Last week we noted the combination of waning momentum and the upcoming sequestration chatter was increasing the probability that the overdue market correction was about to begin. Now the increasing volume on the two down days confirms the short-term momentum is downward.
Strategy
Last week we reported the VIX futures premium had increased and were approaching the important 20% level. By the end of last week, the day weighted had declined to 6.58% and the volume weighted was 6.89% as the futures advanced upward toward the cash on increasing volume. Russell Rhoades at the CBOE sent a tweet Thursday saying the VIX futures volume was over 196K contracts on the decline, the third highest on record with the highest being 221K contracts traded on January 2 when the S&P 500 Index advanced 36.23 points.
The combination of advancing VIX premium along with declining volume, the SKEW index above 130 along with deteriorating market breadth were enough for us to suggest a correction hedge that we booked last Wednesday.
Since the short-term trend is down, Friday’s advance looked like an opportunity to buy some puts or open some put spreads. We think this down leg will take the S&P 500 Index (SPX) back to 1480 or even back to the breakout around 1460 if the sequestration babble gets unusually rancorous. So far, the media reports no resolution, no solution and no sense of urgency to address the issue.
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Earnings Suggestion
Saks Inc (SKS)
Saks Inc, the New York-based luxury retail institution, operates 43 retail stores in the US and internationally, with locations in the United Arab Emirates and Saudi Arabia. Their Q4 2012 earnings conference call is scheduled for next Tuesday, February 26 at 9:30 a.m. ET with analysts estimating.15 per share on revenue of 963.14 million. While the EPS estimate is down from .17 last year, the total revenue is up from the year-earlier 925.1 million.
Last year Sacks posted impressive 56% earnings growth and further 13% growth is expected over the next 2 years.
While many are calling for a correction, so long as the bull trend continues SKS will benefit as their affluent customer base begins to shop with confidence once again. The retailer is also expanding its online business by offering shoppers incentives, including free shipping and returns for orders over one hundred fifty dollars.
The stock is bullish technically, having closed Friday at 11.20 above all the moving averages.
The suggestion is to buy SKS Aug 2013 12 Calls for .75. The current implied volatility is 35.80.
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The risk is .75 with potentially unlimited reward.
All of the suggestions above use the closing middle price between the Friday bid and ask. Monday, the option prices will be somewhat different due to the time decay over the weekend and any price change.
Summary
Currently the market momentum is downward and with increasing sequester noise, it is likely to continue lower for the next week or more, but since this is likely just a correction in a longer-term uptrend be careful with counter trend trades.