« December 2013 »
SunMonTueWedThuFriSat
1
3
4
5
6
7
8
10
11
12
13
14
15
17
18
19
20
21
22
23
24
25
26
27
28
29
31
    
       
Today


IVolatility Trading Digest™


Volume 13, Issue 49
Window Dressing

Window Dressing - IVolatility Trading Digest

Trade selection using volatility as the primary criteria. Different trades for different volatility opportunities.
Please read IVolatility Trading Digest™ Disclaimer at the very bottom of this page

To add comments or to ask questions please click here (or use the blog "COMMENTS" link at the very bottom of the blog page).

 

Window DressingThis is not the first time equity markets began correcting just as they looked most favorable and indeed that is what occurred as S&P 500 Index declined 1.7% since our last market review in Digest Issue 47 "Seasonally Bullish." While some widely followed stocks are continuing to advance on what appears to be year-end window dressing by money managers, market breadth declined every day last week as more money is being concentrated in fewer stocks. Just like leading retailers who decorate their windows for the holidays, so do money managers rotating into fewer and fewer issues in an effort to improve the look of their year-end statements.

We have more after our market review then offer a window dressing idea of our own for Tesla Motors (TSLA) and just to be prudent a hedge idea for iShares Barclays 20+ Year Treasury Bond (TLT).

 

Review Notes Clip ArtS&P 500 Index (SPX) 1775.38. Last Tuesday's 5.75 decline followed by another 20.50 decline Wednesday were technically significant since there now is a potential dreaded Head & Shoulders Top with a minimum measuring objective down at 1747. Although Thursday's close was below the neckline of the pattern, Friday was an Inside Range day as it attempted to stem the decline. Unless it can quickly advance back above resistance at 1780 we will conclude the Head & Shoulder Top is active and look for a further decline to at least 1747.

CBOE Volatility Index® (VIX) 15.76. While increasing 1.97 points since our last review in Digest Issue 47 "Seasonally Bullish" VIX is reflecting considerably more caution as shown by the flat futures premium term structure below.

The table below shows the VIX cash compared to the next two futures contracts as well as our calculation of Larry McMillan's day-weighted average between the first and second months.

 

VIX Closing Cash

 

The day weighting applies 10% to December and 90% to January for an average premium of -1.65% shown above. Our alternative volume-weighted average between December and January, regularly found in the Options Data Analysis section on our homepage, is the same at -1.65%. Tuesday is the last trading day for the December contract. From a contrarian perspective when the premium measures are negative reflecting a flat futures term structure as they are now, it has been a sign to begin looking for an end to the correction.

VIX Options

With a current 30-day Historical Volatility of 71.36 and 54.62 using Parkinson's range method, the table below shows the Implied Volatility (IV) of the at-the-money VIX calls and puts using the futures prices based upon Friday's closing option mid prices along with their respective month's futures prices, since the options are priced from the tradable futures.

 

 

The Implied Volatility Index Mean (IVXM) 75.60 is just above the Historical Volatility at 71.35 so the ratio is 1.06, using the range method for Historical Volatility the ratio is 1.38.

All of the Implied Volatilities along with the Historical Volatilities and Greeks for the VIX options based upon the futures prices are on our Advanced Options page, found by clicking on the " market close" link shown near the top of the page.

US Dollar Index (DX) 80.21. While the downtrend from the July 9 high of 84.75 is now over resistance at 81 was tested and has held several times in the last month. The most recent decline found long-term support at 80 and seems to be unconcerned about the expected taper announcement due from the Federal Reserve on Wednesday. If higher interest rates are expected it is not yet reflected in the dollar.

10-Year Treasury Notes (TNX) yield 2.86 % after spiking as high as 2.93% on the November employment report released December 6 and then retreating to the well-defined upward sloping trendline from the October 30 low of 2.47%. On the Federal Reserve announcement Wednesday, watch to see if rates close above the December 6 high. If so, the next resistance will be the September 5 high at 2.98%. Any higher interest rates after a Fed taper announcement should strengthen the dollar leading to weaker commodity prices especially WTI crude oil, which is seasonally weak in December.

iShares Dow Jones Transportation Average Index (IYT) 126.98. Although lower crude oil prices should support the transports, they declined along with the S&P 500 Index forming a similar potential Head & Shoulders Top pattern while appearing oversold.

NYSE McClellan Summation Index 29.33. In Digest Issue 47 "Seasonally Bullish", we said if there was a weak link in the bullish argument then it was lagging market breadth. Since then our preferred market breadth indicator declined another 315.56 points exposing real weakness in the bullish argument that the correction is about to end while adding validity to the Head & Shoulders Top forecast. We could have the answer as soon as today but more likely it will be Wednesday after the expected taper announcement from the Federal Reserve.

CBOE S&P 500 Skew Index (SKEW) 126.22. SKEW measures the purchase of out-of-the-money S&P 500 Index puts that require a very large downside move to profit from long put positions. An increase of this index indicates greater expectations for an extreme down move.

After advancing to 137.06 on November 18, it quickly dropped down to 124.63 three days later only to rebound once again before declining back toward 125. Now toward the middle of its range SKEW remained stable around 126 all last week reflecting less concern about a further market decline.

 

As we noted in Digest Issue 47 "Seasonally Strong" some issues that corrected early had made bottoms and turned higher such as Tesla Motors (TSLA) 147.65 and Facebook Inc. (FB) 53.32. However, our suggestion to use the iShares Russell 2000 (IWM) 110.20 based upon small capitalization stocks outperforming the market in December did not work as IWM declined right along with the S&P 500 Index.

Perhaps Fred Kelly's advice quoted in Digest Issue 47 "Seasonally Strong" to sell your stocks when the market no longer advanced on good news was the thing to do. However, since the bond equivalent consumer staple stocks are now rolling over we suspect the decline last week was about expectations of a trapper announcement by the Federal Reserve on Wednesday that now seems to be the consensus view. Technically the market is weak with a potential Head & Shoulders Top pattern awaiting confirmation early this week unless the market turns higher in the next few days.

Window Dressing Idea

Following the window dressing theme, here is one long idea with limited and defined risk to consider.

Tesla Motors (TSLA) 147.65.

After peaking at 194.50 on September 30, it corrected back to 120 where it found support and turned higher.

What could make better window dressing than this widely followed stock that growth money managers would like to have on their year-end statements?

First the options data,

The current Historical Volatility is 88.40 and 55.58 using the Parkinson's range method, with an Implied Volatility Index Mean of 49.97 down from 53.79 last week. The put-call ratio at .6 was just below the bearish line, while the volume was 209,952 contracts traded compared to the 5-day average volume of 151,490 reflecting good options liquidity.

Consider this long call spread idea.

 

 

If the Head & Shoulder Top in S&P 500 Index materializes as described above, be prepared to cut this one short as it will likely decline with the market. If so, use a close back below 140 as the SU (stop/unwind), further limiting the risk.

Hedge Idea

Since no one yet knows if the taper announcement is already in the market, here is a hedge idea to consider just in case.

iShares Barclays 20+ Year Treasury Bond (TLT) 103.21.

In the event interest rates continue increasing after the taper announcement, you might consider a bear put spread such as this one as a hedge.

First, some options data.

The current Historical Volatility is 12.97 and 7.04 using the Parkinson's range method, with an Implied Volatility Index Mean of 11.57 down 11.73 last week while the volume was 32,117 contracts traded compared to the 5-day average volume of 49,680.

 

 

Allowing enough time to test the higher interest rate proposition, this is a relatively low cost strategy. Use a close back above 104 as the SU (stop/unwind).

The suggestions above use the Friday closing middle prices between the bid and ask. Monday, the option prices will be somewhat different due to the time decay over the weekend and any price change.

 

 

IVolatility Mobile is a must-have app for all active option traders.

Check implied volatility while on the go.

Download the free IVolatility Mobile app now

 

Summary

Just as the equity markets were poised to continue advancing into year-end, they were sidetracked once again by concerns that interest rates may continue rising after the Federal Reserve announces reducing the Quantitative Easing program on Wednesday as now expected. In the meanwhile, it seems money managers are window dressing their portfolios for the year-end by rotating into a fewer leading issues with good liquidity.

 

Twitter Follow us on twitter for more ideas from our scanners and other developments.

We will be away next week so the last issue will be a year-end summary on Monday December 30.

 

Finding Previous Issues and Our Reader Response Request

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 way to find them is the Table of Contents link in the blog section of our website.

Next week's issue As usual, 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. Use the blog response at the bottom of the IVolatility Trading Digest™ page on the IVolatility.com Website. If you would like to receive the Digest by e-mail let us know at Support@IVolatility.com.

Comments:


Permalink

Comments are closed for this entry.


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.

Our purpose is to offer some ideas that will help you make money using IVolatility. We will also use some other tools that are easily available with an Internet connection. Not a lot of complicated math formulas but good trade management. In addition to Volatility we use fundamental and technical analysis tools to increase the probability of success and reduce risk. We prepare a written trade plan defining why the trade is being made, what we call the "DR" (determining rationale) and the Stop/unwind, called the "SU".