RUT rebound leads markets higher

Today the RUT put in a tremendous performance, returning to the top of its recent range. I have to watch to see if it can make it into new high ground like the rest of the markets have already.

The weekly chart of the RUT has an hanging man candle pattern, and a bearish cluster on the Market forecast chart. This ultimately could be the top for the RUT, or very close to it.



I am not yet getting any more bearish. Instead, I rolled out the RUT 1385/1390 call spread until next week's expiration at higher strikes of 1395/1400 for a credit of 5 cents. This way we are safer further above current resistance levels and have more time to maneuver if the market is again bullish tomorrow.

The SKEW fell today to 129, as the short term volatility collapsed to below 9! I will continue to move the call spreads out and up, if needed to ensure any pullback is caught.

More bullishness with NDX!

Most indexes were flat today, but again the NDX knows only how to rise.

This gave me a chance to put on some more bear call spreads above the trend line for next weeks expiration. The chart below shows the set up.

The NDX is riding the top of its trend line started back on November 8, 2106. The trend marks to upside at 5265 by next Friday. I am interested in selling premium on calls around that level. Importantly, the RSI (bottom gray line on the chart below) is again in the overbought zone, limiting further strong upside moves.

Today I added to the 5260/5270 NDX calls spread for $1.15. I also rolled the 5150/5160 NDX calls to next week expiration for a debit of $2.00 which leaves me with $3.25 credit still.

I also closed most of the RUT put spreads for break even, as the RUT is very weak. The call spread at 1385/1390 that I sold just a few days ago is now nearly worthless. It expires Friday.

The SKEW rose nicely again today to 134, while as the market s fought back to gains, the volatility indexes rose.

February 1st - positive after a sell off

Large caps - or I could say AAPL and some related technology companies - were positive today. However, all closed far below their highs of the day. The RUT actually closed lower today.

Overnight action has not held and the NDX is already down 0.3%. The SKEW is still high although back down to 133. VIX fell today, while VXST rose. This puts the VXST/VIX ratio positive, which is a negative for the market. This has not happened at these low levels of VIX for a long time.

I did not put on any new trades today. I may have missed some easy money, but the tide is not yet even going out.

Rebound?

The market rebounded today. For the RUT, this was a substantial move off support. The NDX lagged but AAPL beat results after hours and that should put the market at a higher open tomorrow. Looking at the RUT chart, you see that a move higher was expected by the position of the Momentum and Near-term lines of the MFC (Market Forecast Chart, in the middle of the graph below). However, the Market Sentiment has completely rolled over from a very high level and is pointing lower now.

Tomorrow is the first of the month, so a positive day is expected. This is not the end of the sell off however, in fact it has not even begun!

Seasonally, February is the weakest month of the 6 month bullish period starting from November. In post election years, it is one of the weakest months of the YEAR!  Nasdaq stocks are usually the weakest in February. 

The SKEW is again on the rise - upto 138 now! I am going to look into what happens when the SKEW clusters for an extended period over 135. 

Put/Call ratios have been stuck in overbought conditions for an extended period. The VIX is also beaten down. Yet, both yesterday and today, the VXST traded above VIX intraday. This is a strong sell signal. 

Figuring tomorrow would be bullish, I traded out of both the NDX and SPX call spreads. 

I bought back the NDX 5140/5150 Feb2s for $3.50. I also traded out of the SPX 2185/2195 calls expiring Friday for a small profit of 30 cents overall. 

I am going to look to put both of these spreads on again tomorrow for larger credits as the market should have a positive day tomorrow. That may be a short reprise, however. 

Melodrama

This market is still holding on to the bullish moment we have seen for over two months. The only index experiencing any type of decline is the RUT, shown below by the ETF IWM. Today, it closed below the low of the high it set back in late November.

 

The retreat has been slow and uninspiring, as volatility remains low (VIX below 13 still) and price action very mild intra-day. There have been no sell-offs, just jerks around as Trump, his cabinet members, the Fed members and politicians talk while the banks post record results.

Today, retailers warned of lower than expected sales in December, so that sent XRT down over 2%. The industrials sectors was the bright spot.

