIX, you don’t need a panic to produce a profit on higher volatility. The VIX was at 22.18 on May 19. And then there are the even higher VIX levels of 27.59 on May 12, 28.57 on Marcy 4, and 28.89 on February 25.
On May 11, when the Standard & Poor’s 500 was headed for a 2.14% loss on the day, I took a long hard look at selling the downside hedges I own in my Volatility Portfolio. In that portfolio I own a September 17 Put Option on the iShares Russell 2000 ETF (IWM) and two Call Options on the CBOE S&P 500 Volatility Index (VIX) for July 21 and August 18. I came very close to pulling the Sell trigger on one of the VIX calls. (Because the VIX goes up as fear in the market rises (usually on a sell off or worries about an impending sell off, the Call Option on the VIX acts as a Put Option. It will become more valuable as the market falls.) I was in the black on the August 18 Call Option with a strike price of 22 because the Vix had climbed 26.33% on the day to a close of 27.59. I think the decision not to sell was a non-decision. And a mistake. I dithered over it for so long that the market had closed by the time I decided to sell. A sell would have resulted in a profit of 9.2% from my March 23 buy. Not huge but still money. I decided not to sell the iShares Russell September 17 put with a strike price of $215. The ETF would close that day at $218.96 and then drop to a close of $211.75 on May 12. A Sell would have resulted in a gain of 15.6% atom my March 24 buy. Unlike the failure to sell the VIX Call, I don’t think the decision not to sell the IWM Put was a mistake even if it meant foregoing a 15% profit (on a holding period of less than 2 months.) Let me explain.
I’d like to think that the volatility of last week is all over and a thing of the past. But I don’t think it is. This is a transitional market with sentiment moving toward value, cyclical, and post-vaccine stocks and away from technology momentum plays. And it’s also a market trying to figure out how to reprice all assets in light of a potential move to lower stimulus bond-buying and to raise interest rates at some point in the future. These kinds of transitions don’t occur smoothly and I think we can expect more volatility.
In the first quarter the economy grew by 1.6%. That’s equal to an annualized growth rate of 6.4% for U.S. GDP. You don’t have to look hard to find the cause. Consumer spending rose 2.6 percent in the first three months of the year, with a 5.4% increase in spending on goods accounting for most of the growth. Americans increased spending on cars, furniture, recreational vehicles and other long-lasting items, as well as on clothes and food
Over the weekend I posted that I’d be looking at a possible buy of Call Options on the CBOE S&P 500 Volatility Index (VIX) today–depending on how the VIX behaved in the Monday action. Today the VIX regained some of the ground that it gave up last week, closing ahead 1.92% to 1701 after closing at 16.69 on Friday. And I’m going to hold off on buying VIX Call Options until I see the trend in first quarter earnings reports.
The week ahead could well bring even less volatility and even more complacency as we move into what everyone expects to be a stellar earnings season–at least in comparison to the first quarter of 2020
