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Sunday, October 10, 2010 12:21:56 PM
Monday Morning Outlook: DJIA Enjoys the View from Above 11,000
Bulls see a silver lining in disappointing jobs report
by Ryan Detrick 10/9/2010 9:56 AM
http://www.schaeffersresearch.com/commentary/content/monday+morning+outlook+djia+enjoys+the+view+from+above+11000/observations.aspx?ID=102798#102798
The bulls resumed what now appears to be a fall rally last week, and the Dow Jones Industrial Average settled above the 11,000 level for the first time since May 3. Looking ahead, Ryan Detrick, Senior Technical Strategist, is sitting in for Todd Salamone. If you recall, Ryan has been stubbornly bullish, even during the worst of the summer doldrums. Ryan takes a victory lap this week -- he's not a bit modest about it -- and foresees more of the same. Next, Senior Quantitative Analyst Rocky White reports that traders of futures on the CBOE Market Volatility Index (VIX) are forecasting VIX readings significantly above current levels in the coming months. Rocky finds this expectation worrisome. Finally, we wrap up with a look at some key economic and earnings reports slated for release this week.
Recap of the Previous Week: Traders Put Their Faith in the Fed
Schaeffer's Editorial Staff
The 11,000 level on the Dow Jones Industrial Average loomed in view all week, but it wasn't until Friday's dismal job figures arrived that the blue chip barometer managed to topple the millennial milestone. Say what? Traders concluded that the weak jobs picture would force the Federal Reserve into action to prop up the recovery. Somewhat tentatively, the bulls tiptoed up to 11,000 on Friday and the Dow closed the week perched just above this mark.
Euro zone worries once again troubled the market on Monday. Irish officials said it might cost 50 billion euros to rescue the nation's troubled banking system, and they also recommended huge budget cuts to prove to financial markets they're serious about dealing with their massive deficit. Here at home, factory orders dropped more than expected. The Dow shed 0.72%.
Overseas news also set the tone on Tuesday, when the Bank of Japan surprised the world by cutting interest rates virtually to zero. That no doubt reminded traders that our own central bank has been broadly hinting at another round of asset purchases. Meanwhile, the Institute for Supply Management's (ISM) nonmanufacturing index jumped to 53.2 in September, surpassing economists' forecast for a rise to 52, a strong indication the employment picture is finally beginning to revive. The bulls took the reins and drove the Dow to a gain of nearly 200 points, or 1.80%. The Dow, at 10,944.72, was within hailing distance of 11,000 for the first time since May.
In the first of three days of employment reports on Wednesday, payroll processor ADP reported that private sector employment fell by 39,000 in September; analysts had expected an improvement. Meanwhile, a pall was cast over the tech sector after Equinix Inc. (EQIX) lowered its revenue guidance for the third quarter and the year. The Dow traded in a tight 60-point range throughout the day, and finally settled on a small gain of 0.21%. While the Dow managed to close above breakeven, the Nasdaq Composite (COMP) slumped 0.80%.
New jobless claims finally dipped beneath the 450,000 mark on Thursday, and retailers reported that the aisles were full during the back-to-school shopping season. Nordstrom (JWN), Macy's (M), J.C. Penney Company (JCP), Abercrombie & Fitch (ANF), American Eagle Outfitters (AEO), and Limited Brands (LTD) all recorded healthy upticks in September same-store sales, giving merchants new hope for the Christmas shopping season. Analysts were pleasantly surprised by both the jobless numbers and the sales figures, but the bulls held their fire in advance of Friday's nonfarm payrolls and unemployment reports. The Dow traded on both sides of the breakeven line through the course of the session, but eventually slipped 0.17%.
