The stock market has signaled that whatever was holding it back for the past couple of weeks ("correction" would be too strong of a word) is over. $SPX and all the other major indices have broken out to new closing and intraday all-time highs. This includes the previously-lagging Russell 2000 Index ($RUT, IWM).
This article was originally published in The Option Strategist Newsletter Volume 18, No. 22 on November 26, 2009.
No matter how you measure it, volatility is decreasing. There are several reasons for this – and we’ll discuss them in this article. In addition to traders’ perceptions about forthcoming actual volatility, there are some strategy-related influences, as well as seasonal influences, that are contributing to this most recent decline in volatility.
Let’s begin by noting that the CBOE’s Volatility Index ($VIX) is at or near its yearly lows and hasn’t been significantly lower since September, 2008, prior to the Lehman bankruptcy. The “old” $VIX – trading under the symbol $VXO since 2003 – has already closed at new yearly lows this week. $VIX is just slightly below 21, but $VXO is already approaching 19. While it is true that these volatility measures are based solely on the S&P 500 Index ($SPX) options that trade on the CBOE, they are and always have been a good measure of the overall mood and volatility of stocks in general.
The Thanksgiving holiday in the U.S. brings about several positive seasonal patterns that are generally worth playing. A number of years ago, we used to trade these separately, but then it became apparent that one generally “morphs” into the other, and so in today’s world, these three systems are really blended into one. The three systems, in their original format, were:
$SPX remains in a bullish trend, despite breaking one support level this week -- a level which it quickly recovered. There is support at 2557 (Wednesday's low, from which prices have rallied over 30 points in a day). Below that, there is support at 2545 (the October lows), and then the major support at 2510 -- the September highs, and the area which launched the current leg of this long market rally.
This article was originally published in The Option Strategist Newsletter Volume 9, No. 7 on April 13, 2000.
The CBOE’s Volatility Index ($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.
This has been a successful seasonal trade in many years, and the last two years were the second and third best years in our history. We have used this in 23 of the past 24 years – skipping only 1995, for reasons which I no longer recall.
In this trade, we buy RBOB Gasoline futures and sell Heating Oil futures. This is the simplest way to establish the spread, eschewing futures options and ETF options – the options are just too illiquid in the February contracts, which is what we use for this spread.
A few of our subscribers have been rather nervous about the fact that the mBB sell signal has not produced immediate results. The sell signal occurred on October 25th, with $SPX roughly at 2557. Even though $SPX has rallied about 1% since then, it has not come close to stopping us out – an action which would require $SPX closing above the +4σ Band. Since that Band has raced away to the upside, we have a trade that is sort of in suspended animation if you will. We bought puts to enter the trade, so one knows exactly what his maximum dollar loss could be. However, we are still of the opinion that this market is tiring out and the sell signal still has a good chance to work.
Stock prices continue to rise, in general. There does seem to be a slowing of the upward momentum, but considering how overbought the market had gotten, much more was expected of the bears.
The $SPX chart remains bullish, in that it is rising, and all of its trend lines are rising as well. The index has still not closed below its rising 20-day moving average since early September -- a period of nearly two months.