S&P 500 Index Double Top Chatter

As soon as the S&P 500 Index overcame resistance from the February 21-24 gap on August 6, and headed for the next target at the February 19 intra-day high of 3393.52, double top clarion calls began. The Market Review explains and then turns to gold along with another mark-to-market report for VanEck Vectors Gold Miners ETF (GDX) still long call spread ideas.

S&P 500 Index (SPX) 3372.85 crept up 21.57 points or +.64% last slowly closing in on the February 19 high. Like in the fairytale, The Little Engine That Could, it kept bravely puffing, "I think I can, I think I can, I think I can." In an equity market context, the little engine SPX has QQQ as a pusher locomotive in the rear giving it a needed boost.

However, now sitting right on the upward sloping trendline from the March 23 low, should QQQ run out of fuel, SPX will have a hard time overcoming the summit at 3393.52. Just in case the upward sloping trendline fails, look for the next downside support at the 50-day Moving Average now 3198.97.

Invesco QQQ Trust (QQQ), 272.16, called "the decider," gained .69 points or +.25% last week. Also closing right on the upward sloping trendline on Friday any further loss of momentum and a close below the trendline, should it continue, will likely start generating pull back warnings. Then, the next support should come at the 50-day Moving average now 255.80, followed by the June 23 high at 251.15. Presuming the big cap secular growth tech companies have assumed a "Risk Off" or a slow economic growth role, in last week's sector rotation derby, "Risk On" nosed out "Risk Off, three- to-two.

CBOE Volatility Index® (VIX) 22.05 slipped .16 point or -.72% 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, slid only .03 point or -.17% ending at 17.18%.

As the chart below shows, the IVXM spiked up to 77.15% on Monday, March 16, the day SPX declined 324.89 points, and likely marks the top for the last market decline. Based upon regression to the mean theory its continuation below 20% supports the bullish view shown in the charts below, first the IVXM and then the SPX.

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.

With only two trading days until August expiration, the day-weighted premium between August and September allocated 10% to August and 90% to September for a premium of 20.52% well into green bull zone. However, the premium on Fridays before expiration remain abnormally high, only to rapidly dissolve on Monday and Tuesday.

The alternative volume weighted version, with a still bullish 13.90% premium, more likely reflects the term structure that will appear on Thursday presuming no material market changes.

The premium measures the amount that futures currently trade above or below the cash VIX, (contango or backwardation) until front month futures contract converges with the VIX at the next monthly futures expiration on Wednesday.

Here is the chart with the abnormal Friday before expiration premium.

For daily updates, follow our end-of- day volume weighted premium version located about halfway down the home page in the Options Data Analysis section on our website.

The relationship of the futures curve to the VIX, as measured by the premium, makes a good real-time sentiment indicator based upon actual commitments of large Asset Managers and Leveraged Funds.

On the Other Hand

From a contrarian perspective, consider this chart showing the equity only put/call ratio that generates sell signals when reaching low levels. The average for last week was .47 with a mean (as in return to the mean), of .62.

Gold Miners Update

VanEck Vectors Gold Miners ETF (GDX) 40.35 declined 2.39 points or -5.59%, last week including a 2.15 point gap open lower on Tuesday August 11.

COMEX cash gold closed the week at 1943.65, down 90.10 points or -4.43% after making a key reversal on Friday August 7and then declining 115.16 points on Tuesday August 11. Score a big one for the key reversal signal.

While a pullback to test support around 2000 had been expected, the suddenness of the decline made it seem like someone shouted, "cave in" and the miners all scrambled for the exit. Extreme moves are not unusual for gold and other precious metals since their markets are small compared to crude oil or equities.

Looking back at the historical COMEX record for extreme moves shows:

Compared to this earlier period of gold enthusiasm, last week's 4.43% decline seems somewhat less chilling, at least so far.

The original trade plan in Digest Issue 30 "Invesco QQQ Trust Breakdown [Charts]"set the SU (stop/unwind) on a close below 39 and since it closed Tuesday August 11, at 39.05 the long October 16 47/52 call spread (long the 47 call & short the 52 call) position remains open along with the second added in Digest Issue 31 "U.S. Dollar Index & Gold [Charts]."

For both, the total mark-to-market unrealized loss totaled 1.43 on Friday with plenty of time to expiration. However, both will be closed if GDX closes below 39.

Strategy

Seasonally equities have a tendency for weakness in August and since both the S&P 500 Index and the influential Invesco QQQ are both right on their respective upward sloping trendlines from March 23 lows, prudent strategists may consider hedging some individual positions, perhaps with collars, in overextended sectors such as the big cap IT favorites.

For gold, the seasonal record favors the bulls in August and September despite last week's correction. However, any further loss will begin to challenge the correction assumption. Stay tuned.

One last thought: this is not the first time "The Little Engine That Could" made the grade and kept on coming from the March 2009 low.

Summary

Although the futures and options indicators for both the S&P 500 Index and the Invesco QQQ Trust remain bullish, declines below their upward sloping trendlines will increase the need begin hedging overbought positions since the August seasonal record favors the bears. Last weeks' gold decline may be limited to a modest correction or the beginning of something more serious.