For those of us attempting to understand market movements we propose yearend profit taking, before a likely capital gains tax rate increase next year, along with “fiscal cliff” uncertainty producing a wait and see attitude, are the two best explanations for the recent low volume up drift among others floating around.
S&P 500 Index (SPX)
Although the “fiscal cliff” chatter denominates the financial media and is becoming more prevalent in the mainstream media as well, selected “risk on” assets continue drifting higher on low volume despite serious profit taking in those equities that have recorded hefty year to date gains. Although the probability remains high there will be a retest of the November16 1343.35 low, at some point, for now we should go with the flow.
E-mini S&P 500 Future (ESZ2)
Since a healthy trend needs open interest to continue expanding, the uptrend from the November low of 1340.25 when option interest was 3.10 million contracts seems to be in good shape as it closed last Thursday at 3.16 million contracts. From here until after the December contract expires, it will be more difficult to use open interest as an indicator since the open interest will now surge prior to contracts rolling over into March.
S&P 500 Index Implied Volatility (IVXM)
At the end of last week, the Implied Volatility Index Mean increased from 13.92 to 14.47, while the CBOE Volatility Index? (VIX) increased slightly from 15.87 to 15.90.
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 35% to December and 65% to January resulting in an average premium of 5.64% shown above. Our alternative volume weighting between December and January is 4.10%.
iPath S&P 500 VIX Short Term Futures ETN (VXX) & VelocityShares Daily Inverse VIX Short Term ETN (XIV)
Increasing volume in both the long VXX and the short XIV appears to be important influences determining the VIX premium. The long VXX trades between 1.5 and 2.5 times as many contracts as the short XIV, but increasing relative XIV volume reduces the VIX premium as more futures contract are sold. When the term structure is in contango, or it slopes upward over time, the advantage goes to a long XIV position since it represents a short futures position and VXX continuously sells the near term contract and buys the next longer term at a higher price.
Fridays VIX futures volume was 111,107 contracts compared to 106,563 the previous Friday while the open interest increased from 385,333 contracts to 395,593.? ?
VIX Options
With a current 30-day Historical Volatility of 79.31 and 65.59 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 tradable futures.
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Using the IV Index Mean of 66.71 the IV/HV ratio is .84, using the range method for Historical Volatility the ratio is 1.02 while the VIX put-call ratio at .34, is much lower than last week’s .69 making it less bullish for VIX, but more bullish for the SPX since they move in opposite directions. Friday’s options volume was substantial at 497,462 contracts compared to the 5-day average of 432,580.
The equity only put call ratio was .64 making the spread between the SPX put call ratio and the VIX put call ratio .30. A wider spread is bullish since means the VIX put call ratio relative to the SPX call ratio is lower.
CBOE S&P 500 Skew Index (SKEW)
Designed to measure the purchase of out-of-the-money S&P 500 Index puts that would require a very large downside move to profit from long put positions, an increase of this index indicates a greater expectation of an extreme down move. Now near the lower end of the 114-130 range it seems to confirm the lack of interest for OTM put buying.
CurrencyShares Euro Trust (FXE)
After advancing to 130, it is sitting on 128, the previous support line. Since further progress on the European debt issues are not likely until after the first of the year, the direction is now more likely to be determined by technical trading. Although it has not been the case in the last few years, since the seasonal highs have come in October and November, and it is currently near the upper part of the recent range, it does have a reputation for advancing into yearend, which would further support “risk on” assets, including equities.
NYSE McClellan Summation Index
Although slowing somewhat this week the two-week advance was 337.63 points, and it appears to be trending higher, an encouraging sign for the bulls.