Considering the Phase One China Trade Agreement a fait accompli, along with the USMCA and continuing Federal Reserve Treasury bill buying, no one should be very surprised that the S&P 500 Index made new intraday highs every day last week, and new closing highs every day expect Tuesday. The Market Review provides details.

S&P 500 Index (SPX) 3329.62 climbed 64.27 points or +1.97% last week, making multiple new closing and intraday highs. Advancing orderly keeps overbought indicators from flashing warning signs while attention turned to improving fundamentals. Although the likelihood of a pullback decreased, just for the record, the first support is now at 3250, followed by the 50-day Moving Average at 3177.33.

CBOE Volatility Index® (VIX) 12.10 declined .46 points or -3.66% 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 .61 points or -5.99% ending at 9.58%.

The IVXM reached its 52-week low at 8.98% on December 16.

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 just two trading days until January expiration, the day-weighted premium between January and February allocated 8% to January and 92% to February, for a premium, of 21.59%, well into bullish green territory vs. 20.84 week ending January 10. Since January futures contracts expire Wednesday, the premium of .45 will be gone by Tuesday.

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

While most indicators are positive, last week market breadth improved noticeably.

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 77.68 points or +8.41% last week ending at 1001.08, well above both moving averages and above the three previous peaks.

Liquidity

The markets, both equities, and fixed income expect the Federal Reserve will keep its hand on the liquidity pump handle and economic growth will soon increase when provisions of both the China Phase One and USMCA trade agreements kick in. Then as demand increases capital expenditures will start rebounding.

By confirming new highs in both the SPDR Dow Jones Industrial Average ETF (DIA) 293.27 and SPX, the advancing iShares Transportation Average ETF (IYT) 202.28, seems to agree, thereby removing any Dow Theory doubts about the advance.

While the Federal Reserve adds liquidity at the front end of the yield curve, the Treasury just announced new 20-year bonds may soon compete with existing issues potentially pushing prices lower and yields higher thereby steepening the yield curve in preparation for less Treasury bill buying by the Federal Reserve. Since regular liquidity additions starting on October 15 correlates closely with