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Volatility Update: Stalking Joe Consumer

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How dramatic was the change in volatility in the past four weeks? Check this out: during the month of October, the S&P 500 saw average daily moves of 18.5 points, or double the daily swings seen in September. During the first week of November, the S&P’s average daily move has been closer to a mere 5 points.

Now that a lot of event risk has passed (including meetings by the world’s most powerful central banks, a swivel to Republican control of the U.S. Senate, and a trio of job-market reports ), focus this week will center on the last batch of major Q3 earnings and potentially pivotal results from the retail world.

Overall trading volumes slowed after a notable surge. For example, the Options Clearing Corporation reported last week that total contracts cleared in October increased by 23% from a year earlier, making this October the second highest volume month on record. Average daily put and call volume across the exchanges last month was 21.7 million contracts. Fast-forward to November, and that number slowed to 16.5 million in the first week.

Volume and volatility often go hand in hand, and that has been the case in recent weeks. After spiking to multi-year highs beyond 31 in mid-October, the CBOE Volatility Index (VIX), the market’s “fear gauge,” is back down to 13 (figure 1). The index tracks the implied volatility in short term S&P 500 Index (SPX) options. Its dramatic descent in the past few weeks possibly reflects changing sentiment that helped buoy the S&P 500 to record highs last week, clearing the key 2020 chart point. VIX shed 6% last week. What’s more, the small cap-loaded Russell 2000 (RUT), which for much of the year had been the lagging index, is now outrunning the rebound in the S&P 500 (good news for bulls who likely want confirmation to spread across indices). The RUT is up 6.6% so far in Q4, topping the SPX’s 3.2% quarter-to-date run.

(Most) Companies Deliver

A better-than-expected earnings reporting season seems to be one reason for the impressive shift in investor appetite for equities. According to Zacks Investment Research, 80% of the S&P 500 has now reported earnings for the most recent period. Of those, total earnings per share (EPS) are up nearly 8% from the year-earlier period on 3.9% higher revenues. That trounces estimates from a month ago, which called for EPS and revenue growth of less than 2%.

We’re not out of the woods yet. Another busy week for earnings lies ahead, including results from Dow components Cisco (CSCO) and Walmart (WMT). A number of other retailers—JCPenney (JCP), Kohl’s (KSS), and Macy’s (M), to name a few—report earnings this week as well. Consumer strength—which makes up two-thirds of GDP—has been a key economic barometer as investors and policy-makers track whether improved job-market conditions are translating into actual spending. These company reports could offer us clues for Friday’s broader retail sales data release.

Ring, Ring

On the economic front, the calendar is back-loaded with the first notable print in Friday’s October retail sales report. It represents the last retail sales data before attention turns to the pivotal Black Friday for retailers post-Thanksgiving.

Yes, believe it or not, we will soon be talking about holiday shopping (and, hey, stores started to stock the shelves with Santas long before Halloween). In that respect, the recent drop in gasoline prices could serve to boost consumer spending a bit in late 2014. In theory, if people spend less to fill up their gas tanks (and all else stays the same), they’ll have more to spend on holiday shopping. Gasoline recently fell below $3 a gallon on average nationwide for the first time since December 2010, according to AAA.

With the S&P 500 now up nearly 10% year-to-date, the big question looms: will an uptick in consumer spending be enough to boost equities to new highs? Now that mid-term elections have passed, the Federal Reserve has officially ended its quantitative easing, and overseas central banks have telegraphed their plans for added stimulus, results from the retailing world this week might hold the best clues for what’s next.

Don’t forget that the latest TD Ameritrade Investor Movement Index® (IMXSM) will be released Monday (refresher: IMX tracks holdings/positions, trading activity, and other data from a sample of our 6 million funded client accounts). Let’s see what stocks this group of retail investors bought and sold during volatile October.

Casting our votes last week and making market decisions each and every day (if we chose) are just a couple of the freedoms that come our way thanks to our veterans. Please take a moment on Tuesday to thank the men and women who have served our country.

Good trading,

JJ

@TDAJJKinahan

TD Ameritrade, Inc., member FINRA/SIPC. Commentary provided for educational purposes only. Past performance of a security, strategy, or index is no guarantee of future results or investment success. Inclusion of specific security names in this commentary does not constitute a recommendation from TD Ameritrade to buy, sell, or hold.

Zacks Investment Research is separate from and not affiliated with TD Ameritrade.

The IMX is not a tradable index.