Are we having earnings déjà vu all over again?
Let’s review:
- Last quarter the market hit a hiccup in the end of June, sold off from a June-closing high of 944 in the S&P 500 index, down to 880 as we entered Q2 earnings.
- This quarter the market has retraced from a high of 1071 in September to 1025 last Friday.
- The VIX in July spiked from a low of 25% in June to a nervous 31% just prior to Alcoa’s release.
- This month the VIX spiked to a 29.5% on Friday after closing at a low of 23.08% in September.
Leading up to tomorrow’s earnings kick-off with Alcoa, the market rallied 1.5% yesterday after market close, and continues to replicate this again so far today.
This behavior is opposite of what we experienced 3 months ago. The market sold off immediately prior to the earnings and likely indicating an oversold condition. With the last couple of weeks trending lower, the shorts may have piled in again and created another oversold condition yet again. This time we are snapping back before we get any earnings confirmation of improving conditions. Volumes have been light and this may be a sign of a bumpier road through this earnings season.
Remember earnings begin tomorrow, however next week they begin in earnest, with heavyweight financials C, BAC, GS and GE all scheduled to announce along with tech titan INTC.
Lastly, when earnings come on expiration week, the short dated options can react dramatically to changes in the underlying price of the stocks. The flipside is the premium can decay immediately if those earnings numbers are not enough of a catalyst to move the stocks. The risk to long options is 100% of the premium paid. On short-dated options that risk can occur in a very short time. The reward is unlimited to the moves above strike plus the premium paid of the underlying stock prices.
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