Last Monday the S&P 500 Index, once again supported at the 50-day Moving Average, offered the first glimmer of hope for the end of the Omicron pullback, then confirmed on Tuesday with a gap up at the open. The Market Review includes comments on the gap along with exploring the VIX-VXST spread indicator.

S&P 500 Index (SPX) 4712.02 advanced a stunning 173.59 points or +3.82% last week closing at a new high thus ending the Omicron 248.71 point or -5.24% pullback from the November 22 Key Reversal. Tuesday's open gap, classified as a measuring gap, with no requirement to be filled, had an objective at 4692 that it reached and exceeded with Friday's 44.57 point gain. Since the upward seasonal pattern typically begins around December 15, it appears the year-end advance began a few days early. Just in case of unexpected trouble, the 50-day Moving Average at 4573.55 again represents the first line of support.

Invesco QQQ Trust (QQQ) 398.01 added 14.88 points or +3.88% last week as it also made a gap up at the open last Tuesday, although it's still well below the November 19 closing high at 403.99 and the November 22 Key Reversal high at 408.71. It may face more headwinds from rising interest rates especially ahead of revised taper comments by Federal Reserve Chairman Powell on Wednesday. The 50-day Moving Average at 383.86 should limit downside risk.

iShares Russell 2000 ETF (IWM) 219.91 gained 5.20 points or +2.42%, but still closing back below the 200-day Moving Average at 223.74. Continuing poor market breadth shown below highlights the underperformance of the small cap stocks.

CBOE Volatility Index® (VIX) dropped 11.98 points or - 39.06% last week ending at 18.69 after reaching an intraday high of 35.32 on Omicron Friday December 3. 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, declined 8.73 points or  -38.83% to end at 13.75% after closing at 22.48% on December 3.

VIX Futures Premium

VIX futures premium ended Friday at 12.31% moving back into the green bull zone, vs. -7.19% in the red bear zone on Omicron Friday December 3.

 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-VXST Spread

This indicator can be useful to help decide when it's safe enough to "get back into the pool." The all clear signal comes when it turns positive again.

While the VIX Index is calculated using monthly options with 30-days to expiration, VXST uses options with 9-days to expiration and include options that expire in one week making then more sensitive to changes in short-term implied volatility. This spread measures the distance between the 30-day VIX and the 9-day VIX to produce an indicator. The sensitivity difference can be measured by comparing gamma, G the Greek term used to measure the rate of change of the underlying. For example, Friday's at-the-money average SPY gamma ended at .0406 for options expiring on December 20 while options expiring on January 10, were .0213.

Typically, the spread is positive with the VIX higher than VXST. Caution signals are given when it turns negative as short-term implied volatility increases faster than the standard 30-day measure. It might also be useful as to measure the degree of bullishness or hedging complacency when it's positive.

Using our recently introduced tongue-in cheek analogy, to decide when to get back into the pool, last Monday the spread ended at -.11, still sitting on the side of the pool, then it turned positive Tuesday at +1.06, so back into the pool at the one foot (or meter) level. It then ended the week at the +2.99 foot level compared to the +5.60 foot level on November 17, before SPX made a Key Reversal on November 22.

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. Last week the decline saga continued although at a slightly slower pace, advancing two days and declining three, ending the week 30.36 points or -18.20% lower at -197.14. After giving some indication the bottom may be within reach it's still located well below the Sep - Oct lows and below the important 50-day Moving Average at 165.89. While the S&P 500 Index closed at a new high and will likely continue advancing into year-end, unless breadth begins improving, further gains may prove tenuous without broad market support

Strategy

Equity markets reacted with a ho-hum to Friday's CPI report, called "in line" with expectations. The next big event comes on Wednesday when Federal Reserve Chairman Powell updates the QE taper plan and may even suggest when to expect interest rate increases. Since the taper trade = value stocks, continue hedging or reducing long duration risk, such as equities with high price-to-earnings (P/E) multiples, especially those without earnings valued on price-to-sales basis.

Summary

Last Tuesday's gap up at the open by the S&P 500 Index suggests diminished concern that the Covid Omicron variant might cause more shutdowns. Confirmation came on Friday as the S&P 500 Index broke out above a three day consolidation to close at a new high just in time to get the expected late December advance going. The scheduled FOMC meeting on Tuesday and Wednesday followed by comments from Federal Reserve Chairman Powel on an update to the Fed's taper plans will get considerable media attention and the markets will deliver and early verdict by the close on Wednesday followed by global confirmation on Thursday.