How the Grinch Stole Black Friday
CME: E-Mini S&P 500 Options ( 
ES1!), E-Mini Nasdaq 100 Options ( 
NQ1!)
Initial data from the biggest U.S. shopping day sends a mixed signal.
• E-commerce sales on Friday increased by 8.5% year-over-year, while in-store sales grew by just 1.1%, according to MasterCard Spendingpulse. The aggregate Black Friday retail sales rose 2.5%, excluding automotive sales and not adjusted for inflation.
• Adobe Analytics estimated that Black Friday shoppers spent a record $9.8 billion in U.S. online sales, up 7.5% from last year, according to Bloomberg.
• Brokerage TD Cowen lowered its U.S. holiday spending estimate to 2-3% growth, from 4-5%, as it forecasts flat Black Friday traffic.
On Friday, I toured a dozen stores in Alton, Illinois, a small midwestern town where the Illinois River and Missouri River merge and form the mighty Mississippi. My trip covers big box retailers Kohl and Target, discount retailer Walmart, home improvement store Home Depot, specialty store Big Lot, thrift stores Dollar Tree and Goodwill, and the Alton Square Mall. My unscientific survey reveals some common patterns: unfilled parking lot, low frequency of shoppers coming in and out, no crowd in the store, and a short wait line at the checkout counter. What’s missing this year are the deeply discounted and limited quantity Big Ticket merchandises that drive shoppers to the stores at 5:00 a.m.
After taking the 4% core CPI into account, the real growth in Black Friday sales comes to a negative number. Shoppers are paying more for fewer merchandises.
The Grinch who stole the show is inflation. While inflation rate has been in decline this year, it only means a slower rate of price increase. The absolute price level continues rising. CPI for All Urban Consumers is 307.7 in October 2023, up from 252.9 in October 2018. The cumulative price increase in the last five years is 21.7%.
While online sales is very robust, in-store purchases are more subdued. However, even though Black Friday is not as exciting as it used to be, U.S. consumers are remarkedly resilient when it comes to holiday shopping. When cash saving is depleted, they tap into credit card borrowing. Once credit limit is maxed out, they opt for the “buy now pay later” option offered by many stores and payment apps.
As long as the job market stays strong, the deterioration of consumer spending will be a slow process. In my writing last week, I hypothesized that the U.S. retail sector could collapse if holiday shopping falters. With a mixed signal from Black Friday, we need to monitor Cyber Monday and the rest of the holiday shopping season to validate this claim.
Year-to-date Performance by Asset Class
As we are fast approaching the end of 2023, I want to pause and compare how major market assets performed so far. Below are year-to-date returns, ranking from high to low, for eight financial instruments. They each represent a major asset class:
1. Bitcoin (Cryptocurrency): +132.2%
2. S&P 500 (Equity Index): +18.8%
3. Gold (Precious Metal): +8.5%
4. Euro (Forex): +3.1%
5. Copper (Base Metal): +0.6%
6. WTI (Energy): -1.8%
7. 10-Year Bond (Fixed Income): -9.0%
8. Corn (Agricultural): -30.9%
The stock market has an above-average annual gain, while cryptocurrencies have out-of-the-chart extraordinary performance. The rest of the asset classes either have mediocre returns or lost money for investors.
One may tend to think what’s flying high now will continue to fly high. Is that true? Back testing this using the 2022 annual return, we will see completely different ranking:
1. Corn (Agricultural): +13.8%
2. Gold (Precious Metal): +2.6%
3. WTI (Energy): -0.7%
4. Euro (Forex): -6.2%
5. Copper (Base Metal): -14.8%
6. S&P 500 (Equity Index): +19.6%
7. 10-Year Bond (Fixed Income): -20.0%
8. Bitcoin (Cryptocurrency): -63.8%
Corn, the loss-leader in 2023, was the champion star performer in 2022. Bitcoin lost the most last year, then rebounded and climbed the highest this year. Past performance is no guarantee of future performance. We can’t emphasize enough this plain simple truth.
The Battle between the Fed and Market Expectation
The Fed’s rate decision remains the single most important factor that drives market direction. Currently, investors price in an aggressive rate-cutting schedule for the Fed, while the Fed adapts to a step-by-step approach to rate decision-making.
As time goes by, market expectation and the Fed decision will have to converge. We may not know who will give in first, but jobs and inflation data released ahead of the Fed meeting could carry invaluable insight.
In my writeup, “Fed Pivot Breathes Life into Markets”, published on November 6th, I explored the idea of using stock index options to trade the events of big reports.