Although private payrolls gained 64,000 jobs in September, the economy as a whole shed 95,000 nonfarm jobs, the Labor Department reported before the open on Friday. Economists were expecting a much smaller decline. A better unemployment report might have emboldened a full-scale assault on the Dow 11,000 mark, but the weak numbers seemed sufficient to ensure that the Fed will step in again to support the economy. Meanwhile, Alcoa (AA) kicked off earnings season with an upbeat report and guidance. The Dow snuck up to the 11,000 mark throughout the morning, crossed above about midday, and then managed to hold on for dear life through a skittish afternoon. The Dow gained 0.53% for the day and settled at 11,006.48, its first appearance above 11,000 since before the early May "flash crash." The Dow recorded a respectable 1.6% advance for the week, while the S&P 500 Index (SPX) climbed 1.7% and the COMP brought up the rear, gaining 1.3%.
What the Trading Desk Is Expecting: Earnings Should Continue to Drive Market
By Ryan Detrick, Senior Technical Strategist
"It's hip to be conservative."
That is a recent quote I ran across, and I think it really hammers home the overall mentality of market participants today. With more than 20 straight weeks of equity mutual fund outflows, the fact is that very few people believe in the strength of this rally. When a recent two-year bond auction saw the highest demand in years, it really said something about what market participants want to own. It said investors would rather own something with no yield than buy "risky" stocks.
Yet, if you've followed what we've been saying at Schaeffer's since the middle of last year, then you know that we think all of this negativity could be very bullish for the stock market. Our overall stance hasn't changed. Price action remains strong, fundamentals are improving, and sentiment is negative. All of that is a recipe for higher prices.
Let's talk some about fundamentals. If next year's S&P 500 Index (SPX) earnings are expected to come in at $95, and the SPX is trading around 1,160, this equals a forward price/earnings ratio of 12. Not too overvalued, if you ask me. What about earnings? Earnings have come in much better than expected for three straight quarters. In the end, earnings are a major driver of equity prices. In our opinion, expectations are simply still too low for this recovery, and that should lead to higher equity prices down the road.
The September monthly jobs number came in weak on Friday, but a good deal of that was due to jobs lost at the state and local government levels. The good news is, private payrolls remain strong. Also, the weekly initial claims finally dipped beneath 450,000 for the first time this year. Should this number continue to creep lower, it will be a major plus. Manufacturing and housing data continue to improve, as well. Things aren't great, but remember -- once they are, that is probably the time to sell.
What about the credit market? If we've learned anything over the past few years, it is that the credit market is probably the best indicator we have for how the economy is really doing. When it shut down in 2008, the economy followed. Well, in the third quarter we just had the busiest quarter of merger and acquisition activity since the financial crisis. August was the best August in more than 10 years. In fact, according to Thomson Reuters, total worldwide M&A volume is up to $1.68 trillion for the first nine months of 2010.
Not to be outdone, stock buybacks are extremely strong as well -- another positive fundamental driver. Think about this: There were more stock buybacks in the first two months of this year than in all of 2009. Buybacks and M&A are two very positive fundamental reasons to remain bullish. Lastly, junk bonds continue to be very strong. If we were truly headed for a double dip, I think the junk bond market would be more worried. Bottom line, the credit market is working just fine and this should lead to an improving economy and higher stock prices.
On the sentiment front, here's one chart I came across this week that stood out as really summing up how investors feel. It's a study by the Investment Company Institute that looks at mutual fund shareholders' overall willingness to take on investment risk. As you might have expected, it hasn't rebounded since the financial crisis. In fact, about 30% are willing to take on above-average risk, the exact same as this time last year. In contrast, in May 2008, 37% were willing to take on such risk. Given some of the impressive gains we've seen since the March 2009 lows, this is a great contrarian bullish sign.
One of my favorite sentiment indicators is the Investors Intelligence poll. Although bullish sentiment has been increasing, it is still nowhere near past major peaks. Given the recent strong price action, this is another sign of potentially higher prices. As you can see here, the difference between bulls and bears is less than 20%. Past major peaks have occurred up near 40%. Nothing wrong with this picture.