The markets refusal to collapse is met with put buying. The SKEW again marked above 140 - a number rarely reached - for the second day in a row. Until that put buying subsides, the market is not going to make any headway higher. 

With Trump's inauguration tomorrow the traders are loaded up on puts. Secretive missives from his staff that immediate Executive Orders are coming places a lot of fear of trade sanctions that could hurt business. Anything but positive remarks tomorrow or this weekend, could set this market flying in either direction. 

I am 100% in cash as weakness until February should pick up soon. Trades will show up, but we need not force them right now.  

 

SKEW is above 130

Friday, the SKEW finally got into the 130+ level. Today, again, it closed above that level. This is a good indicator that volatility will increase in the next few days. With VXST up 21% today, that process has already started. A VIX move to 14 should be the first target.



With the increased volatility the market is under pressure. The RUT led the way down with a loss of 1.35%. The SPX recovered its heavy losses, but still finished down about 0.35%. The SOX was down 1.65% and IBB (a biotech ETF) was down over 2%. Banks were the hardest hit sector today, after they have led the market higher since the election, with XLF down 2.38%. This occurred even though Morgan Stanley posted is largest Q4 profit ever. It fell over 3% today.

As I mentioned last Thursday, we are entering a historically soft spot in mid-January. My SPX 2285/2295 call spread expiring this Friday is showing a profit and needs to be rolled on any up day.

Down and up

The markets opened sharply lower, then recovered most of the losses by day's end. The initial sell off was fast and furious, the rebound was a slow grind. The last few days have been moves lower - with lower highs and lower lows. Today's move looked to continue that pattern.



On a larger scale, a few interesting moments showed up today. There was no real action on the SKEW, the volatility indexes, or the Put/Call ratios. The latter are still on sell signals.

First, the set up on the RUT is already short term negative. The shorter term lines on the Market Forecast have peaked and look to fall further. All the while, the Intermediate (green) line is sloping downward.

 

Second, the NDX registered a bearish cluster on a lower close after 7 days of new highs! This is a great setup for a potential flattening of this uptrend.



Third, an index I don't usually mention - the Semiconductor Index (SOX) - may have put in a lower high today, while its RSI is falling from very high levels. The SOX also put in a dark cloud cover candlestick pattern a few days back. This index is a leading indicator and is highly correlated with the NDX usually.



With GLD continuing to rise, there are dangerous signs that this bullish run is coming to a soft spot (at least). In fact, the StockTrader's Almanac notes that the week of options expiration in January and the days surrounding the Martin Luther King holiday are weak.

I took a small position on the SPX calls by selling the 2085/2095 spread expiring next Friday for $1.05. I sold this too early today, but the SPX would have to make and hold a new high for this trade to be in trouble. Next week should be interesting.

RUT comes back

Today the RUT led higher. Interestingly, all the major indexes suffered an intra-day reversal, but only the RUT recuperated from it completely. The SPX nearly closed on the lows of the day. The NDX stayed postive.

According to McMillan's analysis the Put/Call ratio's 21 day moving average is rolling over to move higher off very low levels on the chart. This could mark the warning sign that a pullback is ahead. Volatility levels are extremely low - especially the VXST trading below 9! Low short term VIX levels don't last long. On a multi-year chart, low levels of the VXST have corresponded with at least short pullbacks in the market. 

Today, was a tricky day for the call spread on the SPX. I initially rolled it out to Jan 17 for a 40 cent credit early in the day. Then as the market pulled back, I closed it out for a total price of 75 cents. We captured 50 cents profit on the trade overall. 

Earnings season starts on Friday with several big banks reporting. January expiration week is next week, and historically, its usually a weaker one. If the market moves up these next few days, I will look to put on more bear call spreads. 

First five days of 2017 positive - NDX up all of them!

NDX is usually the most bullish of the indexes in January. So far this has been the case in 2017.

Unlike the RUT, the Market Sentiment on the NDX is sloping up and has not yet reached the overbought levels above 80. We can expect more gains after a slight pullback coming up in the NDX.

