« April 2019 »

IVolatility Trading Digest™

Volume 19 Issue 16
Foremost Indictors Update [Charts]

Foremost Indictors Update [Charts] - IVolatility Trading Digest™

Trade selection using volatility as the primary criteria. Different trades for different volatility opportunities.
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The first assessment of earnings reporting underway seems to confirm expectations were lowered enough to assure they can be beaten. This week an expanded market review includes an overdue update for selected Foremost Indicators as the S&P 500 Index closes in on the previous high made last September 21at 2940.91.

Review NotesS&P 500 Index (SPX) 2905.03 drifted 2.38 points or -.08% lower last week trading narrow ranges all four days. On any pull back the March 21 high at 2860.31 should provide the first support followed by the 50-day Moving Average at 2815.63. However, it seems unlikely to lose very much upside momentum until it challenges the September 21high.

VIXCBOE Volatility Index® (VIX) 12.09 inched up .08 points or +.67% last week . Our similar IVolatility Implied Volatility Index Mean, IVXM using four at-the-money options for each expiration period along with our proprietary technique that includes the delta and vega of each option, also gained .08 points or +.83% ending at 9.67.


The volatility and line charts above, illustrate the bullish uptrend underway.

VIX Futures Premium

The chart below shows as our calculation of Larry McMillan’s day-weighted average between the first and second month futures contracts.

With 22 trading days until May expiration, the day-weighted premium between May and June allocated 88% to May and 12% to June for a 20.98% vs. 21.98 for the week ending April 12, still well in the green zone between 10% to 20% associated with S&P 500 Index uptrends.


The premium measures the amount that futures currently trade above or below the cash VIX, (contango or backwardation) until front month future converges with the VIX at expiration. Previously, declines below 10 % and advances above 30% were unsustainable. If there was only one indicator available, it would be a top contender.

For daily updates, follow our end-of- day volume weighted premium version located about half-way down the home page in the Options Data Analysis section on our website.

Foremost Indicators Update

VIXBreadth as measured by our preferred gauge, the NYSE ratio adjusted Summation Index that considers the number of issues traded, and reported by McClellan Financial Publications, declined 17.57 points or -1.65% for the week ending at 1046.91 as it follows the 50-day Moving Average (blue line) higher.


The 50-day Moving Average has been a reliable timing indicator and could make an interesting trading system.

iShares iBoxx $ High Yield Corporate Bond ETF (HYG) 86.68 declined .28 points or -.32% for the week after making a new 52- week high on April 12 at 87.01that set up a new upward sloping trendline, USTL from the December 26 low of 78.49 shown in green below.


With an average duration of about four years and a current positive correlation with the SPDR S&P 500 ETF (SPY) of .94 it distributes dividends monthly at an annualized rate of 5.2% based upon the March dividend of .3787, compared to an annualized quarterly rate of 1.7% for SPY. With the US 10-Year Treasury Note at 2.57% the additional risk adjusted premium of 263 basis points compares favorable to a normal range of 200-300 basis points suggested by some bond market pundits.

Along with other broad based indices the SPY reflects changes in each component equity in multiple sectors, subject to many influences including earnings, interest rates, commodity prices, sentiment and macro variables such as exchange rates. Into the mix, HYG adds additional information from the bond market such as credit risk and liquidity for M&A, stock buybacks, and refinancing activity making it skewed more toward default risk and liquidity than inflation and interest rates. While useful as a confirming indicator with a better dividend yield, additional value comes as a warning indicator when it diverges from the SPY like from June 2015 to February 2016.

Now comparing options data and liquidity.




Where IVXM is the 30-day implied volatility index mean, 52 wk is the current relationship to the 52-week IVXM range, HV(R) is the historical or realized volatility using the range method, Ratio compares IVXM to HV(R) as a value measure, OI is last Thursday's option Open Interest, ATM 7/21 is the ask price for at-the-money puts Thursday, and IV is the implied volatility of each put.

While most of the HYG open interest is in the puts, for SPY call open interest far exceeds put open interest.

Since implied volatility for both are relatively low it may be a good time to consider hedging longs as SPY and SPX nears their September 21 highs. With slightly less liquidity the total cost of HYG puts or put spreads are less than SPY(1.18 vs. 5.24).

Before closing here is more on interest rates.


VIXWhile much attention has been given to the 10-2 Spread that measures the difference between the 10-Year and the 2-Year Treasury Notes, other spreads using near term rates were recently in focus. However, the 10-2 seems to be the more important. Now at .19, this one-year chart updates an earlier version in Digest Issue 7 "Target 2000" when the ten-year was 2.66 and the spread was .14.


For the significance of the spread here are two selected quotes from the FRBSF Economic Letter, Economic Forecasts with the Yield Curve.

"Every U.S recession in the past 60 years was preceded by a negative term spread, that is, an inverted yield curve."

"An extensive analysis of various models leads us to conclude that the term spread is by far the most reliable predictor of recessions, and its predictive power is largely unaffected by including additional variables."

Considering its importance, the Federal Reserve is likely doing all that it can keep the spread positive by intervening when necessary, especially after last December, when the markets sent a strong message of interest rate displeasure.

Big Data? In options we are Big Data!
For a comprehensive review and reminder check this out
Options: Observations of a Proprietary Trader  


VIXWith a well defined uptrend underway as defined by the current upward sloping trendline, odds are the S&P 500 Index will continue higher until reaching the September 21 high where it will likely encounter some profit taking. While any pullback could be limited, presuming better than expected earnings reports continue, and Federal Reserve officials refrain from making any comments suggesting they are reconsidering their friendly interest rate policy; it seems prudent to begin considering some hedges while options remain relatively inexpensive. With respect to implied volatility and option strategies remember "Look to sell volatility (options) when it is perceived to be high and buy volatility (options) when it is low."


The S&P 500 Index continued higher, closing in on the previous September 21 high at 2940.91supported by accommodative interest rates and liquidity. While option prices are relatively inexpensive contrarian traders and strategists may want to think about hedging any potential downside risk. HYG and SPY puts or put spreads are two ideas to consider.

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Actionable Options™

We now offer daily trading ideas from our RT Options Scanner before the close in the IVolatility News section of our home page based upon active calls and puts with increasing implied volatility and volume.

“The best volatility charts in the business.”

Next week's market review will include a rotation update featuring the XLP/XLY ratio.

Finding Previous Issues and Our Reader Response Request

PreviousIssuesAll previous issues of the Digest can be found by using the small calendar at the top right of the first page of any Digest Issue. Click on any underlined date to see the selected issue. Another source is the Table of Contents link found in the lower right side of the IVolatility Trading Digest section on our website homepage.

CommentAs always, we encourage you to let us know what you think about how we are doing and what you would like to see in future issues. Send us your questions or comments, or if you would like us to look at a specific stock, ETF or futures contract, let us know at Support@IVolatility.com or use the blog response at the bottom of the IVolatility Trading Digest™ page on the IVolatility.com website. To receive the Digest by e-mail let us know at Support@IVolatility.com




IVolatility Trading DigestTM Disclaimer
IVolatility.com is not a registered investment adviser and does not offer personalized advice specific to the needs and risk profiles of its readers.Nothing contained in this letter constitutes a recommendation to buy or sell any security. Before entering a position check to see how prices compare to those used in the digest, as the prices are likely to change on the next trading day. Our personnel or independent contractors may own positions and/or trade in the securities mentioned. We are not compensated in any way for publishing information about companies in the digest. Make sure to due your fundamental and technical analysis homework along with a realistic evaluation of position size before considering a commitment.

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