Monday Morning Outlook: Two Key Levels for the SPX to Tackle
If the S&P 500 Index can score these technical victories, it could bring buyers off the sidelines
by Todd Salamone 12/10/2011 10:38 PM
schaeffersresearch.com
Stocks ended the first full week of December modestly higher, even after British Prime Minister David Cameron used the European Union (EU) summit as his personal platform to disparage all 17 euro-zone countries. Things might have gotten a little awkward across the Atlantic, but traders here in the U.S. responded positively to news of a revamped fiscal treaty among 23 EU member countries. With plenty of buyers still on the sidelines -- and fund managers looking to end the year on a high note -- Todd Salamone notes that some of the crucial components are already in place for a big rally.
On the other hand, stocks have yet to cement a foothold on positive ground for 2011, so it's probably too soon to celebrate over last week's advance. Fortunately, with a Fed decision on tap for Tuesday, Todd explains why now is an opportune time to add some portfolio protection. And, as we head into a quadruple witching expiration week, Rocky White runs the numbers to see what kind of volatility traders should expect. Finally, we wrap up with a preview of the major economic and earnings reports for the week ahead, as well as a few sectors of note.
Notes from the Trading Desk: Why SPX 2011 Looks a Lot Like SPX 2010
By Todd Salamone, Senior VP of Research
"Only 23% of stock-fund managers were ahead of the S&P this year through Nov. 30, according to Bank of America Merrill Lynch. This period ended with Wednesday's 4% surge."
- Barron's, December 3, 2011
"Outflows from long-term mutual funds spiked in the week ended last Wednesday just as equities began to rebound from November's slide, the latest data from the ICI show. Domestic stock funds continued to see net outflows, and they jumped to an estimated $6.67B the latest week, roughly double what has generally been logged the past several months."
- The Wall Street Journal, December 7, 2011
"We're telling our clients everything we do is hedged," says Luke Rahbari, partner at Stutland Volatility Group, noting that the firm's long and short positions are paired with options and other derivative hedges. "Everything we're doing is limited risk because everything is way too violent right now."
- Dow Jones newswire, December 9, 2011
When you read the above excerpts, do you get the feeling that caution and fear remain the order of the day? It is understandable, as uncertainty looms with respect to Europe and its sovereign debt crisis, and the U.S. is bound by regulatory and political uncertainty, as well. And, quite frankly, investors haven't been rewarded for the risk they have taken on in 2011, with the major market indexes struggling to get back into the green for the calendar year.
However, stocks have also been resilient amid the doom and gloom both here and in Europe. Technical and fundamental hurdles aside, the caution and fear are the ingredients necessary for sharp, sustainable rallies. As the caution and fear recede, sideline cash emerges and short covering unfolds, unleashing a powerful rally. So, for bulls, some of the key ingredients remain in place for a strong advance from this seemingly never-ending chop in the market.
But technical and fundamental challenges are also driving day-to-day price action, and the current chop could continue on for days, weeks or even months. In mid-2010, the sentiment backdrop on equities was also one of fear and caution, as stocks bounced around violently and aimlessly. But equities bottomed on the heels of stronger-than-expected earnings and QE2, as caution and fear turned to optimism. When the S&P 500 Index (SPX - 1,255.19) moved back into the green and above its 200-day moving average in September 2010, after months of being capped around these levels, equities moved higher and advanced mostly uninterrupted for five months (see 2010 SPX chart, below).
Today's technical backdrop is strikingly similar to that of 2010, as bulls do battle with the SPX's calendar-year breakeven point, which is again in the vicinity of the much followed 200-day moving average. A breakout move into positive territory and above the 200-day moving average could be the technical catalyst that lights a fire under equities during this seasonally strong period -- with or without a visible fundamental catalyst, as a great deal of underperforming fund managers have little time to make up for lost ground.
With fourth-quarter earnings still a month away, what are some near-term "known" fundamental catalysts with "unknown" outcomes that could push equities above the resistance levels that have capped rallies in recent weeks? One factor could be how investors digest the outcome of this past week's European Union (EU) summit, in which a fiscal pact was reached. Moreover, holiday retail sales that suggest the consumer is stronger than perceived could turn investors more optimistic about the economy and earnings moving forward. A continuation of last year's payroll tax cut could also be received as good news on the consumer-spending and economic fronts. As we said last week, the shorts are less apt to short at this juncture, which does remove some overhead supply that had been acting as a headwind. But then again, the longs seem hesitant to buy into rallies, which would suggest a positive outcome is needed.
The SPX enters December expiration week just below its year-to-date breakeven point at 1,257.64, as the Russell 2000 Index (RUT - 745.40) and S&P MidCap 400 Index (MID - 885.38) are perched just below resistance at 750 and 900, respectively.
