After a short market review, the spotlight turns to the continuing improvement in market breadth along with updates for China A-Shares ETF (ASHR) and United States Oil (USO), two more of the current ?Foremost Six.?
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Market Review
S&P 500 Index (SPX) ?closed the week up another 18.22 points or +.9% continuing the advance made after the dramatic intraday reversal on October 2 after the nonfarm payroll report. After retesting the August 24 -25 flash crash lows, the rebound and subsequent retest created a potential double bottom activated on a close above 2020.86 that it achieved Thursday with a 29.62 point advance to close at 2,023.86. Accordingly, from a classical barchart perspective, the double bottom upside objective is 2172 measured by the height of the double bottom added to the breakout at 2020.86.
CBOE Volatility Index? (VIX) , based on real-time prices of options on the S&P 500? Index, constructed to reflect investors’ consensus view of future (30-day) expected stock market volatility, declined another 2.03 last week as the downtrend continues reflecting improving market sentiment.
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.
With 2 trading days until October expiration, the day weighting applied 8% to October and 92% to November as of Friday for a 12.91% premium shown above. Our alternative volume-weighted average between October and November regularly found in the Options Data Analysis section on our homepage was slightly lower at 10.82%.
While day-to-day VIX changes offer little forecasting insight following the VIX futures premium helps since it measures expectations of tactical professional traders and money managers using VIX futures and options for hedging long portfolio risk.While day-to-day VIX changes offer little forecasting insight following the VIX futures premium helps since it measures expectations of tactical professional traders and money managers using VIX futures and options for hedging long portfolio risk.
Premiums for normal term structures during uptrends are 10% to 20% while premiums above 20% are unsustainable suggesting a lack of enthusiasm for VIX hedging often occurring around market highs suggesting overbought conditions associated with pullbacks. Alternatively, premiums less than 10% suggest caution and negative premiums indicate oversold conditions. The volume-weighted premium turned negative on August 20 when the long uptrend from October 4, 2011 ended and remained negative until Monday October 5 turning positive with a .85% premium. Last week the premiums ranged from 3.38% Wednesdayto Friday?s high at 10.82, just in the 10% green zone.
In the past when the premiums turned positive, it offered a buying opportunity suggesting the pullback was complete however, since the uptrend ended August 20 there was some concern it may no longer be a reliable buying signal but it now seems confirmed after activation of the double bottom pattern Thursday.
Foremost Six
In last week?s order of perceived importance:
Market Breadth
DBX ETF Trust – Deutsche X-trackers Harvest CSI 300 China A-Shares ETF (ASHR)
United States Oil (USO)
iShares Transportation Average (IYT)
US Dollar Index (DX)
ProShares UltraShort 20+ Year Treasury (TBT)
Expanding on the top three of the six once again:
Market Breadth The McClellan Oscillator Summation Index reported by McClellan Financial Publications, advanced another 831.82 points last week to 1593.22 after an incredible 1199.04 point gain the week before when it went from -437.64 to + 761.40. The improving breadth along with the S&P 500 Index reduces concern about any possible divergence. In addition, it has now advanced above the 200-day moving average shown in the chart below giving top billing to market breadth last week.
DBX ETF Trust – Deutsche X-trackers Harvest CSI 300 China A-Shares ETF (ASHR) ?advanced 2.57 or +7.64% for the week and is now in a defined upward sloping trendline from the lows made on August 24 an 26 during the currency devaluation scare. The modest uptrend seems to be setting the equity stage despite weak China trade data reported Tuesday that added to worries about slowing global economic growth. Data showed Chinese imports fell 20 percent in September due to weak domestic demand, partly reflecting lower prices for imports however, “Import volumes are holding up much better.? Iron Ore and crude oil volumes were slightly higher and much improved from August that had caused concern about a global slowdown.
United States Oil (USO) ?as a proxy for WTI Crude Oil declined .77 or -4.82% for the week as the November WTI futures declined 2.40 or -4.83% closing at 47.26.
While most commentary remains biased towards an oversupplied market scenario those with the most at stake and arguably the most knowledgably, continue covering short positions. Updating the CFTC Commitment of Traders report for October 13 shows the ?Managed Money? group continued covering short positions by an additional 18,049 contracts but they also reduced their longs by 6,699 contracts thereby increasing their net long position by 11,350 contracts representing 7.37 % of the open interest up .55 % from last week and up from 3.80% on August 18.
On Thursday, since both pulled back to support at their defined upward sloping trendlines from the lows, crude oil remains near the top of our list and one the most important variables to watch this week.