The double top in $SPX in 2000 led to a huge bear market. Could it be happening again? To their credit, I have heard a few (very few) market commentators on TV mention the fact that there was a double top in the market in 2000, wondering if it could be happening again now. This is pertinent, of course, because $SPX is laboriously trying to get back to the 2870 highs that were set in January. The average bull (who is just about everyone around) laughs at the idea that $SPX could turn down from here. Admittedly, its chart looks strong, but it did in 2000 also. To evaluate the possibilities, we are going to compare the various technical indicators that we use, comparing their current states to their states 18 years ago.
As it stands today, the “Short Volatility Trade” has been watered down to a great extent. Perhaps in an effort to get ahead of the regulators, most of the Exchange Traded Products (ETPs) that deal with “short volatility” have made adjustments so that their products are no longer as volatile as they had previously been.
By Lawrence G. McMillan
One of things I’ll always remember about the Crash of ‘87 (actually, I’ll always remember everything about the Crash of ‘87 – at least from my vantage point) was that the market was down on Wednesday, Thursday, and Friday of the week before, with Friday being the worst day. That Friday, October 16th, saw the Dow drop 110 points – the largest point drop in history up to that time. Of course, Monday was the Crash. On that Monday, the futures opened down about 20 points (roughly equivalent to 120 points today, by my estimate). So I learned to respect a market as being potentially extremely bearish if there is a big drop into a closing low on Friday. Another notable (bad) memory came in August, 2015, when $SPX opened down 100 points on Monday after an ugly close to the week before.
As trading opened on Monday, February 5th, 2018, stocks had already been falling for a few days. Then on that day there was a major decline – the largest drop in point terms in history. The Dow was down 1,175 points. The S&P 500 Index ($SPX) was down 113 points. All other major stock indices suffered similar fates. Those net changes were effective as of the 4 p.m. (Eastern time) close of the NYSE.
The post-Thanksgiving seasonally bullish period ended at the close of trading on January 3rd. This period is a combination of three different seasonal patterns, which began at the close of trading on November 22nd (post-Thanksgiving, January effect, and Santa Claus rally). $SPX advanced 116 points, or 4.5% over that time period. One component of our research indicates that it is usually best to be in the small-caps during this period. However, this year the Russell 2000 ($RUT) only advanced 36 points, or 2.4%. IWM advanced by 3.56 points, also 2.4%. So this year it would have been better to be in $SPX all the way along, rather than in the Russell.
The idea of a seasonal pattern called The Santa Claus rally came from Yale Hirsch more than 50 years ago. Simply stated, it says that the market generally rallies over the period including the last five trading days of one year and the first two trading days of the next year. On average, the rally has been about a 1% move – nothing great, but certainly worth trading. The seasonal period has just begun for this year: at the close of trading yesterday, Thursday, December 21st.
Traders are abuzz with the seemingly absurd fact that $VIX is up strongly today (and up for four days in a row), even though the market has risen strongly over that time – and is blasting explosively higher today.
Forget why this is happening. Can this be sustained? The simple is answer is “yes,” of course. Anything can happen – and probably will – is an old adage on Wall Street (and in life). But has this ever happened over a lengthy period of time? It certainly has.
This article was originally published in The Option Strategist Newsletter Volume 9, No. 7 on April 13, 2000.
The CBOE’s Volatility Index ($VIX) has been a stalwart for option traders and technicians since it was introduced in the early 1990's. The $VIX measures the implied volatility of $OEX options. However, in recent months, the trading in $OEX options has slowed dramatically, and many traders have forsaken them for the more active and volatile equity options – especially NASDAQ options. As a result, $VIX is becoming harder to interpret. Therefore, we thought that perhaps another Volatility Index could be constructed as a useful supplement to $VIX. It would be a “supplement” rather than a “replacement” because there may come a day when most speculators return to the $OEX market. If that were to happen, then $VIX would regain its former place as a premier measure of public sentiment.
As noted on page 1, a divergence has developed between $SPX (and the other major indices) – which have all been making new all-time highs – and the Russell 2000 ($RUT, IWM), which has not and has even broken down.
