Volatility Trading Digest - Sell in May and Go Away

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Volatility Trading Digest - Sell in May and Go Away

Last year following the old English adage to "Sell in May and go away"  resulted in saving a 9.4% decline in the S&P 500 Index. By the time the decline, beginning on April 26, was completed on July 1, the loss was 15.2%. This year the timing was not quite so easy since the S&P 500 Index made a high on May 2 and while it had been declining, it was still above our upward sloping trendline until May 23 when it closed below giving us the May sell signal.

Strategy
Last week, we made the cyclical rotation case after arriving at the party late and just before what appears to have been an oversold bounce as the material stocks recovered some of their previous losses joined to a lesser extent by the leading industrials. In the process, our Consumer Discretionary Select Sector SPDR (XLY) divided the Consumer Staples Select Sector SPDR (XLP), index recovered to 1.253 from last week's 1.246. Unless we see our "rotation index" start trending higher along with a recovery in the S&P 500 Index (SPX) back above our "Jackson Hole" upward sloping trendline we are suggesting to stay focused on consumer staples, health care and utility stocks. This strategy assumes these defensive groups will have enough strength to preclude a significant decline in the major indexes as the SPX begins a series of Elliott A-B-C waves with the first support at the 1300 level.  
 
Consumer Staples

HJ Heinz Co. (HNZ)
Pittsburgh based HNZ, manufactures and distributes processed foods throughout the world. Their brand names include Heinz ketchup, Classico spaghetti sauce, Ore-ida potatoes, Plasmon baby food and others. With a trailing 12-month price-to-earnings ratio of 18, the forward ratio is 15, while the 1.80 dividend is 3.3%.  

The current Historical Volatility is 10.59 with an Implied Volatility Mean Index of 11.91 just after reporting earnings, for an IV/HV ratio of 1.13 and a .25 bullish put-call ratio. On Friday the options volume was on the light side at 3,843, compared to the 5-day average of 2,380. The bid/offer spreads are fairly wide for out for out-of-the money strikes so it may be necessary to leg into positions. Here is one idea to consider.



Set the SU (stop/unwind) at a close below the last pivot at 52.64.

Kraft Foods Inc. (KFT)
Northfield, Illinois based and formerly part of the Altria Group, it manufactures and markets snacks, under various brand names, including Kraft, Oscar Mayer, Philadelphia, Maxwell House, Jacobs, Nabisco, Oreo, Milka, and LU. In an expansion effort, it has just completed a controversial acquisition of Cadbury Plc adding the Cadbury chocolate products under the Cadbury Dairy Milk, Flake, Creme Egg, and Green & Black's brands. The trailing 12-month price-to-earnings ratio is 20, the forward ratio is 14 and the 1.16 dividend is 3.3%.  

The current Historical Volatility is 12.34, with an Implied Volatility Mean of 14.21 for an IV/HV ratio of 1.15 and a bearish put-call ratio of 1.15. Friday's options volume was 6,769 and the 5-day average volume is 6,960 contracts.



Use a close back below the most recent pivot at 34.28 as the SU (stop/unwind).

ConAgra Foods, Inc. (CAG)
Omaha based, it sells branded, private label, and customized food products, under the Alexia, ACT II, Banquet, Blue Bonnet, Chef Boyardee, DAVID, Egg Beaters, Healthy Choice, Hebrew National, Hunt's, Marie Callender's, Orville Redenbacher's, PAM, Peter Pan, Reddi-wip, Slim Jim, Snack Pack, Swiss Miss, Van Campís, and Wesson brands. The trailing 12-month price-to-earnings ratio is 17, the forward ratio is 13 and the dividend of .92 is 3.7%.  

The current Historical Volatility is 16.57, with an Implied Volatility Mean of 21.12 for an IV/HV ratio of 1.27 and a .10 bullish put-call ratio. Friday's options volume was 65,885 contracts with the June 25 call showing 43,392 calls traded. The 5-day average volume is 15,480 contracts.



Use a close back below the recent pivot at 24.67 as the SU (stop/unwind).
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