Market Rebound

Recently, the US market internals have improved dramatically (VIX is falling, with a positive term structure), and a rebound has taken place. As the SPX approaches the 2710 gap area from March 19th, some pause could take place.

 

The defense sector is holding strong and likely to move higher with Trump's comments supporting "Buy American" initiative to allow more countries to buy more and bigger weapons from the U.S., according to Reuters. 

Look at DFEN - a triple leveraged Defense sector ETF. The stock is running up against its upper Bollinger Band and looks go higher if it can go above the recent down trending line on the chart. 

Ratheyon (RTN) has held up amazingly in the market sell off. It has now broken out to new highs. This supports the DFEN break out above, as RTN runs up its Bollinger Band. 

After the Drop Off

Friday and Monday produced some real damage to the markets. Now, however, there are a couple of buy signals that have emerged, along with some issues that still need to be resolved. This leads me to believe that the markets could stay choppy before finally moving higher.

First, the number of stocks currently above their 20-day moving averages is extremely low (<10%). Usually over the past 20 years, such readings signal intermediate term lows in the market (see second chart). In any case, these are rare events and should be monitored closely.

Second, VIX spiked to above 50 intraday on Monday, and has since fallen back to the mid-20s. This is a 21 day buy signal also, according to McMillan. However, until VXST closes below VIX, I am not going to call the next bullish phase of the SPX.

With McMillan's 21-day Put/Call Ratio averages curling higher from the lowest levels in years, a more bearish picture for the markets emerges. Until they roll back lower, the market could move sideways or even further down.

Also, the SKEW is still high, and actually closed at nearly 137 today. Traders are still buying loads of protection. SKEW readings for a new bull market need to come in below 120, or even better, below 115. Readings above 130 do not provide comfort that the bears are willing to give in.

While the market seems in a position to bounce back after two strong days of selling, everything is not yet bullish. Markets that have rallied are not the usual leaders, instead defense contractors and and industrial conglomerates rebounded recently.

November Weakness

November usually begins the stock markets best six month period. Already next week is options expiration week (again, a usually bullish period with the DOW outperforming other indexes (see here for details).

However, the bullish tendency may not play out so dramatically this year. First of all, we are headed into the weakest days of the month, which this year correspond with options expiration week (more details here.

Second, volatility is rising, but has not yet entered a spiking stage. Although still at low levels, any rising trend should be taken as a warning sign when the markets have traded with such low volatility for so long.

Third, according to McMillan's research, weighted Put/Call ratios have moved to sell signals from extremely low levels. This is likely to signify SPX will struggle in the near term. Recent market leaders, Facebook and Netflix, P/C ratios rolled over to sell signals from very low levels this week. This will likely mean a change of leadership in the market going forward - potentially by oil stocks as they have been outperforming along with consumer staples and real estate stocks.

SPX rebounds for 6th positive close

All indexes sold off in the first hours of trading today, but rebounded and closed higher. This relentless bullish market is continues to press higher. NDX has now closed positive for 8 consecutive days.

The only signs of the market topping out soon are coming from the fact that the volatility indexes are buried at multi-month lows and the SKEW remains trading near or above 130 for almost a month now.

The VIX is below 11 again, while the 'older' measure of VIX, called VXO, now trades under 10. When the VIX trades below 11 and VXO trades below 10, these are usually good indicators that the market will retreat to levels much below where the market currently trades in the next months. In other words, VIX will rise soon from these levels.

As VIX falls, I bought some VIX 11 calls that expire in two weeks. I paid $1.45 for these, but after today's bullish reversal, they only trade for 85 cents. All the better to add more to the portfolio either tomorrow or later this week. 

As this is options expiration week, bullishness is not uncommon. It's what the market does at the end of this month is important. 

SPX is currently trading above its 4 standard deviation Bollinger Band based in implied volatility. If SPX closes below the 3 standard deviation BB level, around 2320 currently, this will give a strong sell signal to the market. 

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. 

