After the VIX Correlation Indicator turned lower again early last week it made another unusual advance going into the CPI report on Wednesday, then ended the week at zero after venturing into positive territory twice. More details follow the Market Review including a WTI Crude Oil update.

S&P 500 Index (SPX) 4682.85 slipped 14.68 points or -.31% last week after making a new closing high on Monday. Then Tuesday the 10-day VIX Correlation Indicator gained 14 to end the day +.01. After Wednesday's CPI, report SPX headed south and the VIX Correlation Indicator ended at +.12. Friday's advance encouraged the bulls leaving VIX Correlation Indicator at zero. In the event of a decline, expect support around the September 2, high at 4545.86 followed by the 50-day Moving Average down at 4492.37.

Invesco QQQ Trust (QQQ) 394.70 lost 3.90 points or -.98% last week declining Monday through Wednesday before recovering on Thursday and Friday. The area around the September 7 high at 382.35 should provide the first support on any further pullback followed by the 50-day Moving Average down at 375.10.

iShares Russell 2000 ETF (IWM) 239.50 retreated 2.31 points or -.96% after advancing 13.78 points or +6.03% the week before when it broke out above its range since the start of the year. Since small caps in the IWM have a tendency to outperform the SPX when interest rates rise, further rotation into this group could indicate expectations for higher interest rates, especially after the CPI report last week. For equities, it's once again a three-horse race.

CBOE Volatility Index® (VIX) slipped .19 points or -1.15% last week ending at 16.29. 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, added .52 points or +4.43% to close at 12.26% after spiking up Wednesday.

VIX Futures Premium

VIX futures premium ended Friday at 15.82% in the middle of the green bull zone vs. 16.79% on November 5, also in the green bull zone. Front-month November futures expire Wednesday with last trading on Tuesday.

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.

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 ended the week at 517.75 after adding another 54.08 points with just a slight decline Wednesday. Improving breadth similar to the gains made this time last year further support a bullish bias into year-end.

VIX Correlation Indicator

Last week's conclusion in Digest Issue 45 "Smooth Sailing [Charts]"proved premature, as the VIX Correlation Indicator turned positive again right before the SPX decline on Wednesday as option traders and strategist rightfully braced for the CPI report thereby creating an unusual double-positive signal.

Accordingly, updating the record, this last advance gets added to the success column making it seven out of nine for a 78% warning success ratio although based on a small two-year sample size. Nevertheless watching the VIX/SPX correlation coefficient seems worthwhile since minor pullbacks occasionally develop into something more menacing.

WTI Crude Oil (CL) 80.79 basis December futures ended Friday down .48 or -.59% for the week while cash closed at 84.15 last Tuesday. There could be a pattern developing here with prices push up on Tuesday then whacked Wednesday after the EIA inventory and production data releases on reminiscent of "buy the rumor sell the news" activity.

In the chart below notice how it opened last Tuesday below the upward sloping trendline, USTL then closed well above it. On Wednesday it opened above the trendline line then delcined to close lower as if to confirm resistance from the trendline.

Comparing prompt December futures at 80.79 to December 22 at 70.96 results in a discount, or backwardation of 9.83 or -12.17%, a condition usually associted with tight supplies that may limit the usual seasonal decline to somewhere around the 50-day Moving Average of  77.43 shown above.

This chart from the U.S Energy Information Administration show the current backwardation condition.

Their weekly report adds details explaining the backwardation to inventory supply relationship. This Week in Petroleum - U.S. Energy Information Administration (EIA).

Strategy

Last week's "Smooth Sailing" claim held up for only one day as the SPX made a new closing high last Monday. However, signs of trouble appeared on Tuesday as it staggered and the VIX Correlation Indictor turned positive ahead of last Wednesday's decline after the CPI report.

Last week's brief pullback somewhat alleviated overbought concerns, but now widely spread inflation news tops the worry list

While the odds still favor more new highs into year-end, watch the IWM relative to SPX for clues of rotation into stocks that hold up better as interest rates rise.

Summary
Last Wednesday's CPI report renewed concerns that interest rates may increase sooner than previously anticipated. An unusual double-positive by the VIX Correlation Indicator warned of trouble. For WTI crude oil, the current futures backwardation indicates tight inventories with strong demand.