While expectations for a meaningful result from the crude oil producers meeting in Doha appeared unlikely Friday, the markets will have it fully priced in Monday morning.?
Market Review
S&P 500 Index (SPX) up 33.13 points or +1.62 % for the week closing just below Thursday?s high of 2087.84 after reaching the minimum double bottom measuring objective at 2084 although still under the long-term downward slope trendline detailed?several weeks ago.”Unless earnings improve, the downward sloping trendline could contain any further advance since compared to the historical norm of 17 the current price-to-earnings ratio seems stretched at 24.05, based upon 2015 as reported earnings of 86.53.
CBOE Volatility Index? (VIX) declined 1.74 for the week and once again back near the lows made between late October and early November last year when SPX was trending higher. Based on real-time prices of options on the S&P 500? Index, VIX reflects investors’ consensus view of future (30-day) expected stock market volatility.
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.
With 2 trading days until the April monthly expiration, the day weighting applied 8% to April and 92% to May for a 23.96% premium shown above. Our alternative volume-weighted average between April and May regularly found in the Options Data Analysis section on our homepage was somewhat lower at 17.25.
While day-to-day VIX changes offer little forecasting insight following the VIX Futures premium helps since it measures expectations of tactical professional traders and money managers using VIX futures and options for hedging long portfolio risk.
Premiums for normal term structures during uptrends are 10% to 20% while premiums above 20% are unsustainable suggesting expectations that the VIX will soon return to higher levels associated with pullbacks. Alternatively, premiums less than 10% suggest caution and negative premiums indicate oversold conditions. The volume weighted premium was in the normal range all last week, ending Friday at 17.25%.
Ahead of Doha
WTI Light Sweet Crude Oil (CL) 40.36 basis May futures gained .64 points or +1.61% for week after reaching an intraday high of 42.42 on Wednesday before pulling back Thursday and Friday.
United States Oil (USO) gained .22 or +2.19 for the week while the options Implied Volatility Index Mean advanced 2.01 from 44.94 to 46.95 in the normal range since last September after spiking higher in February.
CBOE Crude Oil Volatility Index (OVX) advanced 3.85 from 47.42 over the same period and while up from the intraday low of 42.77 made March 30; it?s a long way from the 81.12 high made February 16.
Ahead of the Doha meeting, here is a brief summary of the Disaggregated Commitments of Traders – Options and Futures Combined or Commitment of Traders (COT) report from the CFTC as of Tuesday April 12 released Friday.
“Managed Money” and “Swaps” pushed prices higher while “Others” and “Non-reportable” (small trader) groups faded the advance to 42.12 basis cash, while combined open interest advanced 4.89% as May expiration approaches on 4-20-16 just 3 days after the Doha meeting. The Non-reportable group has the reputation of being on the wrong side of the market at important turning points while Managed Money activity usually provides the best correlation with price changes. By Friday, the price had declined 1.72 to 40.40.
Next checking our Ranker results for high-implied volatility/historical volatility, IV/HV ratios one of our preferred indictors revealed no oil and gas or oil service companies in the top 50 suggesting little enthusiasm to speculate on the results of the Doha meeting.