Sell off

The overnight pressure to the downside carried through to the morning session with a strong sell off across all indexes within the first hour. The indexes took the rest of the day to fight some of that off. This is not going to be the end of this sell off, however, as the SKEW rose today to 134+. Meanwhile, VXST traded higher than VIX several times today, marking more volatility is coming. The VIX is still extremely low.

There is good reason to believe that the recent high on the NDX will hold for sometime. The RSI is falling back out of the upper extremes. Today's candle was an ominous retracement to the breakout area, which is holding as very short term support right now. The Double Smoothed Stochastics are also very high on the chart and could start rolling over soon.

I traded out of some of the NDX spreads today. I bought the NDX Feb2 5160/5170 back for $2.20 and the 5160/5175 spread for $2.85. Having brought in a credit of $1.05 originally, these trades are manageable losses.

I still have the NDX 5140/5150 trade in place, along with the SPX 2185/2195 calls. If needed, I will roll these out further.

In the meantime, I may buy some VIX call spreads on the open, just to take advantage of the high SKEW.

Opens higher, closes flat

The overnight move was again impressive. The NDX especially was strong and opened with a gap. That did not hold and the indexes closed on their lows. After hours, GOOG missed its earnings estimates and sold off about 3%. This could put pressure on the NDX tomorrow.

The SKEW went up a bit to 129 today. It's still a high number, but not extreme like a few days ago.

VIX fell today and ended in the 10 handle. VXST remains only slightly below it at 10.05.

I had to move a lot of trades around and add more put spreads. Yesterday I added a small bull put spread at 5070/5050 for only 70 cents. Today, I added another at 5100/5090 for 40 cents. These are just trying to cover some of the adjustments to the calls. They all expire tomorrow in the AM.

I moved a few NDX call spreads yesterday to next Friday expiration for a credit of 20 cents by widening the strikes from 5130/5140 to 5160/5175. Today, I moved the rest of the 5130/5140 that were to expire tomorrow out to next Friday by moving them up to 5140/5150 for a debit of $1.80.

I did not move the SPX calls at 2285/2295 as they expire next Friday. There is a good chance we will see some pullback before then.

This bullishness is really spectacular given the low level of VIX and the length of the rally already. The RUT has not made new highs yet, however, and was leading to the downside today. This may foreshadow weakness in the market soon, but until signs of a reversal arrive, the market is bullish.

Nothing happening

The sideways pattern continues without a move of greater than 1% on a daily close basis for the SPX. The NDX is most bullish, and the RUT is most bearish.

Typically, this week is bearish - especially for the QQQ - until Friday.  The SKEW is still high, at 137 today, so it supports that more volatility is ahead. This may only be intra-day moves however, like today, as the SPX is very stuck in a tight range between 2230 and 2280.

Volatility itself is low with the VIX marking 11.54. Today VXST did shoot up to 10.94, which puts it close to crossing above the VIX. If this happens, the market may actually begin a more serious pullback.

TRIN was more negative today, especially on the open. It was not excessively so, however.

I traded a short term NDX call spread that will expire this week. The 5130/5140 is placed just outside a 1 standard deviation move. I was able to get a credit averaging $1.01 for the spread. This should close solidly out of the money by Friday morning, but if we get an uptick I will move it out.

Market still wary - even more so now

So much talk about 'buy the election, sell the inauguration' on every news channel just makes the markets worry more it seems. The SKEW hit 146 - a really big number! When combined with a very low VIX, which fell today on monthly options expirations, this is very often a sign that volatility will rise sharply in the days ahead. This makes sense, as we finish out the bearish mid-January season before the end of January bullishness kicks in.

On a grander scale, the SPX could be setting up for something larger. The Market Sentiment line (bottom graph on SPX chart below) is fully extended into the upper most bullish area. This signals that even if the market continues to rise, those gains will not be significant and will be given back in the future. This has happened a few times in the past as the Market Forecast line (middle green line) drop out of the upper reversal area (above 80).



The TRIN is acting very strange these last two days also. As the market is going nowhere, the TRIN is posting fiercely bullish numbers, yesterday hovering around 0.6 and today on the open it hit as low as 0.37! It seems large traders are leading this market higher buying only the stocks that are posting new 52-week highs. Very selective buying does not lead markets higher!