Meanwhile, the CBOE Market Volatility Index (VIX - 26.38) is hovering above the 24 level, which is half its high and potential support. Bulls would like to see the VIX below 24 as major equity indexes break above resistance levels, pressuring the shorts and fund managers into a buying frenzy. Consider rolling out any expiring portfolio protection with the VIX at relatively low levels, and maintain a long bias to play a potential unwind in the predominantly cautious/skeptical sentiment backdrop.
Indicator of the Week: Quadruple Witching Expiration
By Rocky White, Senior Quantitative Analyst
Foreword: This week brings us the third Friday of the month, which means it is options expiration week. December is also a quadruple witching expiration -- which means not only do equity options expire, but so do stock index futures, stock index options, and single stock futures. In the analysis below, I break down previous expiration-week returns in a few different ways to see what we can expect.
Expiration Week: Below is a table showing how the S&P 500 Index (SPX) has performed on a weekly basis going back to 2009. According to this data, we can expect good things from the market this week. Quadruple witching expirations have averaged a return of 0.86%, and they have been positive 73% of the time. This is far better than a typical week, which averages a 0.28% return and is positive 55% of the time. Plus, you'll notice that other expiration weeks have typically been very bearish.
The last column in the table is also worthy of note, as it shows the standard deviation of returns. With all of the different market players closing and rolling positions, it is generally accepted that quadruple witching expirations have a lot of potential for volatility. But, while the potential may be there during these unusual expiration weeks, since 2009 it has not played out. The standard deviation of returns for quadruple witching expiration weeks is only 2.2% -- which is considerably less than typical weeks, with a standard deviation of returns of more than 3%.
Zeroing In on December Expiration Weeks: The table on the left below shows expiration week returns so far this year. As you can see, they haven't been very good weeks for the market. Most have been negative, averaging a loss of 0.61%. However, the last two quadruple witching expiration weeks -- in September and June -- have been positive (March was the other quadruple witching expiration month in 2011).
The table on the right is a different story. It shows December expiration weeks since 2000, and you can see this has typically been a very good week for the market. In fact, nine of the last 10 are positive. Since 2000, December expiration has averaged a gain of 0.38%, and the median was 0.71%.
Individual Equities: We've seen how the market fares during expiration week, but what about some individual stocks? Out of the 11 expiration weeks so far this year, two stocks -- Philip Morris (PM) and Cabot Oil & Gas (COG) -- have been positive nine times. Below are all optionable stocks that meet certain liquidity criteria, and have had at least eight positive expiration weeks.
Below are the stocks that you might want to avoid during expiration week. One stock, OpenTable (OPEN), has been negative in all 11 expiration weeks so far this year. The rest of the stocks on the list have only been positive once all year during expiration week.
This Week's Key Events: Wall Street Braces for Fed's Final Policy Decision of 2011
Schaeffer's Editorial Staff
Here is a brief list of some of the key events this week. All earnings dates listed below are tentative and subject to change. Please check with each company's respective website for official reporting dates.
Monday
The economic calendar kicks off on Monday with the release of the Treasury Budget for November. Earnings results are expected from Avanir Pharmaceuticals (AVNR), FuelCell Energy (FCEL), and Quanex Building Products (NX).
Tuesday
On Tuesday, reports are due out on retail sales and business inventories. Then, at 2:15 p.m. Eastern, the Federal Open Market Committee (FOMC) will announce its latest policy decision. Best Buy (BBY), FactSet Research (FDS), and Pantry (PTRY) are slated to share the earnings spotlight.
Wednesday
Wednesday's docket features data on import and export prices, as well as the usual update on domestic petroleum supplies. On the earnings front, we'll hear from Joy Global (JOYG), MedCath (MDTH), Nordson (NDSN), and VeriFone Systems (PAY).
Thursday
A slew of economic reports are due out on Thursday, including the producer price index (PPI), the Empire State manufacturing index, the Philadelphia Fed index, industrial production and capacity utilization, and weekly jobless claims. The earnings calendar also heats up, with Accenture (ACN), Adobe Systems (ADBE), Discover Financial Services (DFS), FedEx (FDX), Hovnanian Enterprises (HOV), and Research In Motion (RIMM) all stepping up to the plate.
Friday
The week wraps up on Friday with the release of the consumer price index (CPI) and the latest quarterly earnings from Darden Restaurants (DRI).
And now a few sectors of note...
