Last Monday's advance by the S&P 500 Index quickly nixed the suggestion in Digest Issue 25 "Less Accommodative Not Hawkish [Charts]" to consider opening SPX or SPY put spreads or collars on overextended cyclical stocks. An explanation follows in the Market Review below along with an update for the previous earnings calendar spread idea for Micron Technology, Inc. (MU).
S&P 500 Index (SPX) 4280.70 gained 114.25 points or +2.74% making new closing and new intraday highs on both Thursday and Friday. The hedge call happened on Friday, June 18 as it closed below both the operative upward sloping trendline that began at the October 30 low and the 50-day Moving average. Last Monday it rebounded early and closed up 58.34 points ending that threat. Now both the upward sloping trendline and the 50-day Moving Average meet at 4192.93 providing downside support.
Invesco QQQ Trust (QQQ) 349.46 added 7.23 points or +2.11% last week. Based on advances made by QQQ following the April CPI report on May 12 equities began rotating back into secular growth stocks from cyclicals assuming the Fed will raise interest rates sooner than previously expected thereby eventually slowing the economy. Making made new closing and intraday highs on Thursday, it pulled back slightly Friday as the yield on the 10-Year Treasury Note added 5 basis points to end at 1.54%. Support from the 50-day Moving Average now crosses down at 335.15.
CBOE Volatility Index (VIX)slid 5.08 points or -24.54% last week to end at 15.62%. 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 5.17 points or -33.38% ending at 10.33%, another 52-week low.
Since implied volatility has a tendency to revert to the mean of its relevant range (estimated from June 5, 2020) it declined from 17.93% for the week ending June 18 to end at 17.78%. The six-month chart shows the bullish lows.
In addition, both the historical volatility measures ended at 52- week lows at 9.65% and 7.60% for the historical volatility using the range method. The six-month chart shows the bullish lows.
VIX Futures Premium
$VIX futures premium on Friday ended at 18.53%, well into the green bull zone with July futures the front month vs. 4.45% for the week ending June 18 in the yellow caution zone. The contrarian bears watched and waited but were disappointed again.
Since most of the volume and open interest are in the two closest futures contracts measuring the volume-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. The chart reflects the distance from the VIX to the futures curve computed from the two front-month contracts.
Market Breadth as measured by our preferred gauge, the NYSE ratio adjusted Summation Index that considers the number of issues traded, and reported by McClellan Financial Publications, failed to follow the indices higher declining every day last week. Although the rate of decline slowed toward the end of the week, nevertheless, it declined every day ending 69.50 points or -9.04% lower at 699.63, slightly above the 50-day Moving Average at 696.49. Should the divergence continue this week it will begin casting some doubt on further market highs.
Best Calendar Spread Update
Last week's "Best Calendar Spread, in "Digest Issue 25 "Less Accommodative Not Hawkish [Charts]" featured a Micron Technology, Inc. (MU) 82.03 long calendar spread with the implied volatility (IV) and time to expiration added to the legs originally displayed.
Buy Oct 15 82.50 calls 4.85 IV 39.60 (117 days).
Sell July 2 82.50 calls 1.02IV 49.82 (12 days).
Net indicated debit of 3.83 on June 18.
For this strategy, the idea is to sell the July 2 82.50 call during the day on June 30, before the earnings report scheduled after the close of trading to generate the highest credit based upon implied volatility while buying the longer-dated October 15 82.50 call.
For comparison, the long October 15 82.50 call closed Friday at 6.50, IV 37.56, and the July 2 82.50 call closed at 2.23, IV 52.64 for a net debit of 4.27 with the gain due to the increase in stock price from 76.95 to 82.03, helped by time decay of the short put offset by the increase in implied volatility and gamma (rate of change of delta).
With the 30-day Implied Volatility Index Mean, IVXM of 38.61, and with an IV/PHV ratio (using the range method to calculated historical volatility) at 1.36, the risk of a large harmful move in the stock when it reports appears modest by this measure. Check it again at the close on June 29, the day before it reports 3Q earnings on June 30 after the market close. The higher the ratio, the greater the risk. Since the stock advanced last week and may continue higher until Wednesday the odds are increasing it may decline after reporting as in "buy the rumor sell the news" so plan accordingly.
Strategy
In bull markets, a good strategy is to stay long equities and/or ETFs and then tactically hedge pullbacks as they begin developing since ordinary pullbacks can become corrections when something unexpected happens. Then corrections can become downturns when something else unexpected happens, and downturns can become bear markets when many unexpected things change medium and long-term fundamentals.
Summary
With the exception of the market, breadth all the indicators turned bullish again last week canceling the need to hedge long positions. The S&P 500 Index bounced back up above both the operative upward sloping trend line and the 50-day Moving Average. For now, secular growth stocks like those in the Invesco QQQ Trust (QQQ) are outperforming cyclicals but that could change with all the upcoming commentary after the June payroll report on Friday.
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