Strong Corporate Earnings Snap Two-Week Losing Streak in Equities; Looking to Buy S&P 500 Put Options at Current Levels
Last week, equity markets managed to post some moderate gains, with the S&P 500 and Dow Jones breaking two consecutive weeks of losses on strong corporate earnings releases and positive news out of the Eurozone. Gains, however, were tempered by weaker economic data in the housing markets and in weekly jobless claims, so there was some two-way activity throughout the week. Most of the major industry sectors in the S&P 500 were higher by Friday’s close with utilities leading the way. Tech stocks, however, closed in negative territory for the second consecutive week.
Volatility, as measured by the CBOE Volatility Index, fell below 18. This gage is indicative of the balance of stability and fear in the market, so the drop last week shows that trader sentiment is steadily improving. The Dow Jones closed the week with a gain of 1.4 percent, with the S&P 500 and Nasdaq showing more moderate gains at 0.6 and 0.4 percent, respectively. Traveler’s Insurance was the best performer in the Dow, while Bank of America saw the largest drop in the index.
Apple to take Center Stage in Next Week’s Corporate Earnings
Thus far, 121 companies of the 500 listed in the S&P have released their earnings reports for the current quarter and 81 percent of those releases have surpassed the consensus expectations of market analysts. This will continue next week, with nearly 180 companies reporting earnings but most of the attention will likely center on Apple (AAPL), as the stock has already seen massive increases in volatility leading up to the report with a drop last week of 10 percent. The stock has seen a major rally so far this year, rising from the low $400 level to trade above $600 per share, leading many analysts to suggest that the uptrend is over-extended and ready for a downside correction.
The other main stories next week will be seen in the various macroeconomic releases, which will come first from China and the Eurozone (both releasing PMI Manufacturing surveys), and this will guide sentiment early in the week. This will be followed by Home Price data out of the US on Tuesday, and Q1 GDP figures on Thursday. Strength in the US data could actually weigh on some equity markets, as this will lead to analyst speculation that the US Federal Reserve’s quantitative easing program is complete, given that the economy is showing signs of recovery.
My Trading Recommendation In 50 words:
Given the latest rally in equities, I will be looking to enter into a one week 1380 put option in the S&P 500, as prices are likely to be contained by the double top seen at 1420 in the coming week. Downside targets include a drop to at least 1350 before any bounce can be expected, and any downside surprise in this week’s earnings reports could easily bring a test of this level.