We will start today with a?few comments along with our updated indicators and some thoughts about what to watch for this week to determine if the major indexes will soon be making new highs once again.
Market Review
S&P 500 Index (SPX) advancing 77.82 points or 4.12% for the week the reversal up from the October 15 low was remarkable. While declines just before earnings releases began have occurred in the past this one was extraordinary with short covering probably adding to the upward momentum. The challenge now is to continue back above the upward sloping trendline, see below.
iShares Russell 2000 (IWM). Previously we explored the possibility that the relative underperformance of the small capitalization stocks could be resolved by catching up with the larger capitalization indexes. However, this seems less likely since several well-known value mutual fund managers report that small capitalization stocks remain expensive and one even said they would need to fall an additional 30% to 50% to bring their valuations down to normal historical levels. If so, this diminishes the possibility their underperformance will improve anytime soon. On the rebound last week, it exceeded the first resistance at 109.86 while the crucial 107.50 level that defines activation of a technical double top or an alternative Head & Shoulders Top with a measuring objective down about 94, remains the active area of concern.
Powershares QQQ (QQQ) the bounce back by the relative strength leader was even more impressive gapping up Tuesday?to exceed the first overhead resistance at 93.89. It is now just 1.92 points away from the September 19 high at 100.56, which will be an important test to see if it can breakout and continue higher or struggle at the old high setting the stage for a possible double top.
CBOE Volatility Index? (VIX) down 5.88 for the week and down 14.92 from the spike up high to 31.03 on October 15.
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 applies 85% to November and 15% to December for a 5.20% premium shown above. Our alternative volume-weighted average between November and December, regularly found in the Options Data Analysis section on our homepage, is slightly higher at 5.40%. Premiums for a normal term structure are 10% to 20%, while premiums above 20% are unsustainable suggesting a lack of enthusiasm for VIX hedging. Premiums less than 10% suggest caution and negative premiums are unsustainable suggesting an oversold condition. Last week, the premiums remained in the cautious zone despite the market rebound opening Monday at -1.02% and closing Friday at 5.40%.
VIX Options
With a current 30-day Historical Volatility of 169.31 and 132.71 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.
Compared to the range historical volatility of 132.71 both the November and December options are inexpensive.
CBOE S&P 500 Skew Index (SKEW) measures the purchase of out-of-the-money S&P 500 Index puts that require a very large downside move to profit from long put positions. An increase of this index indicates greater expectations for an extreme down move. The CBOE explains further, a Skew value of 100 means the perceived distribution of S&P 500 log-returns is normal so the probability of outlier returns is negligible. As Skew rises above 100, the left tail of the distribution acquires more weight increasing the probability of outlier returns.
After declining 16.47 points to 111.31 at the market bottom on October 15 it rebounded 16.66 points the next day to close at 127.97 back near the middle of the range, makes us wonder if there may have been a data collection problem on October 15.
US Dollar Index (DX) after exceeding the July 9, 2013 high at 84.75, the next target for the advancing dollar is the June 7, 2010 high at 88.71. Reaching 86.75 Friday October 3, it retreated to 84.47 on October 15 before stabilizing above 85 that now appear to be support. While some analysts proclaim the dollar advance is over, economists in Europe say the euro will likely continue falling from the current 1.27 to 1.20 or even 1.15 by year-end and since the euro represents the largest weight in the dollar index the dollar advance is likely to continue.
Interestingly here is the volatility chart from our Advanced Futures Options service using DX for the symbol and ICE for the exchange and then setting the historical volatility to 21 days.
To gain additional insight from options implied volatility/historical volatility relationships, try our futures service Advanced Futures Options – Three Months Free!
Market Breadth
Deteriorating market breadth is a sign of an anxious equity market seeking liquidity and risk reduction, but no longer over concerns that interest rates are about to begin an up cycle any time soon.