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Stock Blanket of Red as Earnings, Data Don’t Let Up

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February 2, 2015

Welcome to February. The first week of the shortest month plunges us into another round of trading sessions that are packed with earnings and economic data. As the latest headlines hit, Wall Street’s anxiety levels are already elevated, as reflected in volatility flare-ups across a number of asset classes.

And if superstition has any sway over the Street, Sunday night’s American Football Conference (AFC) Super Bowl win by the New England Patriots could let more air out of the stock market.

As Schaeffer’s Research notes, when an NFC team has won, the Dow Jones Industrial Average (DJIA) has been positive 88% of the time for the rest of the year, averaging a gain of almost 11%. When an AFC team wins, the DJIA averages a gain of just 3%. Let’s call that mediocre play. Of course there’s plenty of causation versus correlation at work in the Super Bowl indicator. But when has that ever spoiled a little fun (fun for the winners that is)? All I know is, if you ask just about anyone it was Seattle’s bad play call that cost them the game when it mattered most. With year-to-date gains on the line in this event-packed week, we can’t help but wonder if Wall Street will get it right?

Red Vs Green

Broad market averages have some yardage to make up. The S&P 500 (SPX) shed 3.1% last month, and has declined in back-to-back months, with losses widespread across all sectors. To get an idea, check out the red-hot, one-month Heat Map from TD Ameritrade’s Trade Architect (figure 1). What a difference a year makes! At this time in 2014, asset classes were blanketed in green.

FIGURE 1: Red Hot. The S&P 500 Heat Map from TD Ameritrade’s Trade Architect turned negative to start 2015. Financials, energy, and industrials spilled the most red ink. Data source: Standard & Poor’s. For illustrative purposes only. Past performance does not guarantee future results.

Yes, volatility is picking up. The average daily move in the SPX so far this year is 18 points, which compares to an average daily move of just over 10 points all last year and 11 points during January 2014.

Falling stock prices and wider daily market moves are conspiring to send the CBOE Volatility Index (VIX) higher. The market’s so-called “fear gauge” tends to rise when the S&P 500 falls, as it tracks the implied volatility priced into short-term SPX options. VIX nosed above the closely watched 20 line on Friday.  As we can see from the daily chart (figure 2), VIX has now logged several weeks of roller coaster action.

FIGURE 2: Roller Coaster. The CBOE Volatility Index (VIX) approached the closely watched 20 line to end last week. Data source: CBOE. Chart source: TD Ameritrade’s thinkorswim® platform. For illustrative purposes only. Past performance does not guarantee future results.

VIX Not Alone

In fact, VIX is up 11% year to date, moving in step with other measures of implied volatility. For example, volatility in the Dow Jones Industrial Average (DJIA), as measured by the CBOE DJIA Volatility Index (VXD), is up 20% since December. Small-cap implied volatility tracked by the CBOE Russell 200 Volatility Index (RVX) and the tech-sector-focused CBOE NASDAQ-100 Volatility Index (VXN) are ticking north as well.

Volatility is up outside of U.S. equities markets. The CBOE Crude Oil ETF Volatility Index (OVX) was already elevated at the end of 2014 and is up another 16.7% since. Emerging market and currency volatility measures are also pointing up (see figure 3, which compares several volatility measures). The exception is the CBOE Gold ETF Volatility Index (GVZ), which is down modestly so far in 2015. That’s primarily because gold prices have rallied 8.7% year to date, drawing demand as a “safe haven” stash away from other markets.

VIX and other volatility indexes are computed using options pricing models and options premiums. That means these gauges tend to reflect market expectations; higher readings are typically a sign of increasing risk perceptions.

FIGURE 3

Heading North. Comparison of several volatility measures, all posting sharp one-month gains save for gold. Data source: CBOE. For illustrative purposes only. Past performance does not guarantee future results.

Bulls Need Some Good News

Some of the volatility year to date can be pinned on disappointing earnings reports and a sprinkling of disappointing economic news, which periodically spoils a run of positive data. Most notable is the depth of volatility. Few asset classes are immune, which is making early 2015 a very different beast from the market action through much of 2014.

Indeed, investors will have plenty to chew on in early February. Hundreds of companies are due to report quarterly earnings in the week ahead, spanning the financial, technology, energy, and industrial sectors. Can any sectors continue the mildly bullish momentum set up in the tech space in late January, when Apple (AAPL), Amazon.com (AMZN), and Google (GOOGL, GOOG) all largely delivered?

Energy earnings may be the highlighted sector this week. Exxon Mobile (XOM) early Monday said its profit dropped 21% in the latest reporting quarter because—no surprise—production declined. Now, the stock did gain because the drop wasn’t as severe as Wall Street analysts braced for. You see, published reports noted that since January 21, seven of the eighteen analysts that cover the stock had changed estimates and let’s just say that none put on a rosier spin.  Nervousness around the energy sector is heightened because ConocoPhillips (COP) and Occidental Petroleum (OXY) in statements last week talked about cuts to exploration plans for 2015.

On the economic front, an eventful week of data concludes with the often-market-moving monthly jobs report, due out Friday morning (see figure 3 for the full schedule). In addition, since it’s the first week of the month, sales results from automakers and retailers will hit. Has consumer confidence been shaken in these increasingly volatile times? One measure appears to say so. According to the Commerce Department’s personal income and spending data release, Americans cut spending in December by 0.3%, the largest amount since 2009, buying fewer cars and trucks for one thing. Yes, the report indicates spenders had to devote less money to energy amid a deep plunge in oil prices. That cut into overall receipts. But the money didn’t seem to show up elsewhere as incomes and savings rose.

As for the charts, the dip below SPX 2000 was significant, so any action to restore and strengthen this psychologically important line could help set the tone this week.

Good trading,
JJ
@TDAJJKinahan

FIGURE 4:

Weekly U.S. economic report calendar. Source: Briefing.com.

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