Trade selection using volatility as the primary criteria. Different trades for different volatility opportunities.

As sector rotation continues it seems reasonable to wonder if the new closing highs can be sustained after the previous laggards have been nudged higher without the previous leaders declining. This week’s earnings reports should provide the answer as important large cap tech and biotech leaders will report 2Q earnings while their ETF’s are testing previous highs. Should they disappoint expect double top chatter to begin. There’s more below including another update for WTI crude oil from the perspective of the Commitments of Traders Report.

Review Notes

S&P 500 Index (SPX) added another 13.27 points or .54% for the week, reaching new closing highs both Tuesday and Wednesday before declining slightly before July options expiration. Both the upward sloping trendline, USTL from the November 4 low at 2083.79 and the 50-day moving average are down at 2427 with considerable support at 2400.

CBOE Volatility Index® (VIX) 9.36 declined .15 or -1.58% for the week while the comparable IVolatility Implied Volatility Index mean, IVXM now 6.67 declined .13 or -1.91% , to a 52 week low.

VIX Futures Premium

The chart below shows as our calculation of Larry McMillan’s day-weighted average between the first and second months.

With 17 trading days until the August expiration, the day-weighted premium between August and September allocated 85% to August and 15% to September for a very normal 23.66% premium the first August futures Friday.

The premium measures the amount that futures currently trade above or below the cash VIX, (contango or backwardation) until front month future converges with the VIX at expiration.

Crude Oil Update

Crude Oil WTI Light Sweet Crude Oil (CL) basis September futures declined .98 points or – 2.10% for the week, after retesting the 50-day moving average (red line below) and then turning dramatically lower. Both cyclical and seasonal forces are likely involved.

From the Disaggregated Commitments of Traders – Options and Futures Combined report as of July 18 “Managed Money,” the group that best correlates with crude oil price changes and arguably the most important, increased their long position +14,127 contracts and decreased their shorts +22,706 for a net position increase of +36,834 contracts representing 7.73% of the of the open interest up from 6.25% the week before and up from 4.73 % on June 27, the last pivot on the chart below.

7.73% vs. 6.25% last week.

“Managed Money” buying was offset by “Producer/Merchant/Processor/User,” PMP and Swap Dealer selling suggesting some doubt the recent advance will continue and indeed that’s what occurred as crude was unable to remain above the 50-day moving average. This chart shows PMP selling as “Managed Money” buying pushed the price briefly above the 50-day moving average.

From both a cyclical and seasonal perspective it looks as if crude will attempt to retest 42 before the end of July before rebounding once again in August . Next week’s report should reflect “Managed Money” selling again Friday.

Here are last week’s results shown by net change in numbers of contracts.

  • PMP -14,231
  • Swaps -18,016
  • Managed Money +36,834
  • Others +485
  • Non Reportables -5,070
  • Strategy

Since most money is made in trending markets remember: “Trends tend to go further and longer than anybody imagines.” – John Train However, following trends requires a method to determine when they end.

While most indicators including breadth remain bullish watch these leaders as their major component companies report this week. PowerShares Nasdaq 100 ETF (QQQ) 144.11, Technology Sector Select SPDR (XLK) 57.47 and SPDR S&P Biotech ETF (XBI) 80.77 all testing their previous highs. Should they turn lower bullish sentiment will likely be challenged.

The current low volatility environment is a dilemma for option strategists with long volatility exposed to time decay and small underlying movement while short volatility is too cheap to sell.


While the bulls remain in charge of the equity markets sector rotation continues. This week’s earnings reports include large cap tech and biotech that will likely determine if the major indexes are able to push higher or give way to form double tops and another pull back with increasing volatility.