The market's trade in the first five days of the new year is often a barometer for the rest of January. The SPX gained about 1.3% in the first five days of trade, but fell slightly today. This bodes well for a positive January. For large caps, but the RUT could be in trouble. It barely broke even after a strong start last week.

GLD and TLT made strong moves in the first 5 days of the new year. This is in the face of rising equities, so it seems bullishness abounds in many markets. 

In fact, only the energy and utilities sectors were down in the first five days of trade this year. Strangely, healthcare led all other sectors.

In the face of this bullishness and because the first five days have ended I sold a 22295/2305 call spread on the SPX for expiration this Friday for 85 cents at the highs of the day. The market closed on its lows, so the spread is worth 50 cents now.

RUT down, TLT up most in 6 months

Today, the NDX was up, while the SPX was flat. However, there were two noticeable items today that warrant caution for the market.

First, the RUT was down over 1% today, giving back nearly all of yesterday's gain. This created a 'railroad tracks' pattern on the chart. Also, Tuesday I mentioned that the Market Sentiment on the SPX was approaching an overbought area (above 80). The RUT already has attained that level and is flattening. Besides this, the green line of the Market Forecast is sloping down and below the 80 mark. This is a slightly bearish reading for the market.



Second, intermarket analysis shows some headwinds for equities. Gold (GLD) and long term US treasuries (TLT) - both risk-off trades that run counter to equity markets - spiked today. TLT had its best day in 6 months! Without going to deep into the analysis of the charts, they both show nice rounding bottoms and the Market Sentiment is ready for a bullish run. In fact, the Market Forecast for both GLD and TLT have recently turned bullish. The USD fell sharply today, also, and broke distinctively below its 30-day MA. Its Market Sentiment line is now falling from very high levels, which signifies a trend change in the USD is happening.

Medium term volatility hits 52-week low

Markets moved up again today, especially the RUT as oil bounced back and the USD fell.

VXV, the measure of longer term volatility hit lows today that have not been seen in all of 2016. Just a cursory glance at these low levels of the long term volatility measures mark at least breaking points in the uptrend over the last few years, as seen by the SPX chart in green below.



Everything is bullish - and again extremely so. McMillan's Put/Call ratios are at extremely low levels, so when the sell off comes, it could be a big one.


The Santa Claus Rally period ended today with a positive gain. This is generally positive for the markets in the short term, but there are two other test coming up: 1) the first five trading days of January and 2) the month of January. If these are both positive periods, then the market will most likely trade positive for the year.

From the Stock Trader's Almanac "Including this year, Santa has paid Wall Street a visit 53 times since 1950. Of the previous 52 occasions, January’s First Five Days (FFD) and the January Barometer (JB) were both up 28 times. When all three indicators were positive, the full year was positive 26 times (92.9% of the time) with an average gain of 17.8% in all years."

A big test is ahead however as market downturns usually happen when Republican presidents are new to office. The promises made during elections often do not turn into immediate outcomes for the US economy. The table from the Stock Trader's Almanac (2017) highlights this, as 4 out of 5 new Republicans led market declines.


Furthermore, first year's under Republican's is usually a difficult time.

Markets finally get hit

The RUT, which had been weak since December 8th, fell 1.16% today on higher volume. It's still above the 1350 level, but the market is weakening.

The SPX fell almost 0.85% today, and the tech sector also got hit with the NDX down 0.8% also.

Volatility continues to rise, but the SKEw remains low. Further downside this weak maybe limited, but January could get nasty as this final week of the year is a good barometer for the rest of January.



I had to move the SPX Dec28 put spread at 2260/2255 out to Friday for a debit of $2.00. Everything else is ok, and it would be ideal if the market treads water at these levels for the rest of this week.

This has been a difficult month to trade with volatility so low and the market refusing to retreat. January should be much better and I will look to increase bear call spreads on any bullishness this week.

NDX holds up best, RUT getting hit

Again the RUT was weakest today. The index currently sits right on its five-day moving average. This index needs to lead higher if this rally will continue. Usually, the RUT leads in the second half of December, but with this year's huge rally in November and December it will take a lot of optimism to propel it further.