SPX versus Bulls-Bears from II
Turning to the technical backdrop, you have to like the head-and-shoulders breakout we have going on here. The recent consolidation above 1,130 before this week's surge was picture perfect. A move back up to the April highs could be very possible.
SPX with inverse head and shoulders pattern
On a longer-term basis, something happened recently that is very significant -- we had a golden cross on the Dow. This occurs when the 50-day moving average crosses above the 200-day moving average. This formation can have very bullish implications from a longer-term perspective. What I find very encouraging is the fact that nearly no one is talking about this bullish development. Compare that with what happened when we had a death cross in early July. Nearly everyone was talking about the death cross as a sign of the end of the bull market, amid predictions we'd drop to new lows very soon. I think this hammers home the mentality of market participants. Bad news is amplified and good news isn't noticed. The good news for us? As long as this continues, I think we continue to climb that wall of worry.
And if you remember, back in July I showed that a death cross by itself wasn't any reason to expect a market plunge, and cited numerous reasons to remain bullish. Well, fortunately the bears were dead wrong, as we've had a nice rally since then.
We know the market has been strong, but when is it due for a pullback? One indicator I like to use to determine this is how many stocks are trading above their 50-day moving average. This number currently checks in at 86%, a number consistent with two peaks this calendar year and subsequent corrections.
NYSE percent of stocks above 50-day moving average
On the surface, this is a concern for a pending correction. But it's important to remember that this number got up to current levels several times in 2009, and it didn't do much to slow down the bull then. So what will it be this time?
My best guess is that we keep trending higher. If you look at data going back several years, being extremely overbought is actually very bullish. Also, check out how many stocks are over their 200-day moving average. This is only 71% currently, so it has plenty of room to move higher before being "overbought." Speaking of overbought, last year this figure made it up to 90% and stayed there for several months before the overbought status became a problem.
NYSE percent of stocks above 200-day moving average
Earnings season officially kicked off last week with some impressive results from aluminum giant Alcoa (AA). Here's a study that we do every quarter -- and although on the surface you could argue it is random, it has a very solid track record. Whatever way AA goes the day after reporting earnings, it is a very good indicator for how the market will perform in the near term. Given AA was up nearly 6% on Friday, this is a very good sign for the bulls.
SPX returns following AA earnings reports
Looking at this week, the International Monetary Fund and Group of 7 are holding meetings this weekend. Currency matters will be in focus. That, coupled with the effects of options expiration, should add to potential volatility. But in the end, earnings could be the next major driver for the stock market here.
Todd is back next week, so I'll leave you with probably the most important chart I know, which is one you should continue to watch. It is the SPX's 80-week moving average. This trendline marked great buying opportunities during the last bull market, and so far this year has twice held as support. In the end, price action is what matters -- and as long as the SPX stays above its 80-week moving average, side with the bulls.
SPX with 80-week moving average
Good luck trading.
If you enjoy Monday Morning Outlook...
...we also offer a free Market Recap after the close every day. Did the Dow go up 100 points? Or down? We'll tell you why. We'll also tell you who the big winners and losers were, and we'll share some highlights from our daily articles and blog postings. Market Recap is a quick, but insightful read. Sign up here to have Market Recap delivered straight to your inbox every evening shortly after the close.
Prepare for the investing week ahead. Every week, Bernie Schaeffer and his staff provide you with their insight about what has happened and, more importantly, what will happen in the market. We dig deep and show you what's happening behind the scenes, and tell you which indicators are predicting major market moves. If you enjoyed this week's edition of Monday Morning Outlook, sign up here for free weekly delivery straight to your inbox.
Indicator of the Week: VIX Term Structure
By Rocky White, Senior Quantitative Analyst
Foreword: Most options traders are familiar with the CBOE Market Volatility Index, which is popularly known as the VIX. It's calculated using prices of S&P 500 Index (SPX) options and basically gives the market's expectation of volatility in the next month of trading. Using futures prices on the VIX, we can construct a term structure that tells us where traders expect the VIX to be heading. The term structure is the relationship between short-dated VIX futures and longer-dated VIX futures. Keep in mind that the VIX generally moves in the opposite direction as the market. Thus, if traders expect a higher VIX, then it's a pretty good assumption that they expect a lower market.
