Last week's Digest Issue 51"About Bitcoin [Charts]" presented some introductory information about Bitcoin such as symbols for cash, futures, and a closed-end fund. However, the futures section lacked any comparison of market size to alternatives used for either hedging or speculation. A data table with Bitcoin, crude oil, and gold fixes that shortcoming. First a Market Review through last Thursday, December 24.

S&P 500 Index (SPX) 3703.06 slipped 6.35 points or -.17% last week after reaching a lower low on Monday as the previous Friday's key reversal forewarned. However, it recovered and traded in narrow ranges on low volume the rest of the week. Unless an unexpected fundamental event occurs, volume will likely remain low and trade in narrow ranges until next week. Just in case, providing support – both the upward sloping trendline, USTL from the March 23 low, and the 50-day Moving Average both cross just under 3600.

iShares Russell 2000 ETF (IWM) 199.01 gained 3.67 points or +1.88% last week compared to the small decline for the SPX, reflecting rotation into mid and small capitalized stocks along with profit-taking in some previous leaders while holding on to the "decider" title again last week.

Invesco QQQ Trust (QQQ) 309.56 added .06 points or +.02% last week and like SPX made a lower low after the previous Friday's key reversal and like the SPX trading ranges compressed and volume declined, all typical for a short holiday week when both investor's and trader's attention turned elsewhere.

CBOE Volatility Index® (VIX) 21.53 slipped .04 points or -.19% 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 .36 points or -2.08% closing the week at 16.91%.

The IVXM and SPX charts follow.

VIX Futures Premium

This next chart shows our calculation of Larry McMillan’s day-weighted average between the first and second-month futures contracts as of last Thursday.

With 17 trading days until January expiration, the day-weighted premium between January and February allocated 68% to January and 32% to February for a premium of 13.47% in the green bull zone and a bit better compared to 12.13% on December 18 also in the bull zone.

Since most of the volume and open interest are in the two closest futures contracts measuring the day-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.

Bitcoin Introduction

As reported last week in our preliminary look at Bitcoin, with total futures open interest reported at 12,632 contracts, according to the weekly Commitment of Traders report from the Commodity Futures Trading Commission as of Tuesday, December 15

Without some context, the reaction by some readers could well have well been so what is that a lot? By comparing the nominal value of the total open interest compared to crude oil and gold should help. Although it could also be compared to several other futures contracts, both crude oil and gold are often considered as inflation and US dollar devaluation hedges

The open interest for both gold and crude oil includes the derived value of outstanding options as well as futures, while options are not yet traded on Bitcoin futures. In addition, they all also trade on other exchanges in other locations. Crude oil open interest includes both the New York Mercantile and ICE exchanges.   

Setting the Stage

Except on rare occasions like December 2018, equity markets typically trade in narrow ranges on low volume in December and don't offer many directional clues while futures and options traders sell premium in an attempt to take advantage of time decay. Although there has been some profit-taking in market leaders as evidenced by rotation into laggards with IWM doing better than both SPX and QQQ, it has been modest so far although our breadth indicator just turned lower.

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, rolled over and declined 72.45 points or -6.76% last week ending at 998.96, after reaching 1075.27 on December 17. Like driving up a steep mountain pass, at the summit you check the gas level and wonder how much farther you can go.

Strategy

The best strategy, according to that age-old market adage: "Buy low and sell high."

If you don't sell high, how can you buy low? Unless of course, you think it will go still higher – that's the dilemma. For example, the number of new highs since 2009 or even the 2016 lows are too numerous to count.

In bull markets, a better 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.

Rather than waiting to see if a pullback will become a correction or a more serious downturn, consider hedging as soon as the first signs appear and consider it like the cost of insurance. If unnecessary, existing long portfolio positions will continue higher and the insurance protection can be canceled. In addition, by watching and managing a put spread, for example, keeps attention focused, should the pullback develop into something more serious requiring, even more, put spreads.

Summary

Typical for the last two weeks of the year equities traded in narrow ranges on lower than usual volume with the iShares Russell 2000 ETF doing better than both the S&P 500 Index and the Invesco QQQ Trust. With the exception of market breadth that began rolling over, futures and option indicators remain bullish. Although smaller compared to crude oil and gold the Bitcoin market continues attracting support.