Skip to main content

Morning Update

Overnight trading saw a risk-off environment as headlines showed Europe has fallen into another recession, their second in four years. This news should not surprise anyone. What is most concerning is that October Eurozone CPI came in at 2.5%, suggesting the Eurozone could be entering a period of stagflation. In Japan the opposition leader called for unlimited BOJ easing, which has caused heavy Yen selling against all major currencies. In the US this morning the October CPI was reported in-line with expectations at a 0.1 M/M increase. Jobless claims, however, were well above expectations for 361K, coming in a 439K. This is likely a distortion in the data caused by hurricane Sandy and the S&P 500 futures are little changed after the data release.

Yesterday October retail sales data showed a seasonally adjusted decline of 0.3% versus expectations of a 0.1% decline. This was the largest drop since June and followed a strong 1.1% advance in September. The SPDR S&P Retail ETF, XRT, sold off 1.2% yesterday, which was in line with the S&P 500’s decline. XRT saw heavy option trading yesterday as traders rushed to buy puts, sending XRT’s put/call ratio to 50.6 for the day. The biggest trade of the day was the purchase of 23000 Dec. 60 puts for $1.67 and the sale of 23000 Dec. 56 puts for $0.49. This is known as a bear put spread and will profit if XRT is below 58.82 at December expiration. Traders use these spreads when they are bearish on a stock and sell a further out of the money put in order to subsidize the purchase of a closer to the money put. This decreases the total premium paid, which reduces risk, but also limits profits. If XRT is below 56 at expiration this spread will realize its full value of $4.00 and return a profit of $2.82 or 239% return on risk.

Digging into the numbers of the retail sales report reveals some concerns, which is why traders bought so many puts yesterday. The only sectors that saw a meaningful increase in sales were service stations and grocery stores. Auto dealerships saw a 1.5% month over month decline, the largest drop in a year. Service station gasoline sales jumped 1.4% last month, which, if omitted, mean retail sales fell an even sharper 0.5% last month. Grocery store sales were likely up as a result of Hurricane Sandy and do not represent real demand or growth. Sales that I would have expected to be up because of the storm, such as home improvement stores, actually declined. This report was clearly affected by the storm, which has increased the volatility in recent economic data. Retail sales reports are typically volatile to begin with, and it is not uncommon for large increases to be followed by declines. Therefore I am not getting short the retail sector, but I do feel that long stock positions should be protected by puts or put spreads. There is no denying that this was a poor report and that could lead to more selling in the coming days.

Comments

Popular posts from this blog

Wake Me Up When September Ends

The fiscal year for the U.S. Government ends September 30th, 2017. Which is something market participants could care less about if not for, sometime near that date, Congress needs to raise the debt ceiling. Missing that deadline would result in a self-inflicted financial wound that would send shock-waves throughout global markets.  The U.S. Government has been paying off debt since the Andrew Jackson administration without missing a single payment. Raising the debt ceiling is a routine vote.

In fact, with the polarized Washington we have seen in recent years, it is happening a lot more frequently, as Congress has only once passed a budget in the past eight years. In lieu of a budget, Congress passes what is known as a continuing resolution.  A continuing resolution is a type of legislation in which Congress decides to let last year’s budget continue as this year’s budget. Nevertheless, a continuing resolution is incomplete, as it does not allow for the government to spend the money a…

I would like to bet ten tens on the tenth horse in the tenth race, please.

"I would like to bet ten tens on the tenth horse in the tenth race, please."


Last summer, on a warm cloudy day June 11, 2016 in Elmont New York, a good friend of mine (Rob) confidently walked up to the cashier at Belmont and spoke those famous words.  Ten Tens on Ten in the Tenth Race.  In fact, it had been decided it months earlier. We had been discussing hosting his bachelor party in New York, go to the Belmont Stakes, and watch a Yankees vs Tigers game and Rob convinced the group to go to New York by proudly proclaimed his prophecy.  I had almost forgotten about this bold prediction when I witnessed him at the register, but when I looked up, and saw Flintshire, the 10th horse in the race upcoming race was the favorite.  “What could possibly go wrong?”  I thought to myself (an options trader who bought a racing program attempting to handicap and gain an ‘edge’ in the previous nine races unsuccessfully).  I went to a pretzel vendor and changed 5 twenties into ten tens, wal…

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. 
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. As the summer hit, FANG has slowed with GOOGL and AMZN hitting…