Despite all the “fiscal cliff” chatter the equity advance continued last week as other select “risk on” assets began participating. Although the probability remains high there will be a successful retest of the S&P 500 Index (SPX) low of 1343.35 made on November16 at some point, we know better than to fight the tape.
Strategy
S&P 500 Index (SPX)
The upward move from the November 16 key reversal continued higher closing well above the 1400 resistance that is now support. It may be too strong to say important lows are always retested, but there is still a chance to see the previous Head & Shoulders Top measuring objective reached down at 1327, described in Digest Issue 45.
For the month of November SPX closed up .28% a good omen for December since November is usually an up month, according to Jeffrey Hirsch, editor-in chief of the Stock Traders Almanac.? Historically, a lower November close would have made the December forecast relatively weak as we mentioned two weeks ago.
Since we still have several previous put spread suggestions open we will unwind or close them while waiting for the development of a short-term reversal pattern. We added the iShares Russell 2000 Index (IWM) hedge suggestion made last week to the watch list since the condition requiring a lower high along with a lower low has not yet occurred. When it does, we will update the strike prices and implement the hedge although it could be a short counter trend pull back.
S&P 500 Index Implied Volatility (IVXM)
At the end of last week, the Implied Volatility Index Mean increased from 13.29 to 13.92, while the CBOE Volatility Index? (VIX) increased from 15.14 to 15.87.
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 60% to December and 40% to January resulting in an average premium of .30 or 1.88% shown above. Our alternative volume weighting between December and January is 2.12%. This the second time in the last four weeks there has been a discount in the front month premium as the average declines once again.
iPath S&P 500 VIX Short Term Futures ETN (VXX) & VelocityShares Daily Inverse VIX Short Term ETN (XIV)
Increasing volume in both the long VXX and the short XIV appears to be important influences determining the VIX premium. The long VXX trades between 1.5 and 2 times as many contracts as the short XIV, but increasing relative XIV volume reduces the VIX premium as more futures contract are sold. When the term structure is in contango, or it slopes upward over time, the advantage goes to a long XIV position since it represents a short futures position and VXX continuously sells the near term contract and buys the longer term at a higher price. We thank Wayne for pointing out the shortcoming in last week’s explanation.
Fridays VIX futures volume was 106,563 contracts compared to 71,531 the short holiday week before while the open interest increased slightly to 385,333 contracts compared to 382,639 the previous week.?? ?
NYSE McClellan Summation Index
Another development supporting the bulls was the improving NYSE Composite breadth indicator with a 211.20 point advance, taking it back above the important zero line. This was one reason we had remained cautious, but now the advance adds some additional upside support.
Other signs of “risk on” strength came from copper and crude oil, while gold seemed to be under selling pressure, which is unusual since this is a seasonally strong time for gold.