With breakdowns below key support levels for both the S&P 500 Index (SPX), PowerShares QQQ (QQQ), along with several others, the time has come to get busy increasing hedge positions while adding a new SPDR Gold Shares (GLD) to the book.
Since the near-term direction seems clear, a review of all our market indicators seems needless, so we begin with an abbreviated review, followed by two put spreads suggestions and a long call gold spread.
S&P 500 Index (SPX)
Previously SPX closed below the upward sloping trendline (USTL) that began with the June 4 low at 1266.74, then last week it closed below the important 1400 support level setting off the Head & Shoulders Top with the minimum downside-measuring objective at 1327. Since Friday’s key reversal up is unlikely to be important for more than a day or two and we are expecting to see the minimum objective fulfilled before this decline is completed.
E-mini S&P 500 Future (ESZ2)
Lately our focus on open interest has been too narrow since we missed highlighting the peak that occurred on September 14 at 3.4 million contracts coinciding with the recent price high. Now, including the increase on November 7 as the index closed below 1400 on large volume, the open interest was slightly above 3 million contracts based upon the preliminary report. We follow changes in the volume and open interest since a healthy trend needs open interest to continue expanding since a decline suggests short covering by large funds no longer needing as much hedging as they begin reducing long stock positions.
S&P 500 Index Implied Volatility (IVXM)
At the end of last week, the Implied Volatility Index Mean increased from 15.36 to 16.97, while the CBOE Volatility Index? (VIX) increased from 17.59 to 18.61.
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.
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The day weighting applied 28% to November and 72% to December resulting in an average premium of .71or 3.82% shown above. Our alternative volume weighting between November and December is somewhat less at 2.15%. Last week the day-weighted premium was even lower at 3.56%, while the volume weighted was 3.12%. Despite the decline of the SPX below 1400 on large volume, this indicator is not showing as much premium to cash as seen in previous periods of decline. The low premium suggests less hedging enthusiasm using VIX futures, while the volume is somewhat less but still substantial at 128,566 contracts compared to the week before at 142,901 contracts as the open interest declined from 377,862 to 375,058, but in the recent normal range.
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 94.54 and 68.14 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 88.26 the IV/HV ratio is .93, using the range method for Historical Volatility the ratio is 1.30 while the VIX put-call ratio at .44, is higher than last week at .27 making it slightly less bullish for VIX, but more bullish for the SPX since they move in opposite directions. Friday’s options volume was 305,336 contracts compared to the 5-day average of 339,303.
Last week we noted Larry McMillan’s comment that the equity only put call ratio gave a sell signal about a month ago when SPX made the second test of the high that formed the potential double top. Larry says the trend of the ratios is rising and any further continuation is bearish. Friday it was .82 as it continued rising from .77 the previous week.
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 approaching the lower end of the 114-130 range this seems baffling, as we would expect to see it rise as SPX declines.
NYSE McClellan Summation Index
For the previous two weeks the NYSE Composite breadth indicator declined another 175.59 points continuing lower along with the index without any signs of a positive divergence that we look for at turning points.