Tuesday's news of a Trump meeting with Xi Jinping at the G20 in Osaka, Japan on June 28 and 29, came sooner than expected and was followed Wednesday by comments from Fed Chairman Powell, suggesting the possibility of an interest rate cut, sent markets into a buying and short covering frenzy.  The S&P 500 Index made a new closing high Thursday followed by a new intraday high Friday before closing slightly lower.

An updated Commitment of Traders Report for WTI crude oil along with a trade suggestion for United States Oil Fund, LP (USO) follows our Market Review along with a hedge idea for SPDR S&P 500 ETF (SPY) while near the top.      

S&P 500 Index (SPX) 2950.46 advanced 63.48 points or +2.20% last week making a new closing high at 2954.18 on Thursday and then a new intraday high at 2964.15 on Friday as all stock-index futures, stock-index options, single-stock futures, and stock options expired. Hedging activity increased again as shown by the call and put open interest chart below.

Total open interest increased 900K contracts to 18.5 million from 17.6 million for the week ending June 14, with put open interest increasing by 800K to 12.2 million or 66% from 11.4 million the week before. Although some the increase may be due to quarterly expirations, the current put level exceeds the March high. As SPX makes new highs large institutions and funds are likely increasing hedges, reflected by increasing put open interest and implied volatility remaining relatively high.  

CBOE Volatility Index® (VIX) 15.40 added .12 points or +.79% 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, declined .50 points or -3.72% ending at 12.93%. Here are updated IVXM and SPX charts.    

If the new normal is close to 10% then options implied volatility remains modestly elevated and consistent with increasing hedging activity.

"Volatility is a proxy for uncertainty and must be accommodated in measuring investment risk." – Peter L. Bernstein

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 17 trading days until July expiration, the day-weighted premium between July and August allocated 85% to July and 15% to August for an 8.01% premium vs. 9.26% for the week ending June 14, still in the caution zone between 0 and 10.

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 on Wednesday, July 17.   

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.

WTI Crude Oil

WTI Crude Oil (CL) 57.43 basis August futures gained 4.66 points or 8.83% last week.  It twice tested 51 in the last two weeks and then consolidated in a symmetrical continuation pattern before breaking out to the upside Thursday. This small chart shows a somewhat flat looking consolidation pattern.

From the Disaggregated Commitments of Traders - Options and Futures Combined report as of June 18, (The green arrow shows the price as of Tuesday, the day of the Commitment of Traders Report). "Managed Money,” increased their long position 10,127 contracts and reduced their shorts 7,196 contracts for a net position increase of 17,322 contratcts. With substantial financial risk and a vast information network "Managed Money,” the group that best correlates with crude oil price changes and arguably the most important, speculate on future prices.

Of all the market participant combinations hypothesized and tested, "Managed Money" remains the best correlated to price changes and therefore the most informative, and often the most predictive when they change direction.

Although not reported until Friday, "Managed Money" turned positive as of last Tuesday going from 4.62% of the open interest to 5.52% after being a net seller for seven weeks.

Seasonally, WTI crude oil tends to advance from January to August or September after pausing in May and June, before continuing higher.

Adding to the change in sentiment, the US Dollar Index (DX) 96.22 declined Wednesday, Thursday and Friday as traders began anticipating lower US interest rates, thereby narrowing interest rates spreads with other currencies.

Strategy

The declining dollar along with seasonal strength makes a case for United States Oil Fund, LP (USO) 11.97 long call spreads. Although, now looking likely to pull back and attempt to fill the gap between 11.63 and 11.34 after last week's rapid advance, consider call spreads using October 18 calls that allow plenty of time for the expected pullback. For example, long October 18 12 calls at .97 and short October 18 14 calls at .30 for a debit of .67 as of Friday.

If there was ever a good time to consider hedging long positions this is it – the time when the major indices are near their highs. The lagging transports are sending a Dow Theory divergence warning signal, while many retailer s are struggling, consumer staples stocks are trading with growth stock price-to-earnings ratio multiples and some new IPOs bring back memories of the 1999 -2000 tech bubble top.

Consider long SPDR S&P 500 ETF (SPY) 294.00 put spreads. For example, long  August 16 290 puts at 4.72 and short August 16 285 puts at 3.45 for a debit of 1.27 as of Friday.

Once again, 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 every day last week, adding another 181.57 points to end at 551.16. While supporting the new SPX high, breadth remains well below the high of 1280.31 made on March 1, creating another negative divergence.

Summary

News of a scheduled Trump meeting with Xi Jinping at the G20 in Japan at the end of the week, followed by comments from Jay Powell suggesting the possibility of an interest rate cut, boosted the S&P 500 Index to new closing and intraday highs.

However, important divergences are emerging that suggests adding hedges while markets are near their highs.  On the other hand, a declining US dollar due to narrowing interest rate differentials should support crude oil prices that usually advance this time of the year.