After our regular Market Review, this week's issue updates 3 caution indicators from Digest Issue 17 "3 Caution Signs [Charts], " followed by the top 10 bullish ETFs from our Stock Sentiment Ranker showing clear signs of rotation into defensive sectors.

S&P 500 Index (SPX) 2859.53 declined again last week, lower by 21.87 points or -.76%, closing just below the 50-day Moving Average after closing just above Thursday, but well below upward sloping trendline from the December 26 low. Support at 2800 held last Monday's decline and could be tested again very soon depending on the trade and tariff news frequency and content between now and June 1 when tariff increases are scheduled to be applied.

CBOE Volatility Index® (VIX) 15.96 declined slightly -.08 points or -.50% 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 .09 points or +.66% closing at 13.81%. Here is the chart with the SPX chart below.

VIX Futures Premium

The chart below shows as our calculation of Larry McMillan’s day-weighted average between the first and second-month futures contracts.

With just 2 trading days until May expiration, the day-weighted premium between May and June allocated 8% to May and 92% to June for a 6.03% premium vs. 3.83% for the week ending May 10, while slightly better, it remains well below the green zone between 10% to 20% associated with S&P 500 Index uptrends. Not encouraging for the bulls.

The premium measures the amount that futures currently trade above or below the cash VIX, (contango or backwardation) until front month future converges with the VIX at expiration.

For daily updates, follow our end-of-day volume weighted premium version located about half-way down the home page in the Options Data Analysis section on our website.

VIX 10-day Correlation Indicator

Updates the chart in Digest Issue 17 "3 Caution Signs [Charts]. "

Shown in the lower green circle the 10-day correlation topped out at +.68 on April 30 one day before the SPX made a new intraday high at 2954.15 on May 1 (upper green circle). Now on the rise once again, it added .43 last week to end at -.49. Any further advances toward positive correlation will intensify the caution.

SPX Skew and Kurtosis

Skew and Kurtosis are statistical measures used to quantify the differences between actual current frequency distributions to those used by options pricing models that assume frequency distributions of price changes are log-normally distributed with a slight positive skew, explained in greater detail here.

While not intended as a timing indicator, there seems to be a positive correlation between an increasing spread and a declining SPX. This chart plots the spread since the start of the year, currently 5.2654 vs. 3.3401 week ending May 10, 2019. Another reason for caution.

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, declined last week 136.09 points or -18.73% ending at 590.69, lower every day except Thursday and now well below the 50-day Moving Average. This reliable leading indicator also suggests caution.

Bullish ETFs

Further confirmation of rotation into less cyclical sectors comes from our handy Stock Sentiment Ranker set to list bullish ETFs.

At number one, Utilities Select SPDR (XLU) along with iShares U.S. Real Estate ETF (IYR), number two, and Consumer Staples Select SPDR Fund (XLP) number 6, are all in well-defined uptrends, while the others have broken upward sloping trendlines.

Strategy

As everybody knows, the story is about the uncertainty of reaching a trade agreement with China along with the imposition of more tariffs on goods arriving in the US after June l, compounded by a relentless media barrage that will likely continue for at least two more weeks.

In addition, there is the matter of recent broken IPOs. Oh, one more thing, how about "Sell in May and Go Away?"

In the meanwhile, until there is some clarity on the China trade and tariff issue, hedging longs with collars or put spreads while option prices are still reasonable, seems prudent from a trend following perspective.

The contrarians will say something like: "If it's obvious, it's obviously wrong" – Joe Granville

Summary

There are several reasons for more caution, including increasing options implied volatility, a declining VIX futures premium, increasing VIX 10-day correlation, increasing Skew and Kurtosis spread, declining market breadth along with evidence of rotation into defensive sectors. It's all about China trade and tariff uncertainty.