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Today


IVolatility Trading Digest™


Volume 19 Issue 28
Double Barrel Indicator [Charts]

Double Barrel Indicator [Charts] - IVolatility Trading Digest™

Trade selection using volatility as the primary criteria. Different trades for different volatility opportunities.
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Much to the delight of the bulls all three major indexes reached new closing highs last week on expectations for an interest rate cut by the Federal Reserve later this month. While the new S&P 500 Index highs redraw the upward sloping trendline from the February 2016 low, some divergences suggest caution.  The Market Review with an updated S&P 500 Index chart followed by another for iShares iBoxx $ High Yield Corporate Bond ETF (HYG), now labeled the Double Barrel Indictor, explains.

Review NotesS&P 500 Index (SPX) 3013.77 gained 23.36 points or +.78% last week, making two new intraday and two new closing highs pushing it well above the 2950 level need to redraw a new upward sloping trendline and the first support area to watch on any pullback.

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The new operative upward sloping trendline, USTL from the February 11, 2016 low of 1810.10 to the December 26, 2018 low at 2346.58 now crosses just under 2500.  As it advanced above 2950, it renewed the trendline and ended the possibility of the double top formation marked DT? at the two previous pivots.  With well-defined support around 2950, it looks like it will continue higher, except there are some divergences to consider.

VIXCBOE Volatility Index® (VIX) 12.39 slid .89 points or -6.70% 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, declined .77 points or -7.18 % ending at 9.96.  IVXM and SPX charts follow.

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If the new normal is close to 10% then implied volatility has returned to March and April levels, thus confirming the bullish view.

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.      

The premium measures the amount that futures currently trade above or below the cash VIX, (contango or backwardation) until front month futures contract converges with the VIX at expiration on Wednesday.

With just 2 trading days until July expiration, the day-weighted premium between July and August allocated 10% to July and 90% to August for an 20.93% premium, well into the bullish green zone, vs. 6.55% for the week ending July 5.

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


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


Double Barrel Indicator

iShares iBoxx $ High Yield Corporate Bond ETF (HYG) 86.93 declined .06 points or -.07% last week.  

With an average duration of about four years and a positive correlation with the SPDR S&P 500 ETF (SPY) of .75, it distributes dividends monthly at an annualized rate of 5.28% compared to an annualized quarterly rate of 1.74% for SPY, making it a carry trade favorite.

Along with other broad based equity indices, the SPY reflects changes in each component in multiple sectors, subject to many influences including earnings, interest rates, commodity prices, sentiment and macro variables such as exchange rates.

HYG now dubbed our Double Barrel Indicator because it 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 earnings, inflation and interest rate concerns.  While useful as a confirming indicator with a better dividend yield, additional value comes as a leading indicator from the bond market.  

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From the December 26, 2018 low of 77.46 to the June 3 low of 84.10, the well defined upward sloping trendline, USTL now crosses at 86 and at support indicated by the red dashed line. 

With good options volume and liquidity including the largest open interest of all fixed income ETNs, should HYG fail to continue higher with SPY and then close below support around 86, the time will have come to reduce long equity exposure and increase hedges once again as mentioned in Digest Issue 26 "2 Hedge Ideas."

Strategy

Review NotesWith many important economic indicators such as manufacturing PMIs, rail car loadings, auto sales, home appliance sales, and semiconductor billings declining, along with record flows into bonds from equities by institutions, combined with near record high price-to-earnings and price-to -sales ratios, it seems prudent to prepare for an possible market decline. These two key divergences add some urgency.

Review NotesThe Transportation sector defined by the iShares Transportation Average ETF (IYT) 191.39 remains well below the April 24 high at 199.81, lagging the SPDR Dow Jones Industrial Average ETF (DIA) 300.65, creating a well-known and widely followed Dow Theory negative divergence.

Review NotesMarket Breadth 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, gained 56.12 points or +7.73% last week ending at 781.93, but well below the March 1 high of 1280.31. While improving, the rate of recent gain lags the major indexes, confirming narrowing relative breadth.  This reliable leading indicator also suggests caution.

If large institutions are leaving the market, who will be the bag holders?  – a Joe Granville term for those who remember.

In addition, according to Factset data, the number of companies issuing negative guidance has risen to the second highest on record.

One more thing, the major indexes often decline just before earning reporting begins, as if there is some conspiracy to push prices lower in order to add positions ahead of better than expected reduced estimates.  However, since the indexes are now at new highs and reporting begins this week, perhaps this quarter there will be some "sell the news."  

Summary

With the major indexes in new high territory and trending higher all seems good for the bulls, except deteriorating important economic indicators and divergences like the transports and market breadth confirm equity risk reduction by large institutions ahead of second quarter reporting.  Accordingly, once again, it seems like the time has come,   to closely watch the bond market and consider adding some hedges.

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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 will feature another Market Review along with specific hedging ideas.

Finding Previous Issues and Our Reader Response Request

PreviousIssues

All 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

 

 

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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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