On today's up day, I tried to get some call spreads filled. I only caught one trade - the SPX Feb3 2285/2295 for $3.20.  I have been working the SPX 2285/2295 this month with some success. With $3.20 credit for a 2 week trade that would require the SPX to make and hold a new all time high, I feel like I am off to a good start next week.

Let's see what happens as the market gets used to new US president next week. Today's action was like a repeat of the action witnessed on the day of his recent press conference. The minute Trump started his inauguration speech the SPX dropped 6 points. It only settled down after he stepped away from the microphone. If he keeps talking the market actually may start taking him seriously. This may kill the market rally named after him.

SKEW out of control

Today the market bounced back after yesterday's down day. This has happened every day so far this year. Every down day in 2017 has been followed by an up day, so this is nothing out of the ordinary. 

Volatility continued to rise with the VIX up 5% after yesterday's high SKEW reading. Today the SKEW rose to extremes with a reading of 143.43! This is a big number that has not been produced many times in the last five years. These are correlated with high levels of volatility in the very near future. However, this is likely related to the inauguration of Trump on Friday. Traders are hedging their positions by purchasing puts going into this event. 

Without a follow thru to the downside today, I closed out the SPX 2285/2295 call spread for 45 cents, profiting 65 cents on the trade from last Thursday. As Yellen started speaking and the market rose into the last hour, I tried to sell the same spread again for $1.20, but could not get filled as the mark was around 80 cents only. I am looking to sell calls again on the move up from here. 

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.

Markets again down on tech

The NDX led the market down on the last day of the year. The RUT held up best, making this sell off seemingly not so bad.

The SKEW inflated to 127, but that is nowhere near extreme levels. The Put/Call ratios are at very low levels, suggesting that a top is likely forming in the markets. Until the P/C ratio trends higher, the stock market can still rally.

The VIX has been increasing lately, as I highlighted in previous entries on Dec 27 and Dec 28. I mentioned that the increase was not a detriment to the market, but if the trend continues, it will be. With the VIX around 14, anymore increases could be the start of a spiking situation.

 
We are still in a bullish period of the year - you would not know it though - which gives this market a chance to rally back in the next two days. Therefore, I rolled the Dec30 SPX 2245/2235 put spread out to Jan6 for a 40 cent credit. This puts the total credit at $1.10 for that spread. I will try to close this on Tuesday or Wednesday on a strong up move.

As the SPX 2260/2255 puts expired on the money on Friday, I will also look to recover those losses by trading that same spread if things look to get more bullish.

In any case, on any strength we will sell call spreads as this market is looking to roll over soon.

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.

Lackluster bull...

The market opened strong today, but all of the gains came in the first half hour. After that the major averages worked their way lower for the rest of the session. The NDX finished with a gain of .52% while the SPX rallied .22%. The indexes closed on their lows. 

The SKEW is still marking mid-range and the P/C ratios still dwindle in the bottom of the range. Until these numbers pick up, a sell-off is unlikely. 

Volatility did move up today. This is yet to be meaningful, but potentially a bottom in the volatility has been achieved. 



The last few days of December - except for Dec 30 - and the first two days of trading in January are generally the most consistently bullish of the year.

I added a small put spread expiring tomorrow on the SPX at 2260/2255 for 40 cents.

I also added a small put spread for Friday at 2245/2235 for 70 cents. These will help offset the cost of moving the 2260/2270 call spread that I have expiring Friday. I tried to move that up and out to January at 2315, while widening the strikes to 15-wide for a large credit. So far that has not been filled.

Bullish time, but not so bullish

Last week we had a day where the SKEW was above 130, this put a damper on the rally. The VIX is extremely low as with the VXST.

This time of the year is supposed to be very bullish, but signs of weakness are mounting. First, the P/C ratio is now rolling over and moving higher. Market breadth is weakening, also.

The SPX is still very bullish. Until it trades below 2200, the market trend is up.

We are headed into the most bullish part of the year. If the market is not going to rally over the next 5 trading days, January can be a troubled month.

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.