Schaeffer's Trading Floor Blog

2 Must-See Charts for VIX Watchers

When it comes to CBOE Volatility Index (VIX) futures, context matters

by 1/28/2015 8:09 AM
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So what if I've now joined the entire world in saying that volatility will trend higher? It's easy to predict something into the ether. It's especially easy if you do it on TV, as there's no repercussion for making a bad prediction … and then coming back on the air three months later and making the same prediction again. And again … and again ... it will eventually look prescient.

I could do it here in print too. Suppose the CBOE Volatility Index (VIX) is 13 in July? I can just say that the overall long-term trend is higher, not some sort of "day versus day" with random endpoints. But I am actually saying it will trend higher over time -- and day-over-day comps are kind of meaningless through that lens.

A better lens is the year-over-year means that I ran yesterday. I do say the 2015 mean will end higher than the 2014 mean. But that's honestly an easy prediction. We've already booked a month of elevated (versus 2014) means in 2015; if nothing else it's a positive expected value call. It's not actually a value-added prediction, so I'll clarify it to say that it's a call on the next 11 months going forward.

But it's more important to see how the masses vote with their feet. VIX futures are a decent way to gauge expectations for future volatility. On the surface, it looks pretty "eh." Here's the current VIX term structure:

Current VIX term structure

It's a modest premium to VIX itself, and it's relatively flat. Nothing to see here, right? Well, I always like comparing the term structure to other sessions that had a similar VIX backdrop. And here we go -- it's yesterday's term structure versus those on Oct. 24 and Feb. 7 of last year.

Current VIX term structure versus Oct. 24 and Feb. 7

And as you can see, the volatility guess-timates going forward are indeed more bullish (for VIX) now than they were at similar backdrops in 2014. On the surface, that's bearish for volatility on a contrarian basis. But in context, I'm not so sure. We've now had nearly a year of repeated volatility pops. So it makes some sense to internalize that this is a more permanent sea change taking place. We're also further along in the long-term low-volatility regime, which suggests VIX is creeping up anyway.

So yes, people are indeed voting with their feet, and they're quietly saying "higher volatility." But it's tough to make the case that's anything but a sensible call.

Disclaimer: Mr. Warner's opinions expressed above do not necessarily represent the views of Schaeffer's Investment Research.


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Analyst Update: Peabody Energy Corporation, Dunkin' Brands Group, Inc., and Select Comfort Corporation

Analysts adjusted their ratings on Peabody Energy Corporation (BTU), Dunkin Brands Group Inc (DNKN), and Select Comfort Corp. (SCSS)

by 1/27/2015 1:13 PM
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Analysts are weighing in today on coal issue Peabody Energy Corporation (NYSE:BTU), doughnut king Dunkin Brands Group Inc (NASDAQ:DNKN), and mattress expert Select Comfort Corp. (NASDAQ:SCSS). Here's a quick look at today's brokerage notes on BTU, DNKN, and SCSS.

  • BTU is down 4.5% this afternoon to $6.36, and touched a near 12-year low of $6.01, following a dismal demand outlook and subsequent price-target cut from Citigroup, which reduced its expectation to $14 from $18. This bad news is more of the same for the struggling equity, which has shed 62.5% over the past 52 weeks. Accordingly, bearish sentiment in the options pits is ramping up, with Peabody Energy Corporation's 10-day International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX) put/call volume ratio of 1.67 sitting 8 percentage points away from an annual pessimistic peak. Elsewhere, the brokerage bunch isn't as wary of BTU, with 53% of covering analysts rating the stock "buy" or better, and the average 12-month price target of $13.39 is more than twice BTU's current price. Additional price-target cuts and/or a round of downgrades could help push shares even lower.

  • After issuing lackluster guidance, the shares of DNKN have fallen 1.6% to $46.25 in intraday trading, despite receiving price-target hikes from two separate brokers. Specifically, Buckingham raised its target price $3 to $48 while reiterating a "neutral" rating, and Stephens raised its target $4 to $44 while reiterating an "equal weight" ranking. On the charts, Dunkin Brands Group Inc has advanced 8.4% year-to-date, sparking a wave of call buying in the options pits. DNKN's 50-day ISE/CBOE/PHLX call/put volume ratio of 10.71 reads higher than 96% of all similar readings taken in the past year. Short-term options bulls are paying a premium for their bets on DNKN, as the stock's Schaeffer's Volatility Index (SVI) of 30% registers in the 83rd percentile of its annual range.

