Up until last week the correction appeared to be a normal retreat from the previous high made on September 14, but now the picture is less favorable from a technical perspective as the correction could be morphing into some more serious such as liquidation before the election. It could go either way, but we should have the answer this week.
S&P 500 Index (SPX)
There are two important technical concerns: first, if confirmed, is a potential double top with a measuring objective at 1388, while the second is the upward sloping trendline from the June 4 low. We have more details on the chart in the Strategy section below.
E-mini S&P 500 Future (ESZ2)
We follow changes in the volume and open interest since a healthy trend needs open interest to continue expanding and while it declined 17K contracts from October 28 to last Thursday this decline is insufficient to conclude there has been any serious long liquidation to existing shorts who are covering.
S&P 500 Index Implied Volatility (IVXM)
At the end of last week, the Implied Volatility Index Mean increased from 11.96 to 14.23, while the CBOE Volatility Index? (VIX) increased from 14.33 to 16.14.
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 10% to October and 90% to November resulting in the average premium of 1.71or 10.58% shown above. Our alternative volume weighting between October and November is a 7.51% premium. Last week the day-weighted premium was 16.62%, while the volume weighted was 15.00%. The declining premium suggests less willingness to bid up the prices, although Friday’s volume was 149,114 contracts and the open interest expanded to 419,966 contracts compared with the previous Friday’s open interest at 407,720. The last trading day for the VIX October futures is Tuesday.
Since the CBOE updates the VIX futures term structure during the day an estimate of the current premium or discount is always available. In addition, the data is available on our Advanced Futures Options pages, using VX as the Instrument symbol and CF for the exchange. Compare the options Implied Volatility to the Historical Volatility by setting HV chart to 21 days.
VIX Options
With a current 30-day Historical Volatility of 98.03 and 75.02 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.
Using the IV Index Mean of 75.89 the IV/HV ratio is .77, using the range method for Historical Volatility the ratio is 1.01 while the VIX put-call ratio at .53, up from .38 last week is less bullish for VIX, but less bearish for the SPX since they move in opposite directions. Friday’s options volume was 447,066 contacts compared to the 5-day average of 427,180 contracts.
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 higher expectation of an extreme down move. Now just below the midpoint of the 114-130 range this indicator is not reflecting very much concern about a further large decline.
CurrencyShares Euro Trust (FXE)
Recently it seems all “risk on” assets, including equities, have been following the euro, which seems to have found support at 128 and may retest the upper part of the recent 130-131 range. When the euro is up “risk on” assets are also up and vice versa. The 30-day correlation function with the S&P 500 Index in our Advanced Historical Data section is now 61.11 up from 52.69 last week and 40.25 as we reported two weeks ago. Further euro strength would add support for equities.
NYSE McClellan Summation Index
As the correction deepens, our NYSE Composite breadth indicator continues declining as expected. Since we last reported in Digest Issue 39, it has declined 194.44, more points with 158.60 points of the decline occurring last week. Since the momentum here is clearly downward there is no divergence.
iShares Dow Jones Transportation Average Index (IYT)
Now very close to the center of the current 86-94 range, the major market indexes will have difficulty unless this group begins improving. Declining crude oil prices could provide some cost pressure relief, while some economic indicators including the University of Michigan Consumer Sentiment Index at 83.1 are looking better. Further stimulus from China would also help stimulate global GDP.
SPDR Homebuilders (XHB)
With clear signs of profit taking in this group the question is how much lower will it go? Our upward sloping trendline from the June 4 low at 18.93 currently crosses at 23, but three recent attempts to close above 26 all failed. Using the double top measuring technique the minimum downside-measuring objective is right at 23. Any further decline below 23 implies something more than a correction, despite news of improving fundamentals in the sector.
United States Oil (USO)
Based upon the known fundamentals, other than the Middle East risk premium, it seems hard to justify WTI crude at 92, basis December futures. We continue supporting the view, that weakening seasonal demand should result in a continuation of the decline to the 30 level or about 80 per barrel for WTI crude.