7 Bull Chart Story
Of the several ways to tell the bull story underway, one of the best includes charts with a few notations and highlights replacing a lot of long and perhaps boring text. With that objective in mind, this week's Digest has more charts and less text starting with the Market Review along with three Foremost Indicators.
S&P 500 Index (SPX) 3240.02 continued higher adding 18.80 points or +.58% advancing three of the four trading days. The one year chart below shows the operating upward sloping trendline, labeled USTL that began at 2346.58 on December 26, 2018, crossing between the 50-day and 200-day moving averages. All three should provide support on any pullback. Note the bullish high volume on the December 20 gap open at the arrow.
The next six-month chart includes the VIX 10-day correlation at the bottom, advancing from -.90 correlated, to +.56 marked with the red arrow. In the past when the correlation turned positive and continued above zero pullbacks soon followed. This means as the SPX advanced last week the implied volatility of options with 30-days to expiration also increased although the changes were small for both the SPX and the VIX as shown in the VIX section below the chart.
CBOE Volatility Index® (VIX) 13.43 gained .92 points or +7.35% 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 1.37points or -15.22% to end the week at 10.37%, after making a 52-week low at 8.98% on Monday, December 16.
While overbought by most momentum indicators, a pullback can occur at any time, but last week's VIX 10-day unusual positive correlation could be more about hedging over the New Year holiday than about expectations for a pullback since most of the VIX and SPX changes for the week occurred on Friday.
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.
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 16.94% premium, still in bullish green zone, vs. 20.06% for the week ending December 20.
The premium measures the amount that futures currently trade above or below the cash VIX, (contango or backwardation) until front month futures contract converges with the next VIX futures expiration on Wednesday, January 22.
For daily updates, follow our end-of-day volume weighted premium version located about halfway down the home page in the Options Data Analysis section on our website.
Foremost Indicators
Of the closely followed indicators, the three below deserve special attention.
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, gained 131.84 points or +18.18% last week ending at 856.97, well above both moving averages. This most reliable leading indicator suggests further upside.
iShares iBoxx $ High Yield Corporate Bond ETF (HYG) 87.92 up .20 or +.23% last week. Branded in Digest Issue 28 "Double Barrel Indicator [Charts]" since it includes information from the bond market such as credit risk and liquidity for M&A, stock buybacks, and refinancing activity makes it a good "Risk On" indicator.
The gap open breakout on December 6 at the orange horizontal line – now support on any pullback, reflects a sentiment change toward cyclicals and risk assets.
Crude Oil Seasonal
This WTI crude oil seasonal chart from Barchart.com tells the story of unusually strong crude oil prices for late December.
The recent OPEC+ increased production cut announcement along with expectations for improving global growth in 2020 seems to have started the usual spring advance early.
Strategy
An additional positive comes from the Federal Reserve's management of the closely watched curve of the 10-Year US Treasury Note yield minus the 2-year US Treasury Note yield, with a positive slope of 29 basis points.
Markets were thin last week on light volume and this week should be the same, so be careful about making too much about apparent breakouts in some commodities last week.
Ride the bull while watching for signs of a pullback keeping in mind the China trade deal has yet to signed and remember the old adage 'buy the rumor and sell the news."
Summary
As the S&P 500 Index makes multiple new closing and intraday highs well supported by breadth, along with other important indicators such as seasonally strong crude oil, option prices reflect increased hedging activity over the New Year holiday week, so watch for signs of a pullback developing.
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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