  • SCSS is up 4.4% today -- bucking the broad-market trend -- and hit a fresh two-year high of $30.97, after Stifel raised its rating on the stock from "hold" to "buy." The positive price action is more of the same for the mattress maker, with the shares up over 84% year-over-year. Sentiment in the options pits is bullish, with Select Comfort Corp.'s 50-day ISE/CBOE/PHLX call/put volume ratio of 3.50 sitting 6 percentage points away from a yearly optimistic climax.

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Analyst Downgrades: Microsoft Corporation, United Technologies Corporation, and FXCM Inc.

Analysts downwardly revised their ratings on Microsoft Corporation (MSFT), United Technologies Corporation (UTX), and FXCM Inc (FXCM)

by 1/27/2015 9:28 AM
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Analysts are weighing in today on software giant Microsoft Corporation (NASDAQ:MSFT), tech conglomerate United Technologies Corporation (NYSE:UTX), and forex issue FXCM Inc (NYSE:FXCM). Here's a quick roundup of today's bearish brokerage notes on MSFT, UTX, and FXCM.

  • MSFT is reeling this morning, as a lackluster turn in the earnings confessional was met with a number of downbeat analyst notes. Specifically, no fewer than nine brokerage firms reduced their price targets, while Citigroup, J.P. Morgan Securities, and Nomura each downgraded the stock. Although Microsoft Corporation shares have gained more than 30% year-over-year -- as of last night's close at $47.01 -- they're poised to drop 8.6% out of the gate. While shareholders can't be happy with these developments, this recent crop of option bears is likely in celebration mode.

  • Fellow Dow component UTX posted disappointing fourth-quarter revenue last night and also cut its full-year forecast. Adding insult to injury, RBC trimmed its price target to $125 from $128, and Citigroup reduced its target to $136 from $139 -- though both firms reiterated the equivalent of "buy" ratings. On the charts, United Technologies Corporation has rallied since hitting an annual low of $97.30 in mid-October to trade at $118.75. Moreover, last Friday, the stock touched a record high of $120.95. However, ahead of the bell, UTX is pointed 2.3% lower. On the sentiment front, traders have grown bullish in recent months. During the last 10 weeks at the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), UTX has tallied a call/put volume ratio of 3.60 -- just 8 percentage points from an annual high.

  • Finally, FXCM has been swooning on a recent currency decision by the Swiss National Bank, losing more than 85% of its value over the last two weeks . Additional losses could be in store, following a price-target cut to $1 from $3 at Barclays -- which also reiterated its "underweight" opinion. Ahead of the bell, in fact, the stock is pointed 4.5% lower. Elsewhere, short sellers have taken an interest in FXCM Inc, with roughly 15% of its float sold short. At the equity's typical daily trading rate, it would take about three weeks to buy back these bearish bets.

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Why 2015 Looks Like a 'Transitional Year' for VIX

The recent spate of CBOE Volatility Index (VIX) spikes suggests a possible regime change

by 1/27/2015 9:26 AM
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I just want to reiterate again that I'm not bearish on the market at this point, but I do side with the camp that volatility is ready to trend higher. Let me do some 'splaining.

I sporadically mention that CBOE Volatility Index (VIX) tends to trade in long-term "regimes," with four to six years of "low" followed by four to six years of "high." I believe this graph highlights that behavior fairly well. Here's the average VIX level for each calendar year going back to 1993 (click chart to enlarge):

Average VIX level from 1993 - Present

By this metric, we troughed for four years (mid-'90s), spiked for about six to seven years (late-'90s into early "aughts"), troughed again for four years (mid-"aughts"), and then spiked for about four years. That brings us to 2012-2014, which is clearly a trough.

