We have had some requests for more information on these types of ETFs, so here is the first attempt to answering those requests. In the last couple of years, several new ETFs have come to market that essentially write calls against a popular, volatile stock. The ETFs are not all constructed the same way, although there is a basic format to begin with. Sometimes, variations are made if the performance of the underlying stock is exceptional.
Much of what is written below was written a year ago, when the Santa Claus rally also produced a loss. At that time, $SPX rallied immediately from there and never looked back. But the analysis is still valid.
When the typical Santa Claus Rally seven day trading period produces a loss, it is generally a short term problem for stocks. This was stated, poetically, by the system’s creator, the late Yale Hirsch: “If Santa Claus should fail to call, bears may come to Broad and Wall.”
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The new trend of $VIX buy signal is the third one in the last year. The $VIX chart from Figure 4 is reproduced here, without the “spike peak” buy signals, so we can discuss these trend of $VIX signals.
First some background: a trend of $VIX buy signal occurs on the first day when both the 20-day Moving Average of $VIX and $VIX itself are below the 200-day Moving Average. Conversely, on the first day that they are both above the 200-day MA, that is a sell signal.
We have addressed this subject a few times in the past, but with the equity-only put-call ratios plunging to multi-year lows, it seems appropriate to take a fresh look and review what we know from the past. As noted in the market commentary above, the standard ratio is down to levels last seen in November 2021. The weighted ratio is at a new low for this year, which is about as low as it ever gets.
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This is one of our best seasonal trades, but it doesn’t occur every year. Simply stated, if there is a selloff in the broad market of at least 3.2% at any time during October, then the end of the month presents a strong buying opportunity: Buy on October 27th (if that’s a weekend, as it is this year, then buy on the preceding Friday – which would be today, October 25th). Sell on Nov 2nd (if that’s a weekend, as it is this year, then sell at the close on the following Monday – which would be November 4th this year)...
The market has stalled out. For several days (and today is included as well), it has tried to forge through 5860 but has been unable to do so. There was a minor pullback this week, to 5760, but so far it has not been much of a problem except for the deterioration it caused in some of the market internals (more about that later). The support zone of 5670-5770 remains intact, and this week's pullback penetrated just the top of that zone, and then the market bounced higher.
