Skip to main content

Morning Update

Overnight trading in Europe and Asia has been light with European equities trading flat. The only major news driving trading this morning is a poor preliminary Japanese GDP reading: GDP growth was 0.3% Q/Q versus 0.6% expected and 1.2% last quarter. Also notable is a story out of China that a reserve ratio requirement decrease may have been delayed because current reverse repo activities are seen to be providing enough liquidity.

There will be no major US economic data released Monday, but Tuesday’ schedule includes the PPI, retail sales, and business inventories and Wednesday’s includes the CPI and industrial production. We expect these to be market moving events and could provide a catalyst for moving the market from its consolidation around 1400 in the S&P 500.

Technically the market is at a significant level. Last week the Russell 2000 ($RUT) closed above 800, the S&P 500 ($SPX) closed above 1400, and the NASDAQ Composite ($COMP) closed above 3000. At the same time the Russell 2000 Volatility Index ($RVX) closed below 20 and the S&P 500 Volatility Index ($VIX) closed below 15. RVX has only closed below 20 once since 2007 on a weekly basis and VIX has only closed below 15 four times since 2007 on a weekly basis. Since this is options expiration week we foresee traders taking advantage of this low implied volatility by rolling their portfolio protection forward. This could provide moderate downward pressure on the indices as sellers of out-of-the-money puts sell S&P futures against their short options as a hedge.

Comments

Post a Comment

Popular posts from this blog

Is the KCJ Foreshadowing a 2008 Repeat?

The CBOE Correlation Index (KCJ) is close to the lowest level we have seen since it was first listed in 2007. The KCJ measures the implied movement of the S&P 500 components options, compared to the implied movement of the S&P 500 index options. Simply put, the higher the number, the more likely all stocks are going to move together. Conversely, a low number will be characterized by sector rotation, and flat markets; one sector moves higher, another moves lower.  (Source: Access Hollywood) Correlation, for lack of a better term, is correlated with volatility. Not surprisingly, 30-day S&P 500 historical volatility is near the low level of 6.5%. Currently at 33.5, KCJ is sitting close to rock bottom, lower than where it was in 2007, (but not lower than where Lindsay Lohan was in 2007).  So far this year, the market has been able to grind higher, characterized by leadership in FANG(Facebook Apple/Amazon, Netflix, Google) and sector rotation. A...
Post a Comment
Read more

Morning Update

ECB officials said last night that ECB President Mario Draghi will likely wait to hear Germany’s Constitutional Court’s ruling on the EFSM before publicly unveiling his plans. Many were hoping Draghi would unveil his plan after the ECB’s September 6th meeting, but this is becoming increasingly unlikely. Today Reuters is reporting that Germany is the latest European nation to begin studying the possible impact of a Greek exit from the Euro. This comes ahead of Chancellor Merkel’s meeting with Greece’s Prime Minister today. Merkel has repeatedly said that she would like Greece to remain in the common currency, though clearly someone in Germany believes a Greek exit is possible outcome worth preparing for. This morning US new durable goods orders numbers we released for July, coming in at a gain of 4.2% M/M. Though this was strong than expected, it was primarily driven by strong aircraft sales. Non-defense orders excluding aircraft were down a sharp 3.4% M/M versus a 0.2% decline expecte...
Post a Comment
Read more

Morning Update

Last night rumors that a Spanish bailout would occur in the near future strengthened, tightening Spanish and Italian bond yields to bunds. Even after the rumors that Spain would seek a bailout this weekend we denied risk-on sentiment remained. The Euro is now trading near the psychologically important 1.30 level and US equities are pointing towards a higher open. Yesterday the market also looked strong early on but gave back nearly all of its gains by the close. A strong close higher today will take some momentum back from the bears, while another reversal will only encourage more near-term selling. Yesterday we noticed unusual options activity in Best Buy. Someone sold 22,500 BBY Oct. 19 calls for $0.25 and bought 15,000 Nov. 19 calls for $0.90. This trade appears to be someone rolling their long Oct. calls forward into November. The Nov. calls will turn a profit if the stock is above 19.90 at expiration, which would require a 17% move from yesterday’s close. Best Buy has seen de...
Post a Comment
Read more