This is an excerpt from Cabot Options Trader, your guide to quick profits using puts, calls, spreads, straddles, iron condors and other options trades. Analyst Jacob Mintz explains and recommends diverse investing strategies for big gains with controlled risk.
The month of February brought huge returns for the U.S. stock market as the S&P 500 gained 5.5% and the Nasdaq surged by 7.1%. However, the three major indexes were mixed last week as the S&P 500 fell 0.27%, the Dow lost 0.04% and the Nasdaq gained 0.15%.
For the bulls, the positive market action wasn’t limited to the U.S., as markets in Germany and England hit all-time highs, and Japan’s stock market hit its highest level in 15 years. Helping the bull case last week were above-expectations reports from University of Michigan Consumer Confidence and Case-Schiller Home Prices.
For the bears, the market’s steady advance stalled last week as the major indexes were virtually unchanged. Also, Existing Home Sales missed expectations, U.S. Initial Jobless Claims rose more than expected and U.S. oil-rig counts declined for the 12th straight week.
The Chicago Board of Options Exchange Volatility Index (VIX) closed the week at 13.34, lower by another 7% for the week. This lower close has been a constant trend in the month of February as this “fear” index fell by 35% for the month of February.
As I said last week, the price of protection/downside exposure is getting incredibly cheap again. If this trend continues, and the VIX gets to somewhere near 12.50, we may enter into a long VIX, or bear trade in one of the major indexes, as the risk/reward of protection may be too good to pass up.
Events for the Week to Come
This coming week is full of important economic data culminating in the Jobs Report on Friday before the market open. On Wednesday the Beige Book will be released, which is a report on economic conditions that is used by the Federal Reserve. On top of those potential market-moving events, Federal Reserve Chairmen Janet Yellen will give a speech Tuesday morning, and three other Federal Reserve members will speak on Wednesday.
What Traders are Saying
The bear traders that I speak to have virtually thrown in the towel at this point. The bull market run is five to six years old, and not showing any signs of stopping. That said, these bears have recently seen a couple of signs that has given them some hope.
The VIX is again within a couple of points of its all-time low, which for many bears signals that the market players are becoming too complacent. The low level of fear is a contrarian signal that has recently worked.
Also, within the last several days, there were two “high flying growth stocks” that crushed earnings expectations, yet sold off aggressively. Workday (WDAY) beat expectations on nearly every metric and the stock popped higher to trade above 95 on Wednesday. But the stock quickly gave up those gains and then some, and closed at 85.50 on Friday.
Then on Thursday after the market close, Splunk (SPLK) crushed earnings and revenues. The following day, the stock received six price target raises by investment banks. In early trade on Friday, the stock spiked higher from 69.50 to as high as 74.80 before closing the day lower by 2.30 at 67.25.
The bears will point out that this type of price action may be the start of a rotation of stocks whose valuations have gotten too high, which they also perceive is the case for the overall market.
The bulls, on the other hand, would point out that those stocks were getting hit at the end of last week (such as Coca-Cola (KO), Yum! Brands (YUM) and Lululemon Athletica (LULU)) after staging big rallies and may take leadership roles as the bull-run continues.
Jacob Mintz is Chief Analyst of Cabot Options Trader, and a professional options trader. He has developed a proprietary risk management system for options trades.
Subscriber comments on Cabot Options Trader