Trade selection using volatility as the primary criteria. Different trades for different volatility opportunities.
Market Review
S&P 500 Index (SPX) last week the task was to overcome overhead resistance created by the upward sloping trendline from the November 16, 2012 low of 1343.35, accomplished on Tuesday, with the close at 1985.05 followed by a gap open up Friday. For the week, the advance was 53.47 points or 2.7%. The next challenge will be to close above the September 19 high of 2019.26. While this now seems very likely, any hesitation will evoke potential double top speculative comments. Then watch for an upside breakout.
iShares Russell 2000 (IWM) although it also gapped up on the open Friday it is still below the September 3 high at 117.80 and the July 1 high of 120.97. Even though a stronger dollar should be relatively favorable to smaller capitalization stocks, several well-known value mutual fund managers consider small capitalization stocks expensive as noted last week.
Powershares QQQ (QQQ) by Thursday it was back up near the September 19 high at 100.56 and then gapped up on the open Fridayinto new high territory thus remaining the relative strength leader. Now look for a retest back toward 100.56 to close the gap.
CBOE Volatility Index? (VIX), down 2.08 for the week and 17.00 below the spike up high to 31.03 on October 15, at the market pull back bottom.
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 60% to November and 40% to December for a 13.14% 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 13.21%. 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 increased every day and by Thursday, they were 11.56% closing the week at 13.21% back in green territory.
US Dollar Index (DX) after reaching 86.75 on October 3 it retreated back to retest 85 accompanied by comments from some analysts that the high had been made for this cycle. However, Friday’s .77 advance on the Bank of Tokyo announcement to close above 86.75 changes the picture. The next target for the advancing dollar index is the June 7, 2010 high at 88.7. See the chart below.
Since the euro represents 57.6% of the index and economists in Europe say the euro will likely continue falling from the current 1.25 to 1.20 or even 1.15 by year-end and since the euro represents the largest weight in the dollar index the advance is likely to continue.
Looking at the US Dollar Index using the FRED chart from the St. Louis Federal Reserve as of 10-17-14 below for a longer-term perspective, we see it has hardly begun to rise up from the bottom.
In the past, a rising US Dollar Index has not been friendly to commodity prices especially gold and crude oil as well as emerging market equities.