Current Term Structure: Hopefully the chart below will give you a good feel on what the term structure looks like now compared to other times. Each line represents a certain point in time. The black line with the yellow diamonds shows the current term structure. Moving left to right, you see first where the VIX was trading, and then where one-month futures were trading, the two-month futures and so on.
Note that the term structure -- the difference between what short-term traders are expecting and what longer-term traders are expecting -- is very steep right now. The VIX is just above 20, but futures traders expect it be near 30 in four months. This is quite high, given that the average VIX reading this year is between 23 and 24. The green line shows the term structure two months ago. Despite the VIX being lower now than then, futures traders are expecting a higher VIX in four months than they expected then. In short, a steep term structure became even steeper.
The purple line is interesting as it shows the VIX term structure just after the May "flash crash." The VIX spiked up near the mid 30s. The expectations were that the VIX would remain elevated, as the line is pretty flat. The red line shows the term structure in April when the market was in a strong uptrend. The VIX was at one of the lowest points of the year, and VIX futures traders were expecting it to ascend to a more "typical" level.
VIX term structure
Are Futures Traders Right? The steepness of the current term structure is at an exceptionally high level. VIX futures traders are expecting significantly more volatility going forward, which would most likely mean a lower market. To measure the steepness of the term structure, I show the 10-day average of the futures slope, which I defined as the difference between the four-month VIX futures contract and the one-month contract. I calculate the difference as a percentage of the VIX.
The chart shows we are currently at one of the highest levels of the year. The high levels have had a tendency to be warning signs. I circled three previous peaks this year, occurring in January, April and August. Those three spikes preceded significant market declines. Though there have been a couple of false signals, and even early signals, this indicator might be a cause for concern.
SPX daily and 10-day VIX futures slope
This Week's Key Events: Intel, GE, Google in the Earnings Spotlight
Schaeffer's Editorial Staff
Earnings season is under way, and we'll see a handful of big names this week, but the deluge won't begin in earnest until the following week. Here is a brief list of some of the key events this week. All earnings dates listed below are tentative and subject to change. Please check with each company's respective website for official reporting dates.
Monday
* There are no major economic reports scheduled for Monday. Global Payments Inc. (GPN) will report earnings.
Tuesday
* The Federal Open Market Committee will release the minutes of its most recent meeting on Tuesday. Fed officials have been offering broad hints about more quantitative easing, likely by increasing purchases of U.S. Treasury bonds. Traders will examine the entrails of the minutes for more clues. Fastenal Company (FAST), CSX Corp. (CSX), Intel Corp. (INTC) and Linear Technology Corp. (LLTC) are scheduled to issue their quarterly reports.
Wednesday
* We'll get the usual weekly report on U.S. petroleum supplies, along with September import and export data and the Treasury's budget numbers for September. Scheduled to report earnings are ASML Holding N.V. (ASML), JPMorgan Chase & Co. (JPM), and Apollo Group Inc. (APOL).
Thursday
* The Labor Department will release the weekly jobless claims figures, along with the September producer price index. The Commerce Department will report on the August trade balance. In the earnings spotlight will be Safeway Inc. (SWY), Advanced Micro Devices Inc. (AMD), Google Inc. (GOOG), J.B. Hunt Transport Service Inc. (JBHT), and The Progressive Corp. (PGR).
Friday
* Friday will be busy again, with September data available on the consumer price index and retail sales. The New York Fed will report on manufacturing in the region for October, while the University of Michigan will offer up its first reading on consumer sentiment in October. Gannett Co. Inc. (GCI), General Electric Co. (GE), Infosys Technologies Limited (INFY) and Mattel Inc. (MAT) will report earnings.