If the pattern stays true to form, 2015 looks like somewhat of a transitional year. That's exactly what happened in 1996, and again in 2007. Both of those years see volatility trend higher, but not explosively so … yet. The big pop happened in the following years.

It's only really a sample size of two, so I'd reserve making too many sweeping judgments. But it does have the feel that VIX is slowly climbing out of hibernation. Spikes are becoming more commonplace, which certainly seems consistent with an overall uptrend. So why doesn't this bode very poorly for the market?

Well, as we noted yesterday, if you played it that way in the '90s, you stayed on the sidelines for one of the best markets ever. On the other hand, if it scared you out of the market in 2007, it saved you a fortune. The point isn't that it's bullish for the market, just that volatility can move independently of stocks in wider time frames.

On a day-over-day basis, VIX has a large negative correlation to the market, something like about -0.75 to -0.8, depending on how far back you go. But the absolute level of VIX does not have much correlation to SPDR S&P 500 ETF Trust (SPY) … in fact, it's almost zero. That's because the overall value of stocks tends to rise over time. SPY was in the 40s back in 1993, for example. VIX isn't a stock, it's a statistic which mean reverts over time, and thus never "grows."

Ergo, in the very short term we can see those huge correlations, but over the long term … not so much. Obviously, VIX will spike in reaction to market accidents, but those spikes will simply ebb in long-term low-VIX regimes.

Disclaimer: Mr. Warner's opinions expressed above do not necessarily represent the views of Schaeffer's Investment Research.


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Analyst Upgrades: Texas Instruments Inc., Potash Corporation of Saskatchewan Inc., and UnitedHealth Group Incorporated

Analysts upwardly revised their ratings on Texas Instruments Incorporated (TXN), Potash Corp./Saskatchewan (USA) (POT), UnitedHealth Group Inc. (UNH)

by 1/27/2015 9:21 AM
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Analysts are weighing in today on semiconductor manufacturer Texas Instruments Incorporated (NASDAQ:TXN), fertilizer concern Potash Corp./Saskatchewan (USA) (NYSE:POT), and blue chip UnitedHealth Group Inc. (NYSE:UNH). Here's a quick roundup of today's bullish brokerage notes on TXN, POT, and UNH.

  • TXN is off 0.9% in electronic trading, despite seeing its price target raised by no fewer than seven brokerage firms after posting higher fourth-quarter results. The most ambitious of the bunch was RBC, which raised its price target to $66 from $65, and kept its "outperform" rating. Elsewhere, Texas Instruments Incorporated has been stellar on the charts, adding 32.8% from its October low of $41.47 to close yesterday at $55.05. Still, analysts have been slow to give TXN the credit it deserves, as 65% of brokerage firms maintain "hold" or worse ratings. Plus, the stock has already surpassed its consensus 12-month price target of $53.18. Should the security's strong technical run continue, additional price-target increases and/or upgrades could add even more fuel to its fire.

  • POT had its price-target lifted by three brokerage firms. Specifically, TD Securities and HSBC both raised their target prices to $41 -- from $40 and $35.25, respectively -- while deeming the stock a "buy." Also, Susquehanna raised its target price by $3 to $35, while keeping its "neutral" rating. The positive attention is nothing new for a stock that has added over 12% in the past year to finish yesterday at $35.89. Option traders have kept their bearish stance, though, picking up puts ahead of Thursday morning's earnings report. Potash Corp./Saskatchewan's (POT) 10-day International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX) put/call volume ratio of 0.62 ranks in the 68th annual percentile, suggesting speculators have bought to open puts over calls at an accelerated clip in the past two weeks.

  • Finally, even with a price-target hike from Oppenheimer to $128 -- territory never before explored -- from $115, UNH is down 0.5% in pre-market trading, pressured by its fellow blue chips. Regardless, the stock has been a technical standout, outperforming the S&P 500 Index (SPX) by roughly 16 percentage points in the past three months, closing yesterday at $111.61. In fact, the equity tagged a record high of $114.32 on Friday. In UnitedHealth Group Inc.'s options pits, however, short-term speculators have taken a put-skewed approach. The stock's Schaeffer's put/call open interest ratio (SOIR) of 1.02 outranks 70% of all readings in the past year.

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