Last week's Digest Issue 44 "VIX Correlation Warning [Charts]" quickly faded after Wednesday's taper news and Jay Powell's comments declining .45 to zero. Apparently, traders pushed options prices higher as a hedge against the Fed turning more hawkish than expected. The Market Review includes a review of the VIX Correlation Indicator and a brief update for WTI Crude Oil.

S&P 500 Index (SPX) 4697.53 added 92.15 more points or +2.00% last week moving higher every day while again making multiple new closing and intraday highs. On Wednesday, it closed above the 4650 minimum measuring objective of the Head & Shoulders Bottom detailed in Digest Issue 43 "Expecting More New Highs [Charts]".The September 2, high at 4545.86 makes a good support level in the event of a decline followed by the 50-day Moving Average at 4477.49.

Invesco QQQ Trust (QQQ) 398.60 gained 12.49 points or +3.23% last week again outpacing the SPX every day except Friday. On any unexpected pullback, the September 7 high at 382.35 will provide the first support followed by the 50-day Moving Average down at 373.64.

iShares Russell 2000 ETF (IWM) 241.81 rocketed up 13.78 points or +6.03% last week breaking out above its range since the start of the year to capture "the best in show award." As market breadth expands to include more small-cap companies that traditionally lag large cap stocks during periods of rising interest rates there could be something more going on than just slightly lower interest rates. It's been almost a year since IWM received much attention, but that now seems to be changing.

CBOE Volatility Index® (VIX) inched up .22 points or +1.35% last week to end at 16.48. 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, slipped .34 points or -2.81% to close at 11.74% just above the lows reached last June and August.

VIX Futures Premium

VIX futures premium ended Friday at 16.79%, back into normal green bull zone vs. 21.30% on October 29 with 12 days to expiration for the front-month November contract.

The chart reflects the distance from the VIX to the futures curve computed from the two front-month contracts. 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.

VIX Correlation Indicator

From last week: "Typically the VIX and the SPX move in opposite directions. As the SPX advances, the VIX normally declines suggesting less interest in bidding up SPX puts. Historically when the correlation turns positive it produces warning signal since positive readings, and even some just less negative, are followed by SPX declines, perhaps just minor pullbacks or occasionally something more menacing; the higher correlation coefficient the more important the signal."

Looking back at the record for the last two years, on nine occasions the VIX correlation turned positive, including two times around this time of year in 2019, when it failed to warn of an imminent pullback. The most recent positive reading at .50 on November 2, also failed, assuming no pullback in the next few days. All of the other six produced good warning signals, the best on September 2, 2020, when the correlation reached the highest point at +.77  before the S&P 500 Index pulled back 9.6% over the next two weeks. With a 67% warning success ratio (although based on a limited sample size) paying attention when it turns positive seems worthwhile.

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 at 463.67 added 144.53 points last week advancing every day and similar to the gains made in November 2020 shown below.

WTI Crude Oil (CL) 81.27 basis December futures closed the week lower by 2.30 points or -2.75%. In order to align with the CFTC report date cash closed Tuesday, November 2, at 83.91.

Until last Wednesday it looked as if the December futures would hold above the upward sloping trendline, but then it declined 3.05 points closing below this important indicator. While rebounding somewhat Friday it still closed under the trendline.

Although the last price shown is two weeks ago this seasonal chart suggests the odds favor a further decline into year-end.

Since WTI usually declines in November and December comparing futures open interest to price can provide a signal when participants start loosing interest in the prevaling trend. On October 26, open interest declined 27,713 contracts followed by another decline of 24, 751 contracts for the latest report on November 2. However, the  PMP,( Producer/Merchant/Processor/User) , category, considered the most in tune with market conditions, increased thier net long position by 6,985 contracts to 16,035 contacts compared to 9,050 contracts as of October 26. Then the next day December futures declined 3.05 points.

Comparing prompt December futures at 81.27 to December 22 at 71.84 results in a discount, or backwardation of 9.33 or -11.48%, a condition usually associted with tight supplies that may limit the seasonal decline to somewhere around the 50-day Moving Average of 76 (not incuded on the charts above).

Strategy

Now that the VIX correlation warning in last week's Digest dissolved after the Fed's taper announcement the condition could again be described as "Smooth Sailing" especially since the dramatic improvement in market breadth helped by iShares Russell 2000 ETF (IWM) breaking out to the upside. Although somewhat overbought in the short-term odds favor more new highs until year-end.

Summary
Multiple new highs by the major indices including the iShares Russell 2000 ETF (IWM) confirmed by improving market breadth clears a path for more new highs over  the next few weeks. For WTI crude oil, the normal seasonal price decline appears underway but could be limited since demand remains strong.