Bulls see a silver lining in disappointing jobs report
by Ryan Detrick 10/9/2010 9:56 AM
http://www.schaeffersresearch.com/commentary/content/monday+morning+outlook+djia+enjoys+the+view+from+above+11000/observations.aspx?ID=102798#102798
The bulls resumed what now appears to be a fall rally last week, and the Dow Jones Industrial Average settled above the 11,000 level for the first time since May 3. Looking ahead, Ryan Detrick, Senior Technical Strategist, is sitting in for Todd Salamone. If you recall, Ryan has been stubbornly bullish, even during the worst of the summer doldrums. Ryan takes a victory lap this week -- he's not a bit modest about it -- and foresees more of the same. Next, Senior Quantitative Analyst Rocky White reports that traders of futures on the CBOE Market Volatility Index (VIX) are forecasting VIX readings significantly above current levels in the coming months. Rocky finds this expectation worrisome. Finally, we wrap up with a look at some key economic and earnings reports slated for release this week.
Recap of the Previous Week: Traders Put Their Faith in the Fed
Schaeffer's Editorial Staff
The 11,000 level on the Dow Jones Industrial Average loomed in view all week, but it wasn't until Friday's dismal job figures arrived that the blue chip barometer managed to topple the millennial milestone. Say what? Traders concluded that the weak jobs picture would force the Federal Reserve into action to prop up the recovery. Somewhat tentatively, the bulls tiptoed up to 11,000 on Friday and the Dow closed the week perched just above this mark.
Euro zone worries once again troubled the market on Monday. Irish officials said it might cost 50 billion euros to rescue the nation's troubled banking system, and they also recommended huge budget cuts to prove to financial markets they're serious about dealing with their massive deficit. Here at home, factory orders dropped more than expected. The Dow shed 0.72%.
Overseas news also set the tone on Tuesday, when the Bank of Japan surprised the world by cutting interest rates virtually to zero. That no doubt reminded traders that our own central bank has been broadly hinting at another round of asset purchases. Meanwhile, the Institute for Supply Management's (ISM) nonmanufacturing index jumped to 53.2 in September, surpassing economists' forecast for a rise to 52, a strong indication the employment picture is finally beginning to revive. The bulls took the reins and drove the Dow to a gain of nearly 200 points, or 1.80%. The Dow, at 10,944.72, was within hailing distance of 11,000 for the first time since May.
In the first of three days of employment reports on Wednesday, payroll processor ADP reported that private sector employment fell by 39,000 in September; analysts had expected an improvement. Meanwhile, a pall was cast over the tech sector after Equinix Inc. (EQIX) lowered its revenue guidance for the third quarter and the year. The Dow traded in a tight 60-point range throughout the day, and finally settled on a small gain of 0.21%. While the Dow managed to close above breakeven, the Nasdaq Composite (COMP) slumped 0.80%.
New jobless claims finally dipped beneath the 450,000 mark on Thursday, and retailers reported that the aisles were full during the back-to-school shopping season. Nordstrom (JWN), Macy's (M), J.C. Penney Company (JCP), Abercrombie & Fitch (ANF), American Eagle Outfitters (AEO), and Limited Brands (LTD) all recorded healthy upticks in September same-store sales, giving merchants new hope for the Christmas shopping season. Analysts were pleasantly surprised by both the jobless numbers and the sales figures, but the bulls held their fire in advance of Friday's nonfarm payrolls and unemployment reports. The Dow traded on both sides of the breakeven line through the course of the session, but eventually slipped 0.17%.