The November jobs report will be released on December 8th, and the November CPI data will be published on December 12th. These big reports, available to the Fed right before the December 15th FOMC, could have a major impact on its rate decision.
Consider this: Stock market volatility is at a 3-year low. VIX is currently quoting 12.5, down from about 26 in March. You could find asset-specific volatility using CME Group’s CVOL data. We know that options value is positively correlated with volatility. A low volatility suppressed the premium of both call and put options.
My theory: The cost of acquiring options is getting lower. If a big report comes in beyond market expectation, volatility could spike, making the options more valuable. What’s more: with stock indexes trending up, put options get even cheaper. Therefore, the time may be ripe to trade the options on CME E-Mini stock index futures.
CME E-Mini S&P 500 index futures (
ES) has a notional value of $50 times the index. With the underlying December futures ESZ3 settled at 4568.25 last Friday, an out-of-the-money (OTM) put options with the strike price of 4500 is quoted 21.50. An OTC call with 4650-strike is quoted 13.00. To acquire one put options, a trader will pay a premium of $1,075 (= 50 x 21.50) up front. The cost of one call options is $650 (=50 x 13.00).
CME E-Mini Nasdaq index futures (NNQ) has a notional value of $20 times the index. With the December futures NQZ3 settled at 16,011, an OTM put options with a 15,500-strike is quoted 66.75. An OTC call with a 16,500-strike is quoted 49.50. To acquire one put options, a trader will pay a premium of $1,335 (= 20 x 66.75) up front. The cost of one call options is $990 (=20 x 49.50).
If ES and NQ rise, call options would become more valuable, while put options decline in value. When the market turns against the trader, he could lose money, up to but not beyond the upfront premium.
Similarly, if ES and NQ fall, put options would gain while call options lose out. When the trader is wrong, he could lose money, up to but not beyond the upfront premium.
Happy Trading.
Disclaimers
*Trade ideas cited above are for illustration only, as an integral part of a case study to demonstrate the fundamental concepts in risk management under the market scenarios being discussed. They shall not be construed as investment recommendations or advice. Nor are they used to promote any specific products, or services.
CME Real-time Market Data help identify trading set-ups and express my market views. If you have futures in your trading portfolio, you can check out on CME Group data plans available that suit your trading needs tradingview.com/cme/
ES1!), E-Mini Nasdaq 100 Options ( NQ1!)Initial data from the biggest U.S. shopping day sends a mixed signal.
• E-commerce sales on Friday increased by 8.5% year-over-year, while in-store sales grew by just 1.1%, according to MasterCard Spendingpulse. The aggregate Black Friday retail sales rose 2.5%, excluding automotive sales and not adjusted for inflation.
• Adobe Analytics estimated that Black Friday shoppers spent a record $9.8 billion in U.S. online sales, up 7.5% from last year, according to Bloomberg.
• Brokerage TD Cowen lowered its U.S. holiday spending estimate to 2-3% growth, from 4-5%, as it forecasts flat Black Friday traffic.
On Friday, I toured a dozen stores in Alton, Illinois, a small midwestern town where the Illinois River and Missouri River merge and form the mighty Mississippi. My trip covers big box retailers Kohl and Target, discount retailer Walmart, home improvement store Home Depot, specialty store Big Lot, thrift stores Dollar Tree and Goodwill, and the Alton Square Mall. My unscientific survey reveals some common patterns: unfilled parking lot, low frequency of shoppers coming in and out, no crowd in the store, and a short wait line at the checkout counter. What’s missing this year are the deeply discounted and limited quantity Big Ticket merchandises that drive shoppers to the stores at 5:00 a.m.
After taking the 4% core CPI into account, the real growth in Black Friday sales comes to a negative number. Shoppers are paying more for fewer merchandises.
The Grinch who stole the show is inflation. While inflation rate has been in decline this year, it only means a slower rate of price increase. The absolute price level continues rising. CPI for All Urban Consumers is 307.7 in October 2023, up from 252.9 in October 2018. The cumulative price increase in the last five years is 21.7%.
While online sales is very robust, in-store purchases are more subdued. However, even though Black Friday is not as exciting as it used to be, U.S. consumers are remarkedly resilient when it comes to holiday shopping. When cash saving is depleted, they tap into credit card borrowing. Once credit limit is maxed out, they opt for the “buy now pay later” option offered by many stores and payment apps.
As long as the job market stays strong, the deterioration of consumer spending will be a slow process. In my writing last week, I hypothesized that the U.S. retail sector could collapse if holiday shopping falters. With a mixed signal from Black Friday, we need to monitor Cyber Monday and the rest of the holiday shopping season to validate this claim.
