Once again, a $VIX “spike peak” buy signal is working out very well. This powerful indicator generated a buy signal as of the close of trading on Monday, August 11th. $SPX has been up six of seven days since then, gaining over 50 points.
Our publication schedule is altered for August, since our office is going to be closed at the end of August for three days. We are going to publish this newsletter on the first and third Thursdays in August. Regular publication dates will resume in September. The weekly Hotline updates will continue to be issued as usual.
I want to spend just a moment pointing out how these market tops can unfold. One good example was in 2007. The market had just made new all-time highs in July and everything seemed wonderful. Volatility had been low (except for one hiccup back in February, 2007), but no one seemed worried. Then, $SPX broke down sharply with a 30-point down day (yesterday was a 40-point down day for $SPX), and that unleashed the bears.
We are going to have a slight schedule alteration for August. Since there are five Thursdays in July, and since our office is going to be closed at the end of August for three days, we are going to publish this newsletter on the first and third Thursdays in August. This allows us to keep the two-week spacing between issues without skipping an issue. Regular publication dates will resume in September. The weekly Hotline updates will continue to be issued as usual.
We follow four main indicators, and they usually guide us in the correct direction of the markets. As noted elsewhere in this issue, price is the most important indicator of all (in this case, the price of the Standard & Poors 500 Index [$SPX]). However, the others – equity-only put-call ratios, market breadth, and volatility indices – are important, too. Usually, we want confirmation from price before acting on opposing signals from the other areas.
This week’s feature article is a bit longer than usual, but with volatility at such low levels, and so many traders and media talking about it, I wanted to describe how volatility hedged positions should be viewed.
We have written many articles in the past about how to hedge a portfolio with $VIX options, but in this article we are going to expand the discussion somewhat. Not only are there more products than mere $VIX options, but the concepts of hedging with volatility options extends beyond mere portfolio protection into quasi-arbitrage strategies and then into more creative speculative (but still hedged) strategies.
The feature article details a shortterm seasonal systems that lasts for just one week. It actually pertains to the week that is just ending, and we outlined the system in last week’s Hotline, using it to hold onto SPY puts. The full explanation of the system is in this issue, and we will employ this system again in the future.
This seasonal trade first came to my attention last year, but when I heard about it, the system had already been entered. So, I wrote it on my calendar for this year, and the time has arrived. As it turns out, it is one of the few confirmed bearish signals out there right now (no, I don’t count the myriad of overbought conditions as “confirmed bearish signals;” they would have to generate actual sell signals to be confirmed).
The feature article discusses ways in which the market is “overbought,” from time spent above the 200-day moving average, to the time since a 10% correction has occurred, to the low state of the volatility indices. In essence, though, these are not sell signals, for the market can continue to rally even while it is overbought.