Although private payrolls gained 64,000 jobs in September, the economy as a whole shed 95,000 nonfarm jobs, the Labor Department reported before the open on Friday. Economists were expecting a much smaller decline. A better unemployment report might have emboldened a full-scale assault on the Dow 11,000 mark, but the weak numbers seemed sufficient to ensure that the Fed will step in again to support the economy. Meanwhile, Alcoa (AA) kicked off earnings season with an upbeat report and guidance. The Dow snuck up to the 11,000 mark throughout the morning, crossed above about midday, and then managed to hold on for dear life through a skittish afternoon. The Dow gained 0.53% for the day and settled at 11,006.48, its first appearance above 11,000 since before the early May "flash crash." The Dow recorded a respectable 1.6% advance for the week, while the S&P 500 Index (SPX) climbed 1.7% and the COMP brought up the rear, gaining 1.3%.
What the Trading Desk Is Expecting: Earnings Should Continue to Drive Market
By Ryan Detrick, Senior Technical Strategist
"It's hip to be conservative."
That is a recent quote I ran across, and I think it really hammers home the overall mentality of market participants today. With more than 20 straight weeks of equity mutual fund outflows, the fact is that very few people believe in the strength of this rally. When a recent two-year bond auction saw the highest demand in years, it really said something about what market participants want to own. It said investors would rather own something with no yield than buy "risky" stocks.
Yet, if you've followed what we've been saying at Schaeffer's since the middle of last year, then you know that we think all of this negativity could be very bullish for the stock market. Our overall stance hasn't changed. Price action remains strong, fundamentals are improving, and sentiment is negative. All of that is a recipe for higher prices.
Let's talk some about fundamentals. If next year's S&P 500 Index (SPX) earnings are expected to come in at $95, and the SPX is trading around 1,160, this equals a forward price/earnings ratio of 12. Not too overvalued, if you ask me. What about earnings? Earnings have come in much better than expected for three straight quarters. In the end, earnings are a major driver of equity prices. In our opinion, expectations are simply still too low for this recovery, and that should lead to higher equity prices down the road.
The September monthly jobs number came in weak on Friday, but a good deal of that was due to jobs lost at the state and local government levels. The good news is, private payrolls remain strong. Also, the weekly initial claims finally dipped beneath 450,000 for the first time this year. Should this number continue to creep lower, it will be a major plus. Manufacturing and housing data continue to improve, as well. Things aren't great, but remember -- once they are, that is probably the time to sell.
What about the credit market? If we've learned anything over the past few years, it is that the credit market is probably the best indicator we have for how the economy is really doing. When it shut down in 2008, the economy followed. Well, in the third quarter we just had the busiest quarter of merger and acquisition activity since the financial crisis. August was the best August in more than 10 years. In fact, according to Thomson Reuters, total worldwide M&A volume is up to $1.68 trillion for the first nine months of 2010.
Not to be outdone, stock buybacks are extremely strong as well -- another positive fundamental driver. Think about this: There were more stock buybacks in the first two months of this year than in all of 2009. Buybacks and M&A are two very positive fundamental reasons to remain bullish. Lastly, junk bonds continue to be very strong. If we were truly headed for a double dip, I think the junk bond market would be more worried. Bottom line, the credit market is working just fine and this should lead to an improving economy and higher stock prices.
On the sentiment front, here's one chart I came across this week that stood out as really summing up how investors feel. It's a study by the Investment Company Institute that looks at mutual fund shareholders' overall willingness to take on investment risk. As you might have expected, it hasn't rebounded since the financial crisis. In fact, about 30% are willing to take on above-average risk, the exact same as this time last year. In contrast, in May 2008, 37% were willing to take on such risk. Given some of the impressive gains we've seen since the March 2009 lows, this is a great contrarian bullish sign.
One of my favorite sentiment indicators is the Investors Intelligence poll. Although bullish sentiment has been increasing, it is still nowhere near past major peaks. Given the recent strong price action, this is another sign of potentially higher prices. As you can see here, the difference between bulls and bears is less than 20%. Past major peaks have occurred up near 40%. Nothing wrong with this picture.