Today's FOMC meeting was initially met mildly, but Yellen's post meeting news conference that focused on low growth and high interest rates sent the market lower. The market internals showed signs of the weakness with market breadth negative and the number of stocks above their 20 day moving average falling substantially.

The SKEW jumped back to 125 - a moderate reading still. VIX and VXST both rose also, but not substantially.

As this is options expiration week, it should be bullish. So far, it has not been, so the next two days could save this week from negativity.

Finally NDX leads, breaks out.

The NDX took the lead today, roaring out of the gate, but all gains made after the first 30 mins were given back by the day's end. It still ended up 1.26%. The RUT was down and the SPX split the difference with a 0.83% gain.

The SKEW again fell to 119 today, while volatility rose. Everything is overbought but still bullish. In fact, bullish signals have triggered for AAPL and FB recently. Gains in these stocks helped the NDX and SPX make gains today.

Tomorrow's FOMC meeting is tomorrow. Volatility could fall dramatically after that event.

RUT continues to lead, NDX lags

Its more of the same story really. The RUT was up nearly 2% again today. We have an extremely bullish market with most indexes (not NDX though) making new highs. The RSI lines are climbing for all the indexes, even though most are in extreme overbought territory.

Strangely, volatility is rising and SKEW is falling - now down to 119! This could mean that everyone is buying out of the money calls thereby increasing volatility. At least, that is what it looks like to me.

Next week's option's expiration week is historically the most bullish options expiration week of the year. After that, the RUT goes into the most bullish time of the year! How can we get any more bullish???

I am trying to reach for selling some way out of the money premium on the NDX but today I could not get filled.

I wait for any signs the market may halt its endless roar upwards, because a responsible person does not sell put premium at these levels. It may take some time for the market to actually start trading sideways....

Markets build on strength, Volatility up!

Today, the market wobbled for the first half hour of trade and then launched higher - never looking back. All main indexes except the NDX made new highs. Volume increased on the exchanges and market breadth was positive. All this is very bullish - so much so to produce the biggest rally day since the day after the US election.

This type of strong action put many of my colleagues trading verticals in a very tough situation, as the call spreads originally placed above recent highs are now threatened.

I traded out of the RUT call spreads early this morning at a profit, closing them for a debit of $2.90. This provided us a profit of 75 cents for a two day trade. The Dec30 SPX calls at 2860/2870 are the only trade left in the portfolio. I need to take them off when we finally get a some pullback.

Our objective is to put on some put spreads this month, but we need some pullback from this overbought situation. Some interesting items to note that explain how overbought parts of the market have become. In yesterday's blog, we highlighted the RSI reading on the RUT. A similar situation now exists with the SPX. Additionally, today's the SPX will close outside of the two standard deviation Bollinger Band. This is a rare event. In the last year, it happened (maybe - just barely!) once before. Also this is the third time this year that the RSI on the SPX is in an extreme overbought area.

Another rare event occurred today with the VIX. As the SPX rose, so did the VIX. Increases in volatility occur right after the SKEW goes above 130. Today was a good example of this phenomenon. The VXST rose more than 8% today actually. 

Moving up!

A huge increase in the US deficit was reported this morning which put a dent in the bullishness for most of the day. The RUT didn't care much and reached a new high today, however! The NDX was the weakest, but still up.

I thought about putting a RUT bear call spread on today, but refrained and will likely do it tomorrow on any early follow thru strength. The RUT registered a bearish cluster on the MarketForecast indicator, which usually means that the uptrend will slow for a bit. Its RSI is also in the overbought area, for a second time.

Looking back over the last 5 years on the RUT, the RSI overbought has led to downside in the RUT index many times - see graphs below.

 

But, there was one more complex move that did not work as expected. Back in 2012, after a 10% loss over two months, the RUT bolted higher and kept going as the RSI actually left the overbought area. It wasn't until the RSI entered the overbought area a couple more times, did the pullback finally come. I am cautious during this generally bullish period, as we may see similar action again. 

