Big Week Closed Out. Now What?
Stocks traded flattish for a good part of the session as the strength in the financials was offset by selling in sectors such as tech, healthcare, staples and telecoms. The tailwinds for the market are largely the same: QE2 and Bernanke's op-ed in the Washington Post, mid-term elections and the prospects of an extension of the Bush tax cuts and generally stronger underlying economic trends. The risk-on trade remained in the market for the most part, as financials performed strong on Fed reports that healthy banks can increase their dividends and a technical breakout, finishing up over 6% for the week. Cyclicals also outperformed, while defensive names such as telecom, staples, healthcare and utilities underperformed.
The Dow Jones Industrial Average ended up 9.16 points, or 0.08%, to close at 11,444. The S&P 500 rose 4.77 points, or 0.39%, to close at 1225, and the Nasdaq was up 1.64 points, or 0.06%, to finish at 2578.
The CBOE Volatility IndexI:VIX puts were active on November volatility as traders adjust positions to "new lower volatility norm". VIX closed down $0.26, at $18.26, on put volume of 128,000 contracts compared to call volume of 116,000, with November 17 puts as the most active strike on 41,700 contracts.
The SPDR S&P 500 ETF (SPY) - Get Report closed up $0.46, at $122.72, on overall put volume of 1.21 million contracts trading as compared to call volume of 968,000, with the November (W) 123 calls as the most active series on 100,600 contracts. November monthly put option implied volatility is at 15 and December is at 16 versus its 26-week average of 23. Lower volatility suggests decreasing price movement. SPY traded through resistance of its April 26 high of $122.12.
A common measure of put-option prices versus calls examines the pricing of "skew", bearish puts that are "out of the money" or not yet profitable, versus calls that are similarly out of the money. Out-of-the-money SPY December 125 call volatility is at 15 while December out-of-the-money 118 puts are at 19 suggesting traders are leaning towards bearish hedges.
The PowerShares QQQ Trust (QQQQ) volatility trends lower as it closes in near its three-year high of $55.07, closed flat at $53.67. Overall put volume of 184,000 contracts compared to call volume of 120,000, with November 54 puts as the most active series on 19,200 contracts. QQQQ November monthly 56 call volatility is 16,while November 52 put volatility is at 19, indicating traders are open to hedging for downside price movement.
JPMorgan Chase (JPM) traded 2.2x its average daily options volume. December 43 and March 50 calls were active on total put option volume of 98,000 contracts compared to call volume of 178,000, suggesting traders are expecting shares to trend higher on dividend increase speculation.
For the week of November 8, we may see some consolidation of the recent move due to a sparse lineup of catalysts. However, any dip is widely expected to be mild and could be a buying opportunity as we have had a tough time building momentum to the downside. Earnings season is winding down and we are heading into the Thanksgiving holiday in the U.S. Economic data will be quiet this week as the only top-tier economic indicators (besides the usual weekly jobless claims) are International Trade, released Wednesday at 8:30 a.m. EDT and the University of Michigan's Consumer Sentiment index on Friday at 9:55 a.m. EDT. Veterans Day falls on Thursday, November 11, and while the stock and futures markets are open, other agencies are closed. As a result, jobless claims will be released Wednesday at 8:30 a.m. EDT instead of their usual Thursday slot. Import and export prices, while not a top-tier report, are also released on Wednesday at 8:30 a.m. EDT.
Overseas, traders will be focused on China as its imports/exports are expected to be released on Tuesday as well as the CPI early Thursday morning. Looking ahead to Europe, there will also be a slew of trade and the weekly total of sovereign bond purchases made by the ECB.
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