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.
Despite growing concern that this earnings season may disappoint due to a slowing U.S. economy and currency headwinds, the market had a strong week and the three major averages are back in positive territory for the year. The S&P 500 traded higher by 2.07%, the Dow gained 1.66% and the Nasdaq rose by 2.23%.
For the bulls, last week was a positive step forward as once again the S&P 500 and Dow are within a couple percent of all-time highs. Helping the bull cause this week was the market’s ability to digest a disappointing jobs number from the week before, the Nikkei Index broke 20,000 for the first time in 15 years and mortgage applications reached their highest levels since 2013.
For the bears, there was little to get excited about. The Jobs Report the previous Friday was a huge disappointment for the U.S. economy, and S&P futures were pointing to a drop of over 1%. However, that 1% selloff turned out to be just another opportunity for the bulls to “buy the dip.” That said, there are concerns: JP Morgan CEO Jamie Dimon last week openly talked about the next crisis for the markets and market complacency measured by the VIX is at extremely low levels.
The Chicago Board of Options Exchange Volatility Index (VIX) closed the week at 12.58, once again probing the most extreme low levels of 2015. This is quite interesting as the market heads into earnings season.
I am getting close to putting on a new bearish trade for our portfolio. While I’m not bearish on the market, the risk/reward of having a hedge against a long portfolio at these levels/prices may be too attractive to pass up.
Events for the Week to Come
With the release of economic data points, Fed member speeches and earnings announcements, there’s an overwhelming amount of catalysts for market movement this week. And with major market averages once again pushing to the top of their recent ranges, there could be upside or downside volatility.
However, it’s just as likely that economic data and earnings season could be a mixed bag and the market will simply digest them and move on. However, at the very least, expect stock-specific volatility in the weeks to come, as most companies will be reporting earnings.
What Traders are Saying
There’s a general expectation in the market that this earnings season will be disappointing. Many analysts have mentioned currency headwinds as a likely problem for most international companies.
It will be interesting to see how the market reacts to these concerns. For example, Johnson & Johnson and Intel—companies with significant international exposure—report earnings on Tuesday. If both companies report earnings that disappoint due to currency issues, will the market punish the stocks—or has the market already priced in such concerns and rally the shares?
The reaction to both good and bad earnings reports early in earnings season will likely give us a good read on how the market will react to reports over the next several weeks.
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.
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