SKEW on TastyTrade

TastyTrade reviewed the SKEW on a recent segment of Market Measures. Their view it basically as an 'old school' way of viewing volatility.

The segment is important as they show that selling -0.3 delta SPY puts with 45 days-to-expiration when SKEW is higher (above >125 or  >135) is much more profitable and less risky than selling them all the time.

This conclusion is rather incomplete, in my opinion. Although selling puts when SKEW is high leads to great results, that is largely because after extreme readings (especially above 135) the SKEW often prints at an extremely low level, say below 120, within a few days. Those low prints after an extreme often mark the bottom of the SPX in the short term.

In fact, this reversal in SKEW is similar to the VIX speak that McMillan discusses and trades. Both are confirming indicators to get bullish. For that, in the money puts can be sold profitably with great success.

Maxed Out?

A few signs that the market may 'putter out' for a little while (if not reverse into a pullback) are arising. First, the Russell 2000 Index mini-futures have closed higher for 8 consecutive days. This is a rare feat. 

The Tastytrade crew did research on SPX multiple consecutive days trading in the same direction. Although the numbers presented below (taken from that research) are for the SPX, other large indexes like the NDX and RUT are likely to have similar statistics. You can see how rare 8 consecutive up days in a row are.

The SKEW is troublesome also. Yesterday the SKEW closed above 130 and today reached 134. These numbers suggest heavy put buying, and have been used to time increases in VIX rather successfully prior to the 2015 anomaly when SKEW printed high for most of the year.

Also, the number of stocks above their 20 day moving average is getting to that critical 80% level, where usually the market lets the 20 day moving average catch up to the extended stocks by either trading sideways or pulling back.

Finally, the Market Forecast today showed Bearish clusters on the major indexes. This highlights that most everybody is already long over the very short, short and medium term.

Besides these warning signs, the market is bullish and all medium term indicators point to higher prices ahead. 

McMillan's Las VegasTraders Expo 2015 Volatility Presentation

Larry McMillan gave a presentation in Las Vegas in October that discussed most of his volatility based market-timing signals. Of course, I follow many of these signals for trading. The VIX spike and the VIX/VXV cross-over are notably valuable. View it on YouTube here.