On this day, many parts of world celebrate Irish heritage and culture from Irish Pubs where possible since by tradition there are no Lenten drinking restrictions for the day. However, the bears are more likely to be celebrating than the bulls since most indicators show equities again turned negative last week with a few exceptions.
We begin with our market review followed by a review of last week’s alternative energy ideas forFuelCell Energy Inc.?(FCEL) and?Plug Power Inc.?(PLUG).?
Market Review
S&P 500 Index?(SPX) Last week?we were encouraged by the ability of the Dow Jones Transports to exceed the previous January 23 high and noted the Dow Jones Industrial only need to advance less than 1% in order to exceed its December 31 high. However, economic news from China along with more concerns about Ukraine materially dimmed the picture as the Dow Jones Industrials along with the other important indexes closed the week lower.
CBOE Volatility Index??(VIX) Through Wednesday of last week, VIX seemed unconcerned but that changed Thursday and Friday as it quickly advanced 3.71 for the week.
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.
Since the March contract expires Tuesday only one trading day remains, so the day weighting applies 5% to March and 95% to April for an average negative premium of 3.87. Our alternative volume-weighted average between March and April, regularly found in the Options Data Analysis section on our homepage, is slightly higher at -2.36%. Negative premiums reflect an unstable inverted term structure and signal an imminent change in direction for the S&P 500 Index. However, in the recent past, negative premiums have persisted for more than two weeks.
VIX Options
With a current 30-day?Historical Volatility?of 118.37 and 79.61 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.
Monday is the last trading day for March options and compared to the range historical volatility of 79.61 suggests they are relatively expensive reflecting concern about a continuing SPX decline further confirmed by the low?put-call?ratio of .19 compared to last week’s .30.
CBOE S&P 500 Skew Index?(SKEW) 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.
Friday SKEW suddenly declined 15 points taking it back down near the May 28, 2013 low of 112.47. This unusual decline makes us wonder if there may have been a data problem. Here is the chart.
If the data is correct it suggests those that had been hedging against a large down move with puts have suddenly closed their puts, which seems unlikely considering the marco concerns but this is a contrarian indicator. Interestingly, the May 28, 2013 low at 112.47, shown above occurred less than a month before the S&P 500 Index made the June 24, 2013 closing low of 1573.09.
US Dollar Index?(DX) Now in downtrend, DX appears headed back down to test the 79 low made on October 25, 2013. This seems to suggest lower interest rates along with lower crude oil and equity prices on expectations for a slowing global economy.
10-Year Treasury Notes?(TNX) yield 2.64% after reaching 3.03 on December 31. After spiking up to close at 2.79 on March 7, rates declined all last week along with equities suggesting China slowdown news along with seasonal weather factors were the cause. Referring to?iShares Barclays 7-10 Year Treasury ETF?(IEF), some analysts are watching a potential Head & Shoulders Top giving importance to any close above the March 3 high at 102.83 negating the pattern meaning bond prices could continue higher reflecting continuing equity liquidation. Carefully watch IEF this week.
iShares Dow Jones Transportation Average Index?(IYT) ?One of the factors that influenced our positive outlook for equities last week was the ability of the transports to close above the January 23 high at 135.93 on Friday March 7 and thus confirm the S&P 500 Index breakout. Then last Tuesday after closing once again above 135.93 it turned lower and then made a decisive 1.74 point decline Thursday again reflecting expectations for a slowing economy.
NYSE McClellan Summation Index? The summation index is an intermediate indicator comprised of a running total of the McClellan oscillator, a leading indicator, which is the difference between a 19 period and a 39 period exponential moving average of the net difference between the advancing and declining issues on the New Your Stock Exchange. Although higher by 13.96 points since our last review, it declined every day last week.