4 Reasons For Caution

After the S&P 500 Index reached new closing and intraday highs last week some major indexes began pulling back modestly on what appears, at least so far, as profit-taking in leading sectors and rotation into laggards. By the end of the week, several indicators began reflecting caution. The Market Review explains and then includes trade ideas followed by an interesting hedge idea using ProShares UltraShort S&P 500.

S&P 500 Index (SPX) 3663.46 slid 35.66 points or -.96% last week after making a key reversal and a new intraday high at 3712.39 on Wednesday. It seemed like the algos programmed to sell the top-performing sector when the SPX reached a new intraday high, resulting in the semiconductor sector declining 3.10%. Should the pullback continue look for support near 3550, and then at the 50-day Moving Average, now 3518.13.

iShares Russell 2000 ETF (IWM) 190.30 gained 2.10 points or +1.12% last week confirming rotation out of the leaders into the laggards and reclaiming the "decider" title, at least for now.

Invesco QQQ Trust (QQQ) 301.85 declined 3.67 points or -1.20% closing below the upward sloping trendline from the November 2 low. QQQ's weakness reflects selling in the leading semiconductor stocks included in the VanEck Vectors Semiconductor ETF (SMH) 212.51 down 6.88 points or -3.14% last week including -3.10% last Wednesday, as mentioned above.

CBOE Volatility Index® (VIX)23.31 gained 2.52 points or +12.12% 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, added 2.84 points or +17.56% ending at 19.01%.

While hard to see, the orange IV Index Mean crosses above the blue 30-day HV line and closes just under 20%. Looks like regression to the mean.

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.

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Disclaimer: IVolatility.com is not a registered investment adviser and does not offer personalized advice specific to the needs and risk profiles of its readers.Nothing contained in this letter ...

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