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At the beginning of 1973, the Dow (no one paid much attention to $SPX back then) made a new all-time high, trading up to 1067. The Barron’s Roundtable, a survey of top money managers and brokerage firm analysts, was published at the beginning of 1973 under the (now infamous) headline, “Not A Bear Among Them.” They were all bullish. President Nixon declared that the Vietnam War was over (although it didn’t wind down completely until 1975). However, stocks had a mind of their own (then, and now), and the Dow began to immediately decline.
In the past, we have occasionally talked about hard to borrow stocks, and how that affects option prices. When market makers and others cannot borrow stock, then the “normal” option arbitrage relation falls apart. Normally, the following equation holds true (modulo dividends and carrying charges):
Stock price = Strike Price + Call Price – Put Price (where put and call have the same terms)
We did not trade the October Seasonal this year, but I wanted to bring you up to date on the statistics for the trade now that the seasonal period has ended (it began with the close of trading on October 27th and ended with the close of November 2nd). This year, that was an $SPX gain of 108.88 points – the second largest point gain the 43-year history of the system. Percentage-wise, it was 2.4%, and that has been bested many times. Still, it was not a good trade to miss...
Normally, we have “Naked Put Writes” in this section of the newsletter. But with the explosion in implied volatility and stock price in several “short squeeze” stocks (or “meme stocks,” if you prefer: a meme stock is any publicly traded company that is benefitting from the fact that investors are using social media to drive interest in the company's shares).
The following table shows the current status of the most expensive of these in terms of implied volatility:
Whenever the market has an extended bull run, such as it's having now, it begins to put a lot of distance between the current value of $SPX and its 200-day Moving Average. Inevitably, some "analyst" posts the fact that "$SPX is x% above its 200-day Moving Average" and then alleges that disaster is at hand. Usually, a deluge of similar analyses follows. Those types of statements are usually wrong, or at least misleading. Two things that are rarely explored in these articles are: 1) when is disaster going to be at hand, and 2) is percent really the measure we want to use, rather than standard deviations?
We occasionally publish the composite chart of $VIX dating back to near its inception. For these purposes, we use the original $VIX – $VXO – since it has the longest price history. That history is shown in the chart on the below. It has generally been the case that $VIX rises early in the year, peaks in the spring, declines into the late summer, and then begins a rapid acceleration in October, before finally tailing off towards the end of the year.
No two markets are ever exactly alike, but there are quite a few similarities between our indicators at the current time and where they stood a year ago – comparing the third Fridays of February in each case. As noted in the Market Comment section, that was the last day (February 21st, 2020) before stock crashed into a violent, short-term bear market. There are a lot of similarities. Of course, this article doesn’t compare other periods in history where there were also similarities, yet the market didn’t crash. Perhaps almost every top has some of these similarities.
One of the cumulative breadth indicators that we follow is cumulative VOLUME breadth (CVB). It is the running daily total of “volume on advancing issues” minus “volume on declining issues.” While it can be calculated using NYSE, NASDAQ, and “stocks only” data, we prefer the “stocks only” (i.e., all stocks on which listed options are traded in the U.S.).
In the November 15, 2020, issue we had a rather comprehensive discussion of the CBOE’s Equity-only put-call ratio. Both its history over the last 20 years and the comparison of 2020 statistics with those past 20 years were discussed. This is just a brief article to update the figures through the end of the year.