After our regular market review, we update the chart for?ProShares Ultra 20+ Year Treasury?(TBT), our current long-term interest rate indicator.

Volatlity Market Review

S&P 500 Index?(SPX) the turnaround advance that began Friday August 8, on what may have been short covering before the weekend, continued throughout the week until last Friday when Ukrainian concerns caused a reversal creating a large outside range day implying an interruption to last week’s uptrend, if only temporarily depending upon further geopolitical developments. The best fundamental and technical analysis will be meaningless if the situation deteriorates further.

iShares Russell 2000?(IWM) moved mostly inline relative to SPX while also creating a large outside range day?Friday?raising the question if a short position should be established anticipating it will eventually close below the neckline of the potential double top and then accelerate to the downside.

Powershares QQQ?(QQQ) has been relatively stronger than both SPX and IWM making a higher high and higher lowFriday. However, now at an important level near 97.50, any decline from here could raise the possibility of a developing double top like IWM mentioned above.

CBOE Volatility Index??(VIX) , was up .73?Friday, but down 2.72 for the week, after trading as low as 11.89?Friday, before abruptly turning higher on troublesome geopolitical news.

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 4% to August and 92% to September for 5.96% shown above. Our alternative volume-weighted average between August and September, regularly found in the Options Data Analysis section on our homepage, is lower at 3.12%. 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. All last week, the premiums were positive but less than 10%.

VIX Options

With a current 30-day?Historical Volatility?of 152.81 and 111.51 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 111.51 August and September options are undervalued.?Friday’s?volume at 870,767 was considerably higher than the week before at 526,550 contracts, consistent with an outside trading range day.

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.

A few weeks ago?when SKEW was 141.19 we noted. “In the past, higher SKEW prices have been associated with short-term market tops and it appears the out-of-the-money put buyers got it right and are now less enthusiastic to retain their put positions as the market declines.” However, last week, SKEW advanced every day except?Tuesday?and now appears headed back toward 142.

ProShares Ultra 20+ Year Treasury?(TBT) the updated chart below shows the recent decline into oversold territory on “flight to safety” questioning the notion that declining long-term interest rates are primarily due to expectations for a slowing economy.

The downward sloping trendline in sold black that begins on December 31, 2013 requires a close above 60 to change the challenge the downtrend. Then a second confirmation requires a close above 64 as indicated.


This leveraged ETF, very sensitive to long bond price changes, helps demonstrate the extent of “flight to safety” into long-term Treasury Bonds.