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Today


IVolatility Trading Digest™


Volume 20 Issue 48
Rotation Continuation? [Charts]

Rotation Continuation? [Charts]- IVolatility Trading Digest™

Review Notes
Already underway, rotation into cyclical and value stocks really got rolling as the energy sector came alive along with the Russell 2000 Index (IWM ) on the November 9 Pfizer Covid-19 vaccine news. With a seasonal tailwind, the Market Review takes a look and then offers a speculative put sale idea in the hot EV sector with Hyliion Holdings Corp. (HYLN).

  

Review NotesS&P 500 Index (SPX) 3638.35 added 80.81 points or +2.27% last week making new closing highs on both Tuesday and Friday. However, the near term closing objective remains the November 9 intraday high at 3645.99, within easy reach just 7.64 points away since seasonal strength should continue well into December. On any unexpected pullback expect support near 3550 and then around the 50-day Moving Average at 3446.36.

iShares Russell 2000 ETF (IWM) 184.37, up 6.87 points or +3.87 last week and now tentatively labeled the new "decider," a the role previously played by the Invesco QQQ Trust (QQQ) before Pfizer's vaccine news.

Invesco QQQ Trust (QQQ), 299.01 advanced 8.63 points or +2.97% closing just short of the November 9 intra-day high of 299.14 coming in second behind IWM. However, the September 2 intra-day high at 303.50 and closing high at 302.76 remain the levels need to reach to declare new highs. Should profit taking in big cap growth stocks continue, it could continue lagging. While well above support at the upward sloping 50-day Moving Average at 283.18.

Review NotesCBOE Volatility Index® (VIX) 20.84 dropped 2.86 points or -12.07% 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, lost 2.11 points or -10.98% ending at 17.11  well into the bullish zone.

The IVXM and SPX charts.

table

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.

With12 trading days until December expiration, the day-weighted premium between December and January allocated 60% to December and 40% to January for a premium of 13.27%, back into the green bull zone as the futures returned to a more normal upward sloping curve without any difficult to explain abnormal humps.

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.


All on one page
The Sentiment Analyzer included in all IVolLive packages features a quick reference one-page summary including moving averages, relative strength, Chaikin Money Flow, Correlation, Options IV & HV and more.


Setting the Stage – Rotation

Lost in the rotation activity out of the highly valued so called FAANG secular growth stocks, the same can't be said for the VanEck Vectors Semiconductor ETF (SMH) 206.42 up 6.44 points or 3.22% last week. Now well above its September 2 high at 184.61, gaining just slightly less than the iShares Russell 2000 ETF (IWM) up 3.87%. Until the semiconductor sector turns lower, equities are likely headed higher especially with the help of a seasonal tailwind.

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, continued chugging higher adding another 201.33 points or +34.24% last week ending at 789.35 and still trending higher.

Top 5 Idea Review Notes

In the “Rankers and Scanner” section about half-way down our home page on the right side we feature a ranker sample showing the Top and bottom 5 stocks in four categories.
Review Notes

For ideas, we often look at the top 5 stocks based on the Implied Volatility Index Mean vs. the 30-day Historical Volatility (IV Index Mean vs. 30D HV) and the top 5 stocks with greatest IV change from yesterday.

On Friday the top ranked stock by IV/HV ratio spot went to Hyliion Holdings Corp. (HYLN)  24.49 down .61 or -2.43% last week.

In the popular EV sector, this company plans to capture the electrification market for Class 8 trucks – those big trucks that pull all those big cargo trailers on the motorways. The story begins on June 19 when Tortoise Acquisition, a SPAC (Special Purpose Acquisition Company) began trading just above 12.  After reaching a high of 58.66 on September 2 in anticipation of combining with HYLN, it pullback and made a pivot at 18.09 on October 30. At completion of the deal on October 1, it has about $520 million in working capital. Now it's trending slightly higher with expensive options unrelated to earnings since it reported on November 12.

With a current Historical Volatility of 90.02 and 85.24 using the Parkinson's range method, the Implied Volatility Index Mean is 209.46 at .81 of the 52-week range. The implied volatility/historical volatility ratio using the range method is 2.46 so option prices are expensive relative to the recent movement of the stock. Some new entries in the EV sector s lack sufficient options volume, but that's not the case here as Friday’s option volume was 48,846 contracts with the 5-day average of 64,760 with wide bid/ask spreads. Often implied volatility raises before earnings reports, but they reported a loss on November 12 so earnings, or the lack of earnings, doesn't seem to be the reason for the high implied volatility.

Consider this put sale idea.

table

Using the bid for the sale the credit was 1.35 on Friday. As a speculative development stage company without earnings, the current modest price advance could be an Elliott 4 wave countertrend move, soon to be followed by another leg down. Should it close below 19 on December 18 stock assignment of the put would have a basis of 17.65 and below the pivot made on October 30 at 18.09. If so, use a close back below 17.65 as the stop. Should it pull back before December 18 use 22 as the stop.

Strategy

In bull markets, the strategy is to stay long equities and/or ETFs and then tactically hedge pullbacks as they begin developing. As of Friday, our indicators were bullish with no signs of an imminent pullback, although select excessive profit taking still poses some risk. With the S&P 500 Index just 7.64 points away for testing test the November 9 intraday high at 3645.99 be aware of a intraday reversal on unusually high volume while considering these alternatives.

  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 trending higher.

Summary

The relative outperformance of the iShares Russell 2000 ETF (IWM) continued last week with the help of the energy sector closely followed by the VanEck Vectors Semiconductor ETF (SMH) while market breadth continued to improve. So far, the rotation activity looks more like value hunting rather than widespread sector rotation. Year-end seasonal strength suggests the odds favor higher equities until at least mid-December unless derailed by unexpected negative Covid-19 news.

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

Trade selection using volatility as the primary criteria. Different trades for different volatility opportunities.
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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".