Options Market Update December 28, 2015

 
The roller coaster market continued its wild action last week as all three major indexes advanced by nearly 2.5%, led by a surge in commodity-related stocks and other underperformers of 2015. For the week the S&P 500 added 2.76%, the Dow gained 2.47% and the Nasdaq advanced by 2.55%.

For the bulls, the market was able to rebound from the ugly close of the previous week, and again bring the S&P 500 back to unchanged on the year. Also, Oil had its largest weekly advance in nearly four months, which helped stabilize the high-yield bond market and Consumer Confidence figures beat expectations.

For the bears, last week's market advance was extremely suspect as the gains were led by the worst performing stocks of 2015, and happened on extremely low volume during a holiday shortened week. Also, it was reported investors pulled more money from mutual funds in a seven-day period than in the last two and a half years, as $11.1 billion was withdrawn from stock funds, $12 billion from bond funds and $5.6 billion from funds that buy a mix of stocks and bonds.

Volatility

The Chicago Board of Options Exchange Volatility Index (VIX) closed Thursday at 15.74, or lower by 24% for the week. This was exactly as I had forecast in last week's Weekly Update, as I had theorized that if the S&P 500 stabilized, traders would become extremely wary of owning quickly decaying options into the holidays. I would expect the VIX to remain around the 15-16 level for much of this week as this is another holiday shortened week for New Years.

Events for the Week to Come

Please note the market will be open all day on Thursday, but will be closed on Friday in celebration of New Years.

This week has the potential to be as slow as last week, as many hedge funds and traders have essentially closed down trading operations for the year in the week before New Years. Also, economic data releases will be extremely light this week. Because of this potentially slow week, as I had advised last week, I do not recommend buying a lot of options in the days to come as the decay could be drastic if your stock does not make a significant move.  

What Traders are Saying

In this section last week I noted that there could be a rotation into the commodities, transports, industrials and the other sectors that had underperformed so poorly in 2015. While I did not have enough conviction to add one of these stocks to our portfolio based purely on my theory, I wanted to let you know that this was a possibility. Then on Monday and Tuesday morning call buyers and put sellers swept through these sectors, and Tuesday, late in the morning, I sent an update noting this bullish activity.

By the end of the day Tuesday the list of stocks leading the S&P 500 included:

Joy Global (JOY) up 8% on the day - down 70% year-to-date
Diamond Offshore (DO) up 5.5% on the day - down 40% year-to-date
Caterpillar (CAT) up 5% on the day - down 24% year-to-date
United Rentals (URI) up 4.5% on the day - down 27% year-to-date

This was just a small sample of the "dogs of 2015" that ripped higher on Tuesday and Wednesday. Meanwhile, the "leaders" of the market, such as Facebook and Amazon closed marginally lower for the week, even as the three major indexes were up approximately 2.5%.

This is the type of action we have seen all year. The overall market continues to stay within a reasonably tight range, while under the surface there is extreme sector rotation. What sparks this rotation is anyone's guess. That said, this week's action was not terribly surprising as the selling in these beaten down sectors had potentially become too extreme, and traders may have wanted to "frontrun" a rotation into these sectors into the New Year.

Only time will tell if this past week's rush to the trash of 2015 is the start of a bigger trend into 2016 ... I am a bit suspect of this. This move was made during a holiday shortened week, on extremely light volume. That said, my takeaway from last week is that as is typically the case, one of the best reads on the market, and where the "hot money" is flowing, is to continue to watch for trends in my daily bull/bear order flow emails.


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