Year-to-date Performance by Asset Class
As we are fast approaching the end of 2023, I want to pause and compare how major market assets performed so far. Below are year-to-date returns, ranking from high to low, for eight financial instruments. They each represent a major asset class:
1. Bitcoin (Cryptocurrency): +132.2%
2. S&P 500 (Equity Index): +18.8%
3. Gold (Precious Metal): +8.5%
4. Euro (Forex): +3.1%
5. Copper (Base Metal): +0.6%
6. WTI (Energy): -1.8%
7. 10-Year Bond (Fixed Income): -9.0%
8. Corn (Agricultural): -30.9%
The stock market has an above-average annual gain, while cryptocurrencies have out-of-the-chart extraordinary performance. The rest of the asset classes either have mediocre returns or lost money for investors.
One may tend to think what’s flying high now will continue to fly high. Is that true? Back testing this using the 2022 annual return, we will see completely different ranking:
1. Corn (Agricultural): +13.8%
2. Gold (Precious Metal): +2.6%
3. WTI (Energy): -0.7%
4. Euro (Forex): -6.2%
5. Copper (Base Metal): -14.8%
6. S&P 500 (Equity Index): +19.6%
7. 10-Year Bond (Fixed Income): -20.0%
8. Bitcoin (Cryptocurrency): -63.8%
Corn, the loss-leader in 2023, was the champion star performer in 2022. Bitcoin lost the most last year, then rebounded and climbed the highest this year. Past performance is no guarantee of future performance. We can’t emphasize enough this plain simple truth.
The Battle between the Fed and Market Expectation
The Fed’s rate decision remains the single most important factor that drives market direction. Currently, investors price in an aggressive rate-cutting schedule for the Fed, while the Fed adapts to a step-by-step approach to rate decision-making.
As time goes by, market expectation and the Fed decision will have to converge. We may not know who will give in first, but jobs and inflation data released ahead of the Fed meeting could carry invaluable insight.
In my writeup, “Fed Pivot Breathes Life into Markets”, published on November 6th, I explored the idea of using stock index options to trade the events of big reports.
The November jobs report will be released on December 8th, and the November CPI data will be published on December 12th. These big reports, available to the Fed right before the December 15th FOMC, could have a major impact on its rate decision.
Consider this: Stock market volatility is at a 3-year low. VIX is currently quoting 12.5, down from about 26 in March. You could find asset-specific volatility using CME Group’s CVOL data. We know that options value is positively correlated with volatility. A low volatility suppressed the premium of both call and put options.
My theory: The cost of acquiring options is getting lower. If a big report comes in beyond market expectation, volatility could spike, making the options more valuable. What’s more: with stock indexes trending up, put options get even cheaper. Therefore, the time may be ripe to trade the options on CME E-Mini stock index futures.
CME E-Mini S&P 500 index futures (
ES) has a notional value of $50 times the index. With the underlying December futures ESZ3 settled at 4568.25 last Friday, an out-of-the-money (OTM) put options with the strike price of 4500 is quoted 21.50. An OTC call with 4650-strike is quoted 13.00. To acquire one put options, a trader will pay a premium of $1,075 (= 50 x 21.50) up front. The cost of one call options is $650 (=50 x 13.00).CME E-Mini Nasdaq index futures (NNQ) has a notional value of $20 times the index. With the December futures NQZ3 settled at 16,011, an OTM put options with a 15,500-strike is quoted 66.75. An OTC call with a 16,500-strike is quoted 49.50. To acquire one put options, a trader will pay a premium of $1,335 (= 20 x 66.75) up front. The cost of one call options is $990 (=20 x 49.50).
If ES and NQ rise, call options would become more valuable, while put options decline in value. When the market turns against the trader, he could lose money, up to but not beyond the upfront premium.
Similarly, if ES and NQ fall, put options would gain while call options lose out. When the trader is wrong, he could lose money, up to but not beyond the upfront premium.
Happy Trading.
Disclaimers
*Trade ideas cited above are for illustration only, as an integral part of a case study to demonstrate the fundamental concepts in risk management under the market scenarios being discussed. They shall not be construed as investment recommendations or advice. Nor are they used to promote any specific products, or services.
CME Real-time Market Data help identify trading set-ups and express my market views. If you have futures in your trading portfolio, you can check out on CME Group data plans available that suit your trading needs tradingview.com/cme/
Jim W. Huang, CFA
jimwenhuang@gmail.com
jimwenhuang@gmail.com
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