Volatility Trading Digest - Greek Yawn
Volatility Trading Digest - Greek Yawn
The financial markets do not seem to have as much interest in the Sunday Greek election as the financial media. The euro was higher and the dollar lower, providing support for equities, but the yield on the 10-Year US Treasury Note declined suggesting the markets are more interested in the two-day Federal Open Market Committee meeting on Tuesday and Wednesday.
In this digest issue, we update our indictors giving special attention the improving equity market while suggesting it is time to close out any remaining short positions in the strategy section followed by a new long idea.
Market Review
S&P 500 Index (SPX)
Last week we mentioned the destroyed flag pattern highlighted the week before. SPX has since evolved into a new Head & Shoulders Bottom pattern, with the head at the June 4 low of 1266.74 and the neckline NL crossing at 1336 creating the new upside minimum measuring objective at 1404 marked MO on the chart. We should also mention that since the decline to the left shoulder low was very rapid there is likely be little resistance on the way back up to the measuring objective and then a subsequent retest the May 1 high at 1415.32. It seems like equities must be anticipating QE3.
E-mini S&P 500 Future (ESU2)
Since the June futures contract expired Friday, the new front month is September, expiring September 21. Based upon the preliminary CME report Friday's volume appeared to be low at 1.9 million contracts creating some doubt about the breakout above the neckline on the cash chart above. However, revisions to the preliminary reports are common and occasionally they are material, especially the open interest count. We suggest checking the final CME report on Monday morning to see the volume revision, if any. It is found at the CME website under the Market Data heading, Daily Bulletin, the fifth report listed, "PG01C Summary Volume And Open Interest Index Futures And Options."
S&P 500 Index Implied Volatility (IVXM)
Since last week, the Implied Volatility Index Mean decreased from 18.75 to 18.56, while the CBOE Volatility IndexÆ (VIX) decreased from 21.23 to 21.11.
The table below shows the VIX cash compared to the next two futures contracts as well as our calculation of Larry McMillan's day-weighted average between the first and second months.
The day weighting applied 8% to June and 92% to July resulting in the average premium of 2.37 or 11.22% shown above. Our alternative volume weighting between June and July results in a 7.10% premium. Last week the day-weighted premium was 9.44% and the volume weighted was 7.36%.
For this short-term indicator the premium to the cash is a SPX sell signal suggesting professional expectations for the cash to increase toward the futures price. In the past premiums in excess of 20%, have usually preceded corrections, although not a precise timing tool it did appear to be a good way to measure professional hedging sentiment. On the recent decline, the VIX premium indicator failed to increase as expected.
VIX Options
With a current 30-day Historical Volatility of 109.79 and 96.22 using Parkinson's range method, the table below shows the Implied Volatility (IV) of the at-the-money VIX calls and puts using the futures prices based upon Friday's closing option mid prices along with their respective month's futures prices, since the options are priced from the futures.
Using the IV Index Mean of 98.07 the IV/HV ratio is .89, using the range method for Historical Volatility the ratio is 1.02 while the VIX put-call ratio at 1.27, is bearish for the VIX, but bullish for the SPX since they move in opposite directions. Friday's total volume was 680,583 contracts compared to the 5-day average of 456,870 contracts. Tuesday is the last trading day for the June options.
All of the Implied Volatilities along with the Historical Volatilities and Greeks for the VIX options based upon the futures prices are on our Advanced Options page, found by clicking on the "market close" link shown near the top of the page.
CBOE S&P 500 Skew Index (SKEW)
Designed to measure the purchase of out-of-the-money S&P 500 Index puts for downside protection this index again seems out of step with the equity indexes since it increased 11.03 Friday closing above its range since mid March. Perhaps SKEW is correctly reflecting uncertainty before the Greek elections, the G20 Summit, Monday & Tuesday in Los Cabos, Baja California Sur and any possible disappointment if no QE3 announcement follows the FOMC meeting Wednesday.
CurrencyShares Euro Trust (FXE)
After the key reversal we mentioned two weeks ago, the euro advanced as expected, testing 125 where the resistance turned it back to 124 before making a comeback late in the week to close solidly above 125. While the euro is the most obvious indictor for the Greek election, many say the final outcome is not likely to result from this election.
NYSE McClellan Summation Index
In the past two weeks, the NYSE Composite breadth index, one of the most reliable early trend change indicators, turned the corner advancing 220.63 points moving higher along with the broad market index. While the was no positive divergence that would have been created by moving ahead of the index, there is also no negative divergence if it failed to move higher as the index turned higher.
iShares Dow Jones Transportation Average Index (IYT)
The low at 87.01 made on May 18 before the rally back above 92 is now the left shoulder of a new Head & Shoulders Bottom pattern with the head being the June 4 low at 86.09. While it has not yet closed above the neckline, it is right up against it and if it should continue higher, it will set up a minimum upside measuring objective at 97.50 above both the January and March highs, most likely on expectations for lower fuel costs.
SPDR Homebuilders (XHB)
The Head & Shoulder Top pattern, with the Head at the May 2 high of 22.43, the neckline at 19.25 with a minimum downside-measuring objective at 16.57, became active by the close below the neckline at 18.93 on June 4. Since then it rebounded to close back above the neckline, but it is lagging many of the other equity indexes that are creating well defined Head & Shoulder Bottom patterns.
iShares S&P GSCI Commodity-Indexed Trust (GSG)
About all we can say about this energy-heavy index is that it has stopped declining, as it bounces along the 29 support level that could become the low for this cycle, if crude oil prices start advancing, which we don't expect until later in the year.
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