What a difference a single month can make. Four weeks ago, a record-high S&P 500 and a CBOE Volatility Index (VIX) languishing at multi-year lows south of 12 dominated our conversation. Risk perceptions remained “subdued” despite notable cracks in some assets, such as small caps and emerging markets. And now, bubbling risk-aversion across global markets makes for an interesting backdrop to the heart of corporate earnings season.
Of course, earnings and domestic economic data (see the full calendar in figure 3) aren’t the only factors likely to continue to drive trading in the week ahead. Concerns about economic weakness across the euro-zone have affected sentiment, and perhaps that’s why U.S. stock averages seemed to gather strength after Germany’s DAX and France’s CAC 40 rallied roughly 3% on Friday. Last week’s volatile see-saw ended with relative calm on Friday, unexpectedly led by the small cap-dominated and long-bruised Russell 2000 (RUT). And early indicators point higher on this Black Monday anniversary.
Let’s keep an eye on Europe as its economic health remains a key unknown. Fears about an Ebola spread, interest-rate uncertainty, and tumbling oil prices have also influenced the recent jump in market volatility.
Recalling 2011
With so many drivers, the CBOE Volatility Index (VIX) jumped above 31 last Wednesday for the first time since December 2011 (figure 1). It finished the week near 22, a far cry from levels seen a month ago when it drifted below 12. The volatility index tracks the implied volatility priced into short-term S&P 500 Index options. It is sometimes called the market’s “fear gauge” because of its tendency to spike during times of market turmoil, when nervous investors scramble to buy S&P 500 puts to help provide a temporary hedge to their portfolios.
Figure 1: The CBOE Volatility Index (VIX) pushed above 31 last week for the first time since... [+]
Indeed, options volumes were robust last week and rose to three-year highs Tuesday when 33.1 million options contracts traded across the exchanges. The total put-to-call ratio (PC), which is simply the day’s put volume divided by call volume, also notched an extreme when the indicator rose to 1.4 on Monday, according to data from the Options Clearing Corporation (see figure 2). Refresher: buying puts represents the right to sell the underlying stock at a specific price; buying calls represents the right to buy the underlying at a specific price.
A PC ratio greater than 1.0 suggests that investors are trading more put options than call options. Monday’s 1.4 represents a big spike. Notably, the ratio registered at greater than 1.0 during six consecutive trading sessions up until Friday, when it dipped back to 0.91. It was the longest streak of 1-plus readings from the ratio since August 2011.
Figure 2: The all-exchange put-to-call ratio spikes above 1.4, revisiting a level last neared in the... [+]
According to some indicators, such as VIX and the PC ratio, risk perceptions have returned to levels not seen since turbulent market action in the summer of 2011. The sentiment stands in stark contrast to the situation just one month ago, when overall volume and volatility had reached extreme lows. The dramatic change over such a short time frame is impressive and sets up an interesting backdrop heading into this week’s flood of corporate earnings reports.
Mixed Bag
Earnings reports are mixed so far, including some notable bombs like Google (GOOGL, GOOG), Netflix (NFLX), and Intel (INTC), and upbeat results from General Electric (GE), Morgan Stanley (MS), and Schlumberger (SLB). With 65 companies—or nearly 19% of the S&P 500—having reported so far, results are running 2.1% above a year ago, according to Zacks Investment Research. Importantly, management comments, especially from bank CEOs, offered a largely upbeat view for Q4 and 2015.
Now, Apple (AAPL) grabs the spotlight after the bell today as it releases results from a quarter that included its much-anticipated revamped iPhone rollout.
As Apple and others report, keep an eye on a couple short-term chart points for the S&P 500: support at 1851 and resistance at 1871.
Good trading,
JJ
Figure 3: Weekly U.S. economic report calendar. Source: Briefing.com.
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