With pre-Christian origins, most of Europe along with some other parts of the world celebrates the arrival of spring on May 1. However, for the equity markets May usually marks a time of reflection since stocks have a long history of declining in May or June. Since the month has just begun, it’s a bit too soon to declare the pattern will repeat this year. In the meanwhile, we add our current options and technical analysis perspective to the dilemma.
Market Review
S&P 500 Index?(SPX) ?Seeming to defy gravity while ignoring the weaker NASDAQ, SPX advanced 17.74 points or .95% last week, challenging the April 4 high at 1897.28. However, with the reversal day Friday it came up a bit short leaving the possibility of a Head & Shoulder Top still on the table. As previously noted it takes a close back above the April 4 high to negate this potential pattern. There will likely be a resolution this week.
CBOE Volatility Index??(VIX) is not reflecting concern about a potential Head & Shoulders Top as both the Implied Volatility Index Mean and the Historical Volatility measures declined last week. Remarkably, VIX is again below 13. In addition, the VIX futures premium ended the week at 18.11% in the upper part of the green range adding confirmation that hedgers are not actively bidding up the futures prices in search of portfolio protection suggesting they think a breakout is more probable than a decline.
Reinforcing the breakout thesis, the?CBOE S&P 500 Skew Index?(SKEW) remains below the midpoint of its range, suggesting less out-of-the-money S&P 500 Index puts activity compared to other recent attempts when SPX was close to making new highs. This means expectations for a breakout above the previous high remain elevated.
Summary
Despite a good week, the S&P 500 index is still not yet in the clear since the dreaded Head & Shoulders Top remains a possibility and this is May, a month with a poor historical record. On the bright side our futures and option indicators are positive suggesting a likely breakout to the upside soon, perhaps even this week. While waiting, some hedging with inexpensive options still seems like a prudent course of action.