Earnings Playbook

Upside momentum returned with S&P 500 Index reporting about half completed. Companies with better than expected reports lead the disappointers with increasing signs of rotation into secular growth from cyclical growth. This week it will be more earnings, China trade negation news from Shanghai, and the Fed's interest rate announcement. Option and futures indicators remain bullish as detailed in the Market Review including updates for the WTI Crude Oil Commitments of Traders Report and the Double Barrel Indicator.      

S&P 500 Index (SPX) 3025.86 advanced 49.25 points or +1.65 % last week making new closing and intraday highs on both Wednesday and Friday. With considerable support at 2950 on any pullback, the 50-day moving average crosses down at 2915.49 as the uptrend continues.  

CBOE Volatility Index® (VIX) 12.16 dropped 2.29 points or -15.85% last week. Our similar IVolatility Implied Volatility Index Mean, IVXM using four at-the-money options for each expiration period along with our proprietary technique that includes the delta and vega of each option, declined 1.68 points or -14.63% ending at 9.80. Now back near the 10% level previously associated with uptrends. The IVXM and SPX charts follow.

VIX Futures Premium

The chart below shows as our calculation of Larry McMillan’s day-weighted average between the first and second-month futures contracts.               

With 17 trading days until August expiration, the day-weighted premium between August and September allocated 68% to August and 32% to September for a 22.54% premium, well into the bullish green zone, vs. 10.70% premium for the week ending July 19.   

The premium measures the amount that futures currently trade above or below the cash VIX, (contango or backwardation) until front month futures contract converges with the VIX at expiration on August 21, 2019.     

For daily updates, follow our end-of-day volume weighted premium version located about halfway down the home page in the Options Data Analysis section on our website.

The Earnings Playbook

Last week Digest Issue 29 "Hedging Strategies" made the case for hedging market risk in the event lowered earnings expectations disappoint. However, by Tuesday it was clear the usual earnings playbook that lowers expectations before reporting begins, only to be beaten and push stock prices higher, was alive and well underway. In addition, rotation into secular growth stocks continued after better than expected reports from several leading consumer product companies.   

WTI Crude Oil (CL) 56.20 basis September futures advanced .44 last week. The  Disaggregated Commitments of Traders - Options and Futures Combined report as of July 23 shows "Managed Money,” the group that best correlates with crude oil price changes and arguably the most important, increased their shorts and slightly reduced their longs, selling to "Commercials" directly and through "Swaps" as August futures expired. This short position chart shows the changes as "Managed Money" turned bearish again.

Seasonally it appears the peak in prices occurred on April 23-25 reaching a high of 65.92 basis September futures. After declining to 50.91 on June 5, WTI now appears trading in a range between 51 and 61, with normal declining inventory in the summer, offset by reduced demand forecasts. Checking the futures curves, WTI just returned to contango with September 20 futures 1% higher than September 19 indicating supplies are adequate, while Brent remains in a backwardation of 4.36% with September 20 futures lower than September 19 indicating a tighter market.

Strategy

Last week it was about earnings reports, second-quarter GDP, and expectations for an interest rate cut this week, all supporting the bullish view as options and futures indicators show, along with iShares iBoxx $ High Yield Corporate Bond ETF (HYG) 87.17 introduced in Digest Issue 28 "Double Barrel Indicator" as a timing gauge to use for increasing hedge positions. Now above the last pivot at 86.50 and well above the initially defined trigger at 86, it continues trending up with the S&P 500 Index. Although the transports and small-capitalization stocks are not confirming new highs, until this indicator turns lower, delay adding hedges.

Summary

The earnings reporting game continues as better than expected reports push stocks higher, reducing the need to hedge against "selling the news." The S&P 500 Index made new closing and intraday highs twice last week supported by expectations for an interest rate cut announcement along with more favorable earning reports. While some "sell the news" risks remains after the interest rate announcement, until the indicators turn lower, go with the bulls.