Options Market Update February 29, 2016

The market again tested the bulls this week—the S&P 500 dropped below 1,900 and again looked on the verge of a deeper fall. However, the bulls again bought the dip, and the S&P 500 finished the week near its highs at 1,950. For the week, the S&P 500 added 1.58%, the Dow gained 1.51% and the Nasdaq rallied by 1.91%.

For the bulls, the last two weeks have brought huge gains; the Dow added 666 points and the S&P 500 gained 4.7%. The Dow has now rebounded approximately 1,100 points since the lows of February 11. Helping the bull cause lately has been economic data showing that the likelihood of a U.S. recession may have been overblown. For example, GDP, Durable Goods, Existing Home Sales and Consumer Sentiment all beat expectations this week.

For the bears, it was another challenging week, as the bulls were able to withstand another couple of days of selling and push the market to recent highs. However, the bears would point out that volumes have been light and the S&P 500 still has not broken out above 1,950. Also, China’s Shanghai Composite is again moving extremely violently and has not participated in the rest of the world’s recent stock market rally and Eurozone economic data continues to be weak.


The Chicago Board of Options Exchange Volatility Index (VIX) closed the week at 19.81, lower by 3.56%. It appears the 20 level will be sticky to the downside unless the market can break out of its recent range to the upside. Until that breakout, I still believe puts/volatility in some form need to be in an investor’s portfolio.

Events for the Week to Come

This week will be packed with important economic data. However, the biggest event of the week could come from the political world. More than a dozen states will hold primaries on Super Tuesday, which may give the markets a bit more clarity on who will be the nominees for President. One thing to note about politics: while there are likely candidates the market would prefer over others, what the market most seeks is certainty, which we may get more of after Tuesday. From there, the markets will turn attention to Manufacturing, Oil and Jobs data set to be released this week.

What Traders are Saying

As I’ve noted, the sector rotation has been extremely violent in the past year. In the blink of an eye, media, biotech or cloud computing could go from hot sectors to sell at all cost.
Last Friday, after a week of “good” economic data, the market again switched directions. No longer was there fear of a U.S. recession, and the market began to price-in a rate hike or two this year. And in a blink of an eye, financials rebounded after grossly underperforming for weeks, and utilities and dividend stocks were sold aggressively. In the options world on Friday afternoon, these interest-rate-sensitive stocks saw bullish activity:

Buyer of 7,500 Citigroup (C) March 41.5 Calls (exp. 3/11) for $0.43 (financials bounced back in a big way)
Buyer of 4,000 Charles Schwab (SCHW) June 28 Calls for $1.10 (interest-rate play perhaps)
Buyer of 10,000 MetLife (MET) January 47.5/55 Bull Call Spreads for $1.05 (interest-rate-sensitive stock)

Whether this will be another head fake or a true rotation into these interest rate sensitive stocks is anyone’s guess. However, it’s something to keep an eye on in the days and weeks to come.

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