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Today


IVolatility Trading Digest™


Volume 20 Issue 46
Rotation Quandary [Charts]

Rotation Quandary [Charts] - IVolatility Trading Digest™

Along with the unexpected Covid-19 vaccine news from Pfizer last Monday and some lingering controversy about the election results, evidence of renewed cyclical rotation surfaced again as some big cap growth stocks lagged. The Market Review explains followed by a long call spread idea taking the cyclical rotation side with Freeport-McMoRan (FCX).

Review NotesS&P 500 Index (SPX) 3585.15 added 75.71 points or +2.16% making a new closing high on Friday after making a new outlier intraday high at 3644.22 last Monday's on Pfizer's Covid-19 vaccine news. Then Tuesday, after closing Monday's opening gap, it wobbled a bit before closing back above the September 2 high on Friday. Now the new intraday high makes a tempting target for the bulls going into year- end, a period of seasonal strength. Any pullback from an unexpected event should find support around the 50-day Moving Average at 3405.17.

Invesco QQQ Trust (QQQ), 290.93 declined 3.68 points or -1.25% last week. Previously called "the decider," it failed to make a new intraday or closing high last week while becoming exhibit one for rotation into the cyclicals argument. Although tech and Semiconductors remain in well-defined uptrends and could continue higher into year-end, more rotation into cyclicals while good for SPX will cause QQQ to underperform. However, semiconductor favorite Nvidia Corp. (NVDA) 531.88 scheduled to report earnings on Wednesday, could change the picture. The 50-day Moving Average at 279.81 should support any unexpected pullback.

Review NotesCBOE Volatility Index® (VIX) 23.10 slid 1.76 points or -7.08% 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 2.42 points or -11.57%, ending at 18.49%, regressing to the mean and then some encouraging the bulls.

The IVXM and SPX charts follow.

table

Next the VIX 30-day options and the VXST 9-day options spread turned briefly negative again last Monday, but turned positive again Tuesday and closed Friday at 2.09. Going in the bullish direction.

table

One more, the Equity Only Put/Call ratio dropped down to an abnormally low .37 last Monday, but returned back to .50 on Friday. Unless contrarians actively adjust positions after using extreme lows as sell signals the results will likely be disappointing unless supplemented by other indicators.

The updated chart follows.

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VIX Futures Premium

This next chart shows as our calculation of Larry McMillan’s day-weighted average between the first and second month futures contracts as of last Friday.

With just two trading days until November expiration, the day-weighted premium between November and December allocated 10% to November and 90% to December for a premium of 7.51% still in the neutral zone. However, on Friday's before futures expire the premium remains abnormally high and then quickly fades on Monday and Tuesday. For comparison, the alternative volume weighted premium was 4.65%.

table

Since most of the volume and open interest are in the two closest futures contracts measuring the day-weighted premium relative to the standard 30-day VIX provides a good real-time sentiment indicator based upon actual commitments of large Asset Managers and Leveraged Funds.

VIX Futures Premium

This next chart shows as our calculation of Larry McMillan’s day-weighted average between the first and second month futures contracts as of last Friday.

With just two trading days until November expiration, the day-weighted premium between November and December allocated 10% to November and 90% to December for a premium of 7.51% still in the neutral zone. However, on Friday's before futures expire the premium remains abnormally high and then quickly fades on Monday and Tuesday. For comparison, the alternative volume weighted premium was 4.65%.

table

Since most of the volume and open interest are in the two closest futures contracts measuring the day-weighted premium relative to the standard 30-day VIX provides a good real-time sentiment indicator based upon actual commitments of large Asset Managers and Leveraged Funds.


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Setting the Stage – Sector Rotation

Of all the influences tugging on the markets including Covid-19 vaccine news, more fiscal stimulus and continuing election uncertainty it's becoming apparent the extreme valuation of a small group of big cap growth stocks may have reached their upper limit encouraging sector rotation into cyclicals and those perceived as value stocks. If so, market breadth should widen – a healthy sign. Indeed, our preferred market breadth indicator continues showing improvement.

Review NotesMarket Breadthas measured by our preferred gauge, the NYSE ratio adjusted Summation Index that considers the number of issues traded, and reported by McClellan Financial Publications, added 203.36 points or +144.53% last week ending at 344.06 after climbing back above both the 200-day and 50-day Moving Averages.

Cyclical Rotation Idea

Freeport-McMoRan (FCX) 20.14, up 1.02 points or 5.33% last week as copper prices continue higher helped by EV production and expanding industrial demand in China. The last suggestion in Digest Issue 38 "Momentum Mania [Charts]," then at 17.00   quickly failed as the big cap growth stocks roared higher. Now using that decline as a pivot for a well-defined upward sloping trendline a new and perhaps better timed long call spread suggestion follows.

table

Using the ask price for the buy and mid for the sell the call spread debit was .95 on Friday about 24% of the distance between the strike prices. Use a close back below the upward sloping trendline at 18 as the SU (stop/unwind).

Strategy

In bull markets, the strategy is to stay long equities and/or ETFs and then tactically hedge pullbacks as they begin developing. Now however, for the S&P 500 Index, the odds for a pullback developing before it reaches the intraday high made on the Covid-19 news at 3,644.22 seem low especially since November and December are seasonally strong months. Nevertheless, sector selection remains important presuming last week's rotation activity continues and interest rates don't spike higher on more Covid-19 vaccine news.

Ideally, cyclicals and value sectors can close some of the performance gap between tech and semiconductors as breadth continues improving. Should tech and the semiconductor sector turn lower and close below their 50-day moving averages would increase the odds of a meaningful pullback and would renew the call for hedges.

More likely the S&P 500 Index will continue up to and test the intraday high and then,

  1. Attempt to form a double top or
  2. Exceed the previous high, and start forming a potential H&S Top pattern or
  3. Resume the long-term uptrend.

Summary

The one day market spike up in response to Pfizer's Covid-19 vaccine news created a new upside target for the S&P 500 Index that could be reached soon presuming market breadth continues improving as money continues rotating into cyclical and value sectors. Needless to say, an unexpected breakdown of the tech and semiconductor sectors would change the outlook.

By Jack Walker

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 another indicator update.

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 the home page of our website.

 

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

 

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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".