SPX versus Bulls-Bears from II
Turning to the technical backdrop, you have to like the head-and-shoulders breakout we have going on here. The recent consolidation above 1,130 before this week's surge was picture perfect. A move back up to the April highs could be very possible.
SPX with inverse head and shoulders pattern
On a longer-term basis, something happened recently that is very significant -- we had a golden cross on the Dow. This occurs when the 50-day moving average crosses above the 200-day moving average. This formation can have very bullish implications from a longer-term perspective. What I find very encouraging is the fact that nearly no one is talking about this bullish development. Compare that with what happened when we had a death cross in early July. Nearly everyone was talking about the death cross as a sign of the end of the bull market, amid predictions we'd drop to new lows very soon. I think this hammers home the mentality of market participants. Bad news is amplified and good news isn't noticed. The good news for us? As long as this continues, I think we continue to climb that wall of worry.
And if you remember, back in July I showed that a death cross by itself wasn't any reason to expect a market plunge, and cited numerous reasons to remain bullish. Well, fortunately the bears were dead wrong, as we've had a nice rally since then.
We know the market has been strong, but when is it due for a pullback? One indicator I like to use to determine this is how many stocks are trading above their 50-day moving average. This number currently checks in at 86%, a number consistent with two peaks this calendar year and subsequent corrections.
NYSE percent of stocks above 50-day moving average
On the surface, this is a concern for a pending correction. But it's important to remember that this number got up to current levels several times in 2009, and it didn't do much to slow down the bull then. So what will it be this time?
My best guess is that we keep trending higher. If you look at data going back several years, being extremely overbought is actually very bullish. Also, check out how many stocks are over their 200-day moving average. This is only 71% currently, so it has plenty of room to move higher before being "overbought." Speaking of overbought, last year this figure made it up to 90% and stayed there for several months before the overbought status became a problem.
NYSE percent of stocks above 200-day moving average
Earnings season officially kicked off last week with some impressive results from aluminum giant Alcoa (AA). Here's a study that we do every quarter -- and although on the surface you could argue it is random, it has a very solid track record. Whatever way AA goes the day after reporting earnings, it is a very good indicator for how the market will perform in the near term. Given AA was up nearly 6% on Friday, this is a very good sign for the bulls.
SPX returns following AA earnings reports
Looking at this week, the International Monetary Fund and Group of 7 are holding meetings this weekend. Currency matters will be in focus. That, coupled with the effects of options expiration, should add to potential volatility. But in the end, earnings could be the next major driver for the stock market here.
Todd is back next week, so I'll leave you with probably the most important chart I know, which is one you should continue to watch. It is the SPX's 80-week moving average. This trendline marked great buying opportunities during the last bull market, and so far this year has twice held as support. In the end, price action is what matters -- and as long as the SPX stays above its 80-week moving average, side with the bulls.
SPX with 80-week moving average
Good luck trading.
If you enjoy Monday Morning Outlook...
...we also offer a free Market Recap after the close every day. Did the Dow go up 100 points? Or down? We'll tell you why. We'll also tell you who the big winners and losers were, and we'll share some highlights from our daily articles and blog postings. Market Recap is a quick, but insightful read. Sign up here to have Market Recap delivered straight to your inbox every evening shortly after the close.
Prepare for the investing week ahead. Every week, Bernie Schaeffer and his staff provide you with their insight about what has happened and, more importantly, what will happen in the market. We dig deep and show you what's happening behind the scenes, and tell you which indicators are predicting major market moves. If you enjoyed this week's edition of Monday Morning Outlook, sign up here for free weekly delivery straight to your inbox.
Indicator of the Week: VIX Term Structure
By Rocky White, Senior Quantitative Analyst
Foreword: Most options traders are familiar with the CBOE Market Volatility Index, which is popularly known as the VIX. It's calculated using prices of S&P 500 Index (SPX) options and basically gives the market's expectation of volatility in the next month of trading. Using futures prices on the VIX, we can construct a term structure that tells us where traders expect the VIX to be heading. The term structure is the relationship between short-dated VIX futures and longer-dated VIX futures. Keep in mind that the VIX generally moves in the opposite direction as the market. Thus, if traders expect a higher VIX, then it's a pretty good assumption that they expect a lower market.
