Options Market Update November 16, 2015

The concerns that hit the market in August, such as the China and European slowdowns, commodities’ rapid declines and interest rate worries, again hit the market. For the week, the S&P 500 dropped 3.63%, the Dow lost 3.71% and the Nasdaq fell by 4.26%.

For the bulls, it was a challenging week as virtually every sector of the market was hit hard. That said, there were a couple of bright spots: Consumer Sentiment beat expectations, ECB President Mario Draghi hinted again that the ECB is ready to add stimulus if needed, and the further decline in oil means more spending money for the average American this holiday season.

For the bears, it was a great week as nearly every possible scenario played out perfectly for those betting against the market. For example, earnings from retailers such as Macy’s (M) and Nordstrom (JWN) were even worse than lowered expectations, Federal Reserve members continue to point to a rate hike in December, and the rapid decline in commodities are signaling a further slowdown in global growth.


The Chicago Board of Options Exchange Volatility Index (VIX) closed the week at 20.08, or higher by 40% for the week. While the VIX rose significantly, it was not a huge spike but rather a slow and steady grind higher. Also, put buying was marginally more aggressive than call buying this week, but again not by a wide margin, except in commodity and retail stocks, which were the two hardest-hit sectors.

Events for the Week to Come

Unfortunately, traders will likely be focused on the terrorist attacks in Paris to start the week. However, unless there are new developments, slowly but surely the market will move past this incident and focus on economic data and earnings.

We will hear from many Federal Reserve members again this week, and get the release of the Fed’s Minutes from its last meeting. Traders will be focused on how close the Fed was to raising rates at its last meeting and their thoughts on the future of interest rate hikes.  

Traders will also continue to focus on the steep decline in commodities and the retail sector. Once again, as the price of oil drops, there are fears of defaults for the oil-related companies. For the Retail sector, the last month has been a disaster. Many of the stocks in the sector had fallen in anticipation of bad earnings, but the earnings were so bad, companies such as Macy’s and Nordstrom lost another 20% and 18% respectively for the week. This selling pressure spread to leaders such as Ulta Salon (ULTA) and Restoration Hardware (RH), which have not yet released earnings but lost 8.5% and 6.6% on Friday in sympathy to the Retail selling.

What Traders are Saying

In my Thursday market update I highlighted the continued deterioration of the market as selling pressure seemed to be spreading. However, as I noted, the leaders of the market were still holding up, though I thought that they may be vulnerable. Unfortunately for the bulls my read was correct as the market lost another 1% on Friday, and the selling spread to stocks such as Facebook and Amazon. That said, the selling did not feel like panic selling, but was slow and orderly.

In the hours after the Paris attacks the S&P futures were down another 1% after the close on Friday. This morning, the market is set to open marginally higher. Unfortunately, because of the frequency of such attacks, traders have grown accustomed to terrorist attacks, and typically, after a day or two, traders again focus on the economy and typical trading activities. I’m sure there will be a spike in volatility/puts on the open Monday, but then if the market holds, or does not sell off too aggressively, volatility will likely calm down.

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