Dissecting The Sectors
Sector Utilities
Bullish
Outlook: The utility sector has emerged as a pocket of technical strength in 2011, as the PHLX Utility Sector Index (UTY) is up about 10% for the calendar year -- while the broader S&P 500 Index (SPX) remains just south of breakeven, on a year-to-date basis. Plus, UTY recently regained its footing above support in the $460 region, suggesting that the index's late-November retreat was simply a blip on the radar. On the fundamental front, the utility sector also sports some attractive dividend yields, which are certainly a selling point in the context of a choppy market environment. However, there's plenty of pessimism surrounding the utilities sector, despite its technical strength and fundamental appeal. Drilling down, 77% of stocks in the electric utility group are trading above their 200-day moving averages, but they've attracted only 44% "buy" ratings from brokerage firms. Meanwhile, the gas utility group boasts 80% of stocks trading above their 200-day moving averages -- yet these names have garnered only 41% "buy" ratings. Within the group, Duke Energy (DUK) and Consolidated Edison (ED) have racked up double-digit percentage gains in 2011, and both stocks are lingering near annual-high territory. Nevertheless, there's not a single "buy" endorsement between the two. Going forward, a round of well-deserved upgrades could draw a fresh wave of buyers to the table, helping these stocks extend their positive price action.
Sector Leisure/Retail
Bullish
Outlook: By most accounts, the holiday shopping season is off to a strong start. For the four-day period starting with Thanksgiving, the National Retail Federation (NRF) reported a 16.4% year-over-year sales increase, with the average customer spending 9.1% more than last year. Overall, Thomson Reuters reported that same-store sales climbed 3.1% in November. NRF had previously predicted "average" holiday sales this year, and a major financial publication recently featured a broadly negative commentary on the retail sector, warning of a bleak shopping season -- so it seems that an upside surprise is well underway. From a technical standpoint, the SPDR S&P Retail ETF (XRT) is now looking to take out resistance at the $55 level, following a recent bounce from support at its 320-day moving average. On the sentiment front, we've seen an influx of put butterfly spreads on XRT options, which is a strategy fund managers use to guard against corrections. This strategy was also popular during a retail-sector rally around this same time last year. Overall, we remain upbeat on select outperformers within the consumer discretionary group, and recommend focusing on stocks in solid technical uptrends that are surrounded by skepticism. A few of our current favorites within the group include retailers AutoZone (AZO), Advance Auto Parts (AAP), Nordstrom (JWN), Limited Brands (LTD), and Whole Foods Market (WFM), along with restaurateurs Chipotle Mexican Grill (CMG), Domino's Pizza (DPZ), and McDonald's (MCD).
Sector Gold
Bullish
Outlook: The SPDR Gold Trust (GLD) continues to hold steady above support at its 120-day moving average, which has served as a solid technical floor since April 2009. In light of the strong price action, it's interesting to note that various indicators we track point to significant pessimism on gold. For example, investors were spooked after learning that a popular hedge fund manager liquidated a portion of his GLD stake during the third quarter. Meanwhile, a recent survey of 121 portfolio managers found that a hefty 34% are bearish on gold. Among all asset classes, only a few predictable underdogs (U.S. Treasuries, municipal bonds, and European stocks) garnered a higher bearish vote. In spite of this downbeat attitude, the World Gold Council reported that gold demand jumped 6% during the third quarter, thanks in part to global anxiety about the European debt crisis. However, one risk is the decline in GLD's 20-day buy-to-open (BTO) option volume, as this has previously coincided with periods of declining or range-bound price action for the trust. That said, cumulative BTO volume on GLD options is at the lows of 2010, which marked buying opportunities. Bulls would like to see BTO option volume on GLD turn higher from here, as a sign that investors are taking a renewed interest in the shares on this pullback to potential support.
Sector Financials
Bearish
Outlook: After outperforming during the second half of October, the Financial Select Sector SPDR (XLF) is now stuck below staunch resistance in the historically significant $13.50 area once again. The fund is currently sitting on a substantial year-to-date loss of 18%, significantly underperforming the broader equities market. From a sentiment standpoint, downgrade potential for the group seems to be elevated at the moment. From late May through late November, the percentage of "buy" ratings on bank stocks rose to 40.4% from 32.5% -- a period of time during which XLF shed 25% of its value. Downgrades in response to the group's underperformance could prompt additional selling pressure. However, as a point of caution, the financial sector was strong in December 2010, and appears to be faring well so far in December 2011. For example, XLF found support last week at its 80-day moving average. Plus, the recent influx of out-of-the-money December call buying on big-cap banks has so far proven to be smart money, and we haven't seen significant liquidations of these options yet. Further muddying the waters, there's been choppy action lately in the direction of the 50-day call/put volume ratio on XLF, suggesting that bulls and bears are currently in a tug-of-war over this sector. Overall, these various factors increase the risk of initiating short positions at the moment.
Prepare for the investing week ahead. Every week, Bernie Schaeffer and his staff provide you with their insight about what has happened and, more importantly, what will happen in the market. We dig deep and show you what's happening behind the scenes, and tell you which indicators are predicting major market moves. If you enjoyed this week's edition of Monday Morning Outlook, sign up here for free weekly delivery straight to your inbox. |