Current Term Structure: Hopefully the chart below will give you a good feel on what the term structure looks like now compared to other times. Each line represents a certain point in time. The black line with the yellow diamonds shows the current term structure. Moving left to right, you see first where the VIX was trading, and then where one-month futures were trading, the two-month futures and so on.
Note that the term structure -- the difference between what short-term traders are expecting and what longer-term traders are expecting -- is very steep right now. The VIX is just above 20, but futures traders expect it be near 30 in four months. This is quite high, given that the average VIX reading this year is between 23 and 24. The green line shows the term structure two months ago. Despite the VIX being lower now than then, futures traders are expecting a higher VIX in four months than they expected then. In short, a steep term structure became even steeper.
The purple line is interesting as it shows the VIX term structure just after the May "flash crash." The VIX spiked up near the mid 30s. The expectations were that the VIX would remain elevated, as the line is pretty flat. The red line shows the term structure in April when the market was in a strong uptrend. The VIX was at one of the lowest points of the year, and VIX futures traders were expecting it to ascend to a more "typical" level.
VIX term structure
Are Futures Traders Right? The steepness of the current term structure is at an exceptionally high level. VIX futures traders are expecting significantly more volatility going forward, which would most likely mean a lower market. To measure the steepness of the term structure, I show the 10-day average of the futures slope, which I defined as the difference between the four-month VIX futures contract and the one-month contract. I calculate the difference as a percentage of the VIX.
The chart shows we are currently at one of the highest levels of the year. The high levels have had a tendency to be warning signs. I circled three previous peaks this year, occurring in January, April and August. Those three spikes preceded significant market declines. Though there have been a couple of false signals, and even early signals, this indicator might be a cause for concern.
SPX daily and 10-day VIX futures slope
This Week's Key Events: Intel, GE, Google in the Earnings Spotlight
Schaeffer's Editorial Staff
Earnings season is under way, and we'll see a handful of big names this week, but the deluge won't begin in earnest until the following week. Here is a brief list of some of the key events this week. All earnings dates listed below are tentative and subject to change. Please check with each company's respective website for official reporting dates.
Monday
* There are no major economic reports scheduled for Monday. Global Payments Inc. (GPN) will report earnings.
Tuesday
* The Federal Open Market Committee will release the minutes of its most recent meeting on Tuesday. Fed officials have been offering broad hints about more quantitative easing, likely by increasing purchases of U.S. Treasury bonds. Traders will examine the entrails of the minutes for more clues. Fastenal Company (FAST), CSX Corp. (CSX), Intel Corp. (INTC) and Linear Technology Corp. (LLTC) are scheduled to issue their quarterly reports.
Wednesday
* We'll get the usual weekly report on U.S. petroleum supplies, along with September import and export data and the Treasury's budget numbers for September. Scheduled to report earnings are ASML Holding N.V. (ASML), JPMorgan Chase & Co. (JPM), and Apollo Group Inc. (APOL).
Thursday
* The Labor Department will release the weekly jobless claims figures, along with the September producer price index. The Commerce Department will report on the August trade balance. In the earnings spotlight will be Safeway Inc. (SWY), Advanced Micro Devices Inc. (AMD), Google Inc. (GOOG), J.B. Hunt Transport Service Inc. (JBHT), and The Progressive Corp. (PGR).
Friday
* Friday will be busy again, with September data available on the consumer price index and retail sales. The New York Fed will report on manufacturing in the region for October, while the University of Michigan will offer up its first reading on consumer sentiment in October. Gannett Co. Inc. (GCI), General Electric Co. (GE), Infosys Technologies Limited (INFY) and Mattel Inc. (MAT) will report earnings.
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