The SKEW rose above 130 today - a mark it has not seen in a long time. This can be a predictor of more volatility in the days ahead. Short term volatility is below 11 again.

December looks to be an interesting month. It will be a difficult to follow-thru to the upside after such an amazing November. It will be equally difficult to start an sort of a meaningful downtrend. This looks like a good time for Iron Condors.

Back to bullish

Today's first post Italian referendum trading day turned into a bullish celebration for the Euro! Go figure.... The Dow closed at an all-time high. Seasonally, today is generally a very bullish day. Accounting for that, on Friday, I took off the Dec09 RUT 1345/1355 call spread for a debit of $1.15 affording us about 50% of the total profit.

Put/Call ratios are falling and the total Put/Call ratio fell below 0.90 again recently, so market are again bullish in terms of sentiment. Volatility fell today, but the SKEW did not move much. The RUT bounced back the most today, and the NDX was up 0.87% also. The NDX looks the weakest of all the indexes, as it never made a new high and has strong resistance around 4900.

Seasonally, the next two trading days are weak, after today's bullish day, so I put on a 20 point wide Dec16 NDX 4865/4885 call spread for $3.65. My plan is to cut this off after a couple days of weakness.

Last day of November is always weak...

November 30th is usually a weak day for the markets. Today was no different. The RUT and SPX started strong, related most likely to news of the OPEC deal and the fact that they were technically due for a bounce. NDX had not shown recent weakness and got caught up today as it lead everything lower. In the end the NDX landed near 4810, a pretty incredible fall of 1.28% on the day! It now trades below its 50 day moving average after never making a new high as all the other major indexes did.

A couple of indicators really stood out today. First, short-term volatility (VXST) marked higher than VIX almost all day. It closed below it, however, unable to provide a bearish stance for the market. Second, the TRIN was extremely bullish today, trading below 0.5 and as low as 0.37, only to spike up on the last minutes of selling in the market. Such bullishness is impressive - and at some level worrisome for the bulls when it occurs on a down day. Finally, much like the TRIN, the TICK never hit low levels today either only twice marking below -600 during the whole trading day. All this shows that the NYSE stocks were strong while the tech sector got hammered.

Tomorrow being the first of the month, and a bullish month at that, should be a day for a rebound. However, the rebound maybe short-lived as many of the longer term indicators mark a peak in the market.

Today's trading was complicated due to the weakness in the NDX, where most all of my bull put spreads exist. I mentioned Monday that I added some put spreads to butterfly the 4810/4825 calls I have expiring Dec1. In addition to that butterfly, yesterday I added a 4820/4790 NDX Dec1 put spread. I had to close that today for a debit of $6.85 before it got ran over. Luckily so, as the market ended down at 4810 - right at the apex of my butterfly!

I sold some additional NDX 4880/4900 call spreads for a credit of $2.75. By day's end they were worth 55 cents. I also added some put spreads at 4780/4770 expiring Dec1 for 95 cents. They were worth $1.20 by day's end. All in all, it was an eventful day with the NDX, but overall profitable. We will see what tomorrow brings!

I will give a full monthly wrap up as overall the portfolios were off about 2% this month.

Same roles for the indexes

Today, again the RUT was the weakest, and the NDX was the strongest. It seems the roles have turned since this uptrend started. Before it was the RUT leading, and the NDx playing catch-up.

McMillan noticed that there has been some heavy put buying (the SKEW actually rose today to above 128) yesterday and today, and that has pushed the P/C ratio higher nad back on a sell signal. We noticed that the VIX is starting to move higher and the short term measures of volatility are coming close to crossing higher than the longer term VIX. With tomorrow being the last day of the month, I would expect to see some selling. This would set us up for a positive first of the month.

In any case, I moved the Nov30 3120/3130 RUT call spread up and out to the Dec09 1345/1355 calls for a debit of $3.20.

I also added a bull put spread on the NDX for Dec01 at 4810/4790 making a butterfly out of the call spreads we have on at 4810/4825. With this trade, we are actually neutral to bullish on the NDX over the next few days.