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Market Update

Oil Plunge, Dollar Brawn Add Dimension to Earnings

January 12, 2015

The Q4 earnings spigot opens wide a full week from now, but this week’s handful of teaser reports are big names in their own right.

Alcoa (AA) unofficially cuts the ribbon on this earnings round with its release after hours on Monday. Beyond its own bottom line, AA’s results could give an indication of late-year manufacturing economy health. From the banking corner, JPMorgan Chase (JPM) and Wells Fargo (WFC) will be the first big financials to report results this go-around when they announce on Wednesday. Dow Jones Industrial Average (DJIA) component Intel (INTC), a potential tech-sector bellwether, is out with results Thursday.

Earnings season packs added drama as Wall Street wonders how much oil’s slide may have helped the consumer-reliant retailers (crude is down again to start this week as Goldman Sachs again cuts its pricing outlook). Another big question: how much has a brawny dollar hurt export-focused multinationals as the buck hit a nearly 9-year high against the euro and remains strong against other major currencies? The Federal Reserve has tried to strike a balance by acknowledging the impact of weak overseas economies on the U.S. and yet assuring Wall Street of U.S. economic insulation. Earnings may help qualify that risk, especially executive commentary looking out to coming quarters.

Volatility Sets the Tone

There’s no denying that earnings kick off against a backdrop of stock market volatility. The S&P 500 (SPX) fell sharply during the first three trading days of the year, only to stage a dramatic 3% rebound over Wednesday and Thursday. It then dropped some 17 points to 2,044.99 Friday and is now negative for the year.  Some will pin Friday’s sell-off on the weak wages component in the December jobs report. Maybe. More likely, participants were booking quick profits and taking some risk off the table after the two days of strong gains. Keep an eye on SPX 2050; that line marks upside resistance that may require more than a few feeble tries to overtake.

I believe that in early 2015 in particular, we may see quick-change inflows and outflows between stocks and fixed income.  Broadly, many will call it a “flight to safety” play but I don’t think it’s a panic situation. Investors, especially large accounts, can quickly put money to work in stocks after selling fixed-income positions or shuffle to fixed income for temporary storage of money; they’re certainly not in bonds for the return right now. This early-year volatility could continue at least until we got three to four straight weeks of oil market stability—this could mean 100-point DJIA moves and a VIX stuck closer to the 18-20 band. This is generally healthy broad market capitulation and for retail traders should prompt a review of position size and stop-loss placement.

Wider Moves

The average daily move in the S&P so far this year has been about 22 points, which is more than four times greater than the average daily move during the first week of 2014. Back then the S&P 500 saw average daily moves of less than five points.

What’s more, the CBOE Volatility Index, which tracks the implied volatility of S&P 500 Index (SPX) options, is bouncing too. VIX hit 22.9 early last week before finishing the week at 17.83. The index is down 7% year-to-date and a far cry from the levels seen in mid-October (see figure 1), but it’s still posting wider swings than the market had gotten used to.


The CBOE Volatility Index (VIX) tracks the implied volatility priced into S&P 500 options. It’s down 7% year to date but is posting wider intra-day moves. Chart source: TD Ameritrade’s thinkorswim® platform. Data source: CBOE. For illustrative purposes only. Past performance does not guarantee future results.

In fact, while VIX is down from a week ago, actual volatility certainly isn’t. Note that VIX is typically viewed as a forward-looking indicator because it is based on volatility perceptions priced into S&P 500 options. Although it can move in reaction to current market swings, it also captures expectations about future volatility.

Dust Off Your Math Skills?

Another measure, historical volatility (HV), is computed based on actual closing prices of the underlying investment. It’s a percentage calculated using an annualized standard deviation of prices over a period of days.

If that sounds too complicated, you can rest easy, because knowing the math isn’t necessary. We have plotted the 20-day HV for the S&P 500 in figure 2. Notice that just as it did in October, HV is climbing north of 18% and is at the upper end of its one-year range. Although VIX is well off October highs of 31.06, actual volatility is at nearly the same levels as then—a period of an oil-inspired washout in the stock market. This reading could mean that more volatility is in the works.


The S&P 500 (SPX) and its historical volatility (HV). HV is back above 18% with the latest move for SPX, now in the upper end of its one-year range. Chart source: TD Ameritrade’s thinkorswim® platform. Data source: Standard & Poor’s. For illustrative purposes only. Past performance does not guarantee future results.

Earnings aren’t the only attention-grabber. On the economic front, retail sales, industrial production, manufacturing, and inflation will guide investors from Wednesday on (see the full calendar in figure 3, below).

Oil continues to spill into broader financial markets. This week, the inventory numbers due for release on Wednesday could potentially trigger short-term swings in crude prices. Benchmark measures of oil prices fell to below $48 a barrel last week and are now down over 50% in the past six months.

Although the decline in fuel prices is a positive for some areas of the economy (just ask truck drivers), the plunge takes a bite out of the energy sector and the volatility reverberates throughout the broader market. Will this week’s inventory figures offer short-term support or send crude oil prices to fresh five-year lows?

Good trading,

FIGURE 3: Weekly U.S. economic report calendar. Source:

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