« November 2016 »

IVolatility Trading Digest™

Volume 16 Issue 45
US Dollar Index Breaking Out [Charts]

US Dollar Index Breaking Out [Charts] - IVolatility Trading Digest™

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Of all the interesting developments that occurred last week, the breakout by the US Dollar and the corresponding declines by the euro and yen are likely to be the most important and long lasting. There is more below in market review including an update in the crude oil price saga.

Review NotesS&P 500 Index (SPX) 2181.90 added 17.45 points or +.81% for week, advancing above the active upward sloping trendline from the February 11 low at 1810.10 shown last week in Digest Issue 44 "Rotation Breakout Ideas [Charts]" and then tracking the trendline higher. The next objective resides just 11.91 points higher at the August 15 intraday high of 2193.81.

VIXCBOE Volatility Index® (VIX) 12.85 declined 1.32 points or -9.32% for the week returning to a level associated with an advancing S&P 500 Index. Our comparable implied volatility index mean, IVXM declined .99 or -8.40% to end the week at 10.79.

VIX Futures Premium

The premium measures the amount the futures currently trade above or below the cash VIX, (contango or backwardation) until front month future converges with the VIX at expiration. Depending on the time to expiration, premiums for normal term structures during uptrends are 10% to 20% and decline when the VIX advances faster than the nearest future as the market declines and/or the futures decline as the front month expiration approaches. Premiums less than 10% suggest caution and negative premiums indicate oversold conditions when the VIX is higher than the futures and are usually associated with reversals.


After November futures expired last Wednesday, the premium advanced from 9.46% to 16.64%, well within the comfort zone for uptrends. At the end of the week, the total open interest declined slightly to 402,996 contracts vs. 409,662 the week ending November 11.

VIX Options

With a current 30-day Historical Volatility of 129.52 and 128.59 using Parkinson's range method, the Implied Volatility Index Mean (IVXM ) was 75.44 down from 88.47 the week before. However, the mean does not tell the whole story since the call-implied volatility was 86.34, while the put was 64.54 as the six-month chart below shows the skew; blue line for calls, puts in orange.


Volume shows calls spiked up in June, September and early November.


After November futures expired Wednesday, total VIX options volume on Friday was 366,899 contracts while the weekly average was 594,480.


Charts source: IVolatility .com/Advanced Historical Data

After November futures expired, the open interest declined as it does every month after futures expire. However, the call open interest in blue starts December at the lowest level in six months, suggesting somewhat less enthusiasm for using VIX calls for hedging. Interestingly, the skew between the call implied volatility at 86.34 and put implied volatility at 64.54 implies higher bids for calls.

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The macro bus returns

DollarBusUS Dollar Index (DX) 101.21 advanced 2.15 points or +2.17% for the week closing at the highest level in almost a year and above the 92.50 - 100 range established in early 2015. The combination of a December interest rate hike, now said to have a 96% probability based upon futures pricing, along with the perception that increasing fiscal spending on infrastructure will increase inflation and interest rates, resulted in selling both the euro and yen. Both are now funding currencies with low interest rates and declining value relative the US Dollar. For the week, the euro declined 2.40% while the yen decline was more dramatic falling 3.64%.


Previous attempts at 100 shown in the chart above,


Although not shown on the chart, going further back it reached 121.02 on July 1, 2001 during the strong dollar "tech bubble" era.

As for the macro implications, recall the conclusion from Citi Research illustrating about 75% of US equity market variance is explained by macro variables, such as exchange rates, and bond prices, up greatly from around 55% in 2012, 2013.

Recently correlation between a rising US dollar with declining equity prices, especially for US multinationals with large non-dollar sales, commodities, precious metals and crude oil has been high. While it may be premature to conclude a new stronger dollar era has begun, further advances above 100 will likely have serious portfolio implications.

Crude OilWTI Light Sweet Crude Oil (CL) 45.69 basis December futures gained 2.28 points or +5.25% after testing 42 last Monday and then abruptly reversing on more chatter about some sort of possible OPEC production deal although OPEC’s production just reached a record high of 34 million barrels.

The weekly Commitments of Traders reports from the CFTC as of Tuesday November 15, shows activity by "Managed Money," the group that best correlates with crude oil price changes and arguably the most important. Last week , their net long position increased by 3,904 contracts, by adding 24,517 longs while increasing shorts by 20,613 contracts representing 5.59% of the open interest about where is was on March 17, 2015 when WTI was 43.39 suggests a wait and see strategy by "Managed Money" before the OPEC meeting.


Other noteworthy changes include the Producers/Merchant/Processor/User "PMP" group increasing longs by 8,296 contracts and selling 26,979 contracts to "Swap Dealers" who added 37,979 long contracts.

StrategyWith a positive VIX futures premium as the S&P 500 Index attempts to reach the August 15 intraday high of 2193.81, some sectors appear overbought and due for profit taking. However, since breadth has begun to improve, unless interrupted by an unexpected macro event, chances are good it will reach the previous high before the "Algo Rotators" begin another bout of "Whac-a- Sector" selling explained in Digest Issue 23 "Rotation Redux." In the meanwhile, consistent with the mantra of trading what you see, not what you think, the long side gets the nod.

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Now with risk measures returning to normal levels and breadth beginning to improve the S&P 500 Index will likely continue higher and test the previous intraday high made August 15 high at 2193.81, although the going may get tough should the US Dollar and interest rates rise further between now and year end.

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Next week we will again refer to our rankers and scanners to find more trade ideas.

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 source is the Table of Contents link found in the lower right side of the IVolatility Trading Digest section on the home page of our website.

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