Options Market Update January 25, 2016

After testing multi-year lows on Wednesday, the market was able to stabilize, rebound and close the week at its highs. For the week, the S&P 500 gained 1.41%, the Dow added 0.66% and the Nasdaq advanced 2.29%.

For the bulls, the action Wednesday was likely scary, but also exactly what they were looking for, as the Dow dropped over 550 points, in what may have been capitulation and the start of a relief rally. Also, Existing Home Sales, Consumer Confidence and Manufacturing PMI all beat expectations, and European Central Bank President Mario Draghi hinted that more stimulus may come as early as March.

For the bears, the issues that have concerned the market for so long, such as a slowing Chinese economy, commodity price destruction and fears of defaults in the oil sector, continued to weigh on the markets. These issues crushed the markets, as the Nasdaq lost over 15% in 14 trading days. Also, many top hedge fund managers are sounding warning bells about the possibility of a much larger selloff in the markets, and almost all stocks reporting earnings have so far been met with selling pressure.


The Chicago Board of Options Exchange Volatility Index (VIX) closed the week at 22.34, lower by 17%. This close in the low 20s came after the “fear index” spiked well above 30 at the lows of the selloff on Wednesday. Then, as the market stabilized and then ripped higher on Friday, the VIX and put premiums came in extremely hard.

While the VIX at 22 is still high, if the market stabilizes, I would anticipate put prices to get even cheaper, so if you feel you need portfolio protection, I wouldn’t talk you out of buying at these levels.

Events for the Week to Come

This week is packed with important economic releases, including Consumer Confidence, GDP and the Federal Reserve’s Announcement on Wednesday. Also, this will be the busiest week of earnings releases, including McDonald’s (MCD), Apple (AAPL), Boeing (BA), Facebook (FB) and Microsoft (MSFT). Unfortunately, until the U.S. market can get past “outside” events, I expect very little of this will matter if China’s market unwinds overnight or if oil makes another dramatic move.

What Traders are Saying

For the past two to three weeks, stocks like Kroger (KR) and Nvidia (NVDA) that had stood out amid the carnage have also failed. And the list of stocks above their 50- and 200-day moving averages have basically dwindled to a small handful of utility stocks—not the stocks that will produce the next home runs.

The next two weeks are packed with earnings releases, my favorite time to find new stocks to put on positions. In fact, I would almost prefer the market to stay somewhat weak during the next several weeks, as that makes it easier to find the next standout performers.

Earnings season has not yet yielded those new stars. Stocks that the bulls were hoping would lead, such as JPMorgan (JPM) Wells Fargo (WFC) and Intel (INTC), have so far disappointed. But there will undoubtedly be earnings stars, and we will likely target those stocks for new positions.

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Headline News

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Tesla Motors

If Tesla ever begins to cut back on development and innovation costs, earnings will soar.


China seems to be raising up its very own version of Amazon in Alibaba (BABA.


Roy Ward uses the PEG ratio to determine if the stock is undervalued or overvalued.

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