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Today


IVolatility Trading Digest™


Volume 13, Issue 44
Relative Strength Update

Relative Strength Update - IVolatility Trading Digest™

Trade selection using volatility as the primary criteria. Different trades for different volatility opportunities.
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Relative Strength UpdateSince a few of the previous momentum darlings appear to be rolling over as 3Q earnings reporting ends this seems to be a good time to again update our relative strength list first introduced in Digest Issue 34 "Downward Momentum" supplemented by Digest Issue 38 "Options Relative Strength Top 15."

First we offer a few market and strategy comments.

 

Review Notes Clip Art

S&P 500 Index (SPX) 1770.61. SPX challenged the October 30 high of 1775.22 twice last week before declining 23.34 points on Thursday over building concern of a slowing economy only to be round tripped Friday with a 23.46 advance setting up for another go at the now important October 30 high after a better than expected employment report. However, since the market breadth deteriorated every day last week, except for Monday we continue to maintain a correction of about 3% remains likely until there is close above 1775.22 along with improving market breadth.

 

Although the market remains near the high there is notable rotation going on as some momentum favorites stall while others begin rolling over, especially the previous social cloud leaders along with those announcing disappointing earnings and cutting forward guidance.

Along with cooler weather, year-end thoughts could now be partly responsible for the recent rotation into larger capitalization stocks, those with deep liquidity just in case they need some quick selling. However, since options implied volatility remains near the lower part of the range relatively inexpensive hedging strategies are a likely alternative to wholesale selling. For example, the CBOE S&P 500 Skew Index (SKEW) 126.37 may already be reflecting opportunistic contrarian hedging activity due to the availability of relatively inexpensive puts.

While updating the relative strength list we noted several former leaders such as Facebook (FB), Google (GOOG), Yelp (YELP) and even LinkedIn (LNKD) were no longer above their respective upward sloping trendlines having been replaced by Apple (AAPL), Microsoft (MSFT), General Electric (GE), Pfizer (PFE) and others. Perhaps the Twitter IPO was partially responsible or perhaps portfolio managers are taking profits in the previous leaders while looking to redeploy proceeds in safer less volatile issues.

 

Options Relative Strength

We first introduced our Options Relative Strength list in Digest Issue 34 as momentum suggestions for further analysis. For this update, we refined it somewhat by applying more specific options volume criteria considering not only Friday's one-day volume but also the 5-day and 30-day volume setting a minimum daily volume of 10K contracts for the previous month thereby reducing the influence of temporary volume spikes around earning reports. Here is the new list expanded to the top 20.

 

 

Listed in column 4 in 5-day options volume order, these are the candidates remaining above their upward sloping trendlines (USTL), our preferred trend measurement technique. Most begin at their June lows, but in the some cases, the uptrend begins later like Microsoft (MSFT), General Electric (GE) and Pfizer (PFE). These are the ones with good options liquidity and favorable bid/ask spreads an important consideration when considering options strategies with multiple legs.

IVXM in column 5 is the current implied volatility index mean of the puts & calls while WA IVXM in column 6 is the comparable measure for last week or week ago (WA). Since many have completed 3Q earnings reports the current IVXM compared to the prior week are very close. Since Michael Kors (KORS) just reported, there is still a noticeable difference between the IVXM before and after reporting as shown above.

RHV in column 7 is the historical volatility of the stock calculated using the range method while IV/HV Ratio in column 8 is the implied volatility/historical volatility ratio, another way to evaluate options prices relative to the actual movement of the underlying stocks. Since most have recently reported earnings and implied volatility of the market as measured by CBOE Volatility Index® (VIX) 12.90 is relatively low, most of the ratios are close to one. By this measure, some would consider options relatively inexpensive for both long strategies and hedging existing long stock positions with puts.

Some noticeable already mentioned new additions are Microsoft (MSFT), General Electric (GE) and Pfizer (PFE) while Apple (AAPL) returns after resuming its uptrend.

Going into year-end there appears to be a noticeable shift into larger stocks with more traditional price to earnings ratios and less willingness to pay a premium for growth at any price, which should be good for the market in the longer term but not so good for breadth as money flows into fewer large capitalization stocks.

Other noticeable additions include oil & gas and oil service companies, such as Halliburton (HAL), Transocean (RIG) and Cheniere Energy (LNG), due to sector seasonal strength that usually lasts into the spring.

We suggest staying long these relative strength stocks going into year-end while keeping a close eye on their upward sloping trendlines while being prepared to close, partially unwind or hedge positions if they decline and close below this key guideline.

 

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Summary

Although there is still a possibility for 3% correction on some disappointing news before year-end, most fundamentals suggest chances are good the market advance will continue into year-end although group rotation into larger capitalization stocks and profit taking will likely become more pronounced.

 

Twitter Follow us on twitter for more ideas from our scanners and other developments.

 

In next week's issue, we will again review all our market indicators.

 

Finding Previous Issues and Our Reader Response Request

All previous issues of the Digest can be found by using the small calendar at the top right of the first page of any Digest Issue. Click on any underlined date to see the selected issue. Another way to find them is the Table of Contents link in the blog section of our website.

Next week's issue

As usual, we encourage you to let us know what you think about how we are doing and what you would like to see in future issues. Send us your questions or comments, or if you would like us to look at a specific stock, ETF or futures contract, let us know. Use the blog response at the bottom of the IVolatility Trading Digest™ page on the IVolatility.com Website. If you would like to receive the Digest by e-mail let us know at Support@IVolatility.com.

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IVolatility.com is not a registered investment adviser and does not offer personalized advice specific to the needs and risk profiles of its readers.Nothing contained in this letter constitutes a recommendation to buy or sell any security. Before entering a position check to see how prices compare to those used in the digest, as the prices are likely to change on the next trading day. Our personnel or independent contractors may own positions and/or trade in the securities mentioned. We are not compensated in any way for publishing information about companies in the digest. Make sure to due your fundamental and technical analysis homework along with a realistic evaluation of position size before considering a commitment.

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