Measurable volatility declined, focus on earnings this week

BY  | FROM  | 2015-06-29 10:06

The market news this week was off-Wall Street, as the Greek story avoided tragedy status for now (which should make for a fun weekend for those inside closed meeting rooms), and the Shanghai market proved that gravity is stronger than bids, as it continued its uneven decline, ending the week with a 7.4% decline on Friday, and posting a 19% loss since its June 12, 2015, high.  To be fair (and I guess I should be), that market remains up 29% year-to-date and up 106% over the one-year period, meaning there is still a lot of profit on the table—sounds like an interesting poker game to watch (with Morgan Stanley telling its clients not to play in at this time). 

A bit south of Wall Street, the U.S. Supreme Court was active, issuing its rulings as it gets ready to adjourn for the summer.  The court upheld the tax credits for the health care law, therefore ensuring medically related companies will continue to be busy, and helping the already busy M&A in the sector—which also helps investment houses. 

The tone of the market, which ended the week with a 0.40% decline, was mixed, but on the up side, as summer vacations begin and earnings season starts in two weeks.  At this point, the earnings whisper numbers are higher than the consensus earnings, meaning more positive surprises and higher prices. In economic data, the May Durable Orders report posted a 1.8% decline for the month, when a 0.6% decline was expected, as the prior month was unexpectedly restated down to -1.5% from the originally released -0.5%.  Aircraft orders were noted for part of the decline, as their orders fell 49%. 

The ex-transportation component, which was unaffected by the aircraft orders, posted a 0.5% gain, as was expected, with the prior month also being restated down to -0.3% from positive 0.5%.  In M&A, rejection was in the air.  Insurance issue Cigna (CI) official rejected Anthem’s (ANTM) USD 47.5 billion offer.  Cigna was up 13.1% last week on the rumor and was up 8.4% this week, as Anthem was off 0.2% this week.  Gas and oil pipeline issue Williams Companies (WMB) rejected an unsolicited USD 48 billion offer, as it rose 18.2% for the week.  A U.S Judge blocked the planned merger of Sysco (SYY; up 2.6% for the week)) and US Foods. 

Globally, Dutch grosser Konkinklijke Ahold (AHONY) said it would merge with European Delhaize Group (DEG) in a USD 10.4 billion share deal. On an issue level, microcomputer parts maker Micron Technology (MU) missed estimates, closing the week off 19.66%, as NIKE (NKE) beat estimates, closing up 3.30 for the week.  Stock splits came back into the news, as online entertainment issue NetFlix (NFLX) declared a 7-for-1 stock split, which pushed its stock up, but the company ended the week off 0.8%, as activist Carl Icahn said (actually tweeted) that he sold his interest.  Supermarket and convenience store owner Kroger (KR) declared a 2-for-1 split, but it closed the week off 1.4%. For the week, the market posted a 0.40% decline, after last week’s 0.75% gain.  Greece dominated the headlines, but the country shared the trading impact with economic news.  The year-to-date gain going into the half-way point for the year (Tuesday), the market was up 2.07%, which disappointed some but was acceptable to others who expected a correction, given the run-up in recent years (although there is still half of a year left). 

Actual volatility was lower for the week, although (again thanks to Greece) it seemed higher.  The market was 1.38% away from its closing high (from May 21, 2015), with most just wanting the market to at least hold the line until earnings season in two weeks. Breadth turned strongly negative, even as the week posted only a slight decline.  For the week, 190 issues gained, down from last week’s 391 and the prior week’s 260, as 310 issues declined, up from last week’s 108.  One issue gained 10% or more (two did last week), while eight other issues were up at least 5% (seven the previous week).  One issue fell at least 10% (none did last week), with 14 falling at least 5% (two did the week before).  Seven of the ten sectors declined for the week, as compared to last week, when all ten increased.  Health care added 0.30%, as the U.S. Supreme Court validated part of the health care law’s tax credits, which ensured continued coverage.  Given that the coverage would confirm more medical sales, the sector’s gain was seen as small.  However, given that the sector is already up 10.89% year-to-date, compared to 2.07% for the overall index, some of the health care gains (and expectations) were already baked in.  Utilities did the worst for the week, off 2.42%, as its prior week’s 2.53% rebound disappeared; the sector is off 11.61% year-to-date.  Energy fell 0.12%, as oil was stable, with materials off 1.85%, as commodity prices were the worry. Trading volume declined due to last Friday’s quadruple witching house onslaught, but it increased 2% from the prior week, as it remained 8% below the 1-year average weekly volume level. 

Measurable volatility (the high-over-low price variance) declined, even though it felt high, falling to 1.34% from last week’s 2.61%, and staying well below the one-year average of 2.27%. The VIX closed slightly up for the second week in a row, at 14.02, up from last week’s 13.96 and the prior week’s 13.78; the higher level, however, did not appear to bother anyone.  Interest rates increased noticeably, as the majority grew on agreement for a September interest rate increase (with a second one in December still being debated), as the U.S. 10-year Treasury yield closed at 2.47%, up from last week’s 2.26%, and up from the previous week’s 2.40% (year-end 2014 was 2.17%).  Oil continued in its range, with few headlines, closing at USD 55.65, basically unchanged from last week’s USD 59.51 (the prior week was USD 59.94).  One-year comparisons to oil’s June 2014 USD 105 close continued, with month-end commentaries expected to highlight energy’s stock performance (off 23.41% from June 2014 at this point, compared to the S&P SmallCap 600 energy sector, which is off 50.13% from June 2014).

The euro closed down at 1.1167 from last week’s 1.1353 (the previous week’s 1.1268); the pound was at 1.5748, down from last week’s 1.5874 (the previous week’s 1.5562); and the yen (quoted in yen-to-U.S. dollar, so higher is weaker) was at 123.87, compared to its 122.68 close last week (and the previous week’s 123.40). Discussions would continue over the weekend on Greece, and the events (or outcome) could impact markets Monday.  The market will be closed next Friday for observance of a U.S. holiday (which is actually on Saturday—July 4, 2015, Independence Day).  Trading is typically light for the week, as summer vacations start.  Tuesday is the end of the quarter (and half), so there could be some volatility due to window dressing.  Earnings will be light, with Greece still playing a role in the market (especially in Europe).  The economic highlight  will be Thursday’s employment report, which, given the expected low trading, could move markets more than usual if the actual data differs much from the estimates.

S&P Dow Jones Indices will implement three changes in the S&P 500 next week.  Generic drug issue Baxalta (BXLT), which is being spun-off by Baxter International (BAX), will replace QEP Resources (QEP), and surface and delivery services issue J. B. Hunt Transportation Services (JBHT) will replace Integrys Energy Group (TEG), which is being acquired by Wisconsin Energy (WEC), after the close of June 30, 2015. Pipeline and storage issue Columbia Pipeline Group (CPGX), which is being spun-off from NiSource (NI), will replace Allegheny Technologies (ATI) after the close of business on July 1, 2015.

    Related News

      Financial Times

    • Fed fears market misreading of guidance
    • The US Federal Reserve is keen to revamp its forward guidance about future interest rates but terrified of a market misunderstanding, according to the minutes of its September meeting


    • Asian shares rebound after Fed renews dovish credentials
    • Asian shares bounced back and the dollar fell on Thursday after minutes of the U.S. Federal Reserve's latest policy meeting showed policymakers have some concerns about downside risks to the global economy and the dol...


    • Nigeria succeeds at containing Ebola
    • People here are shaking hands again, kissing, hugging, touching. These days, shops are open, people are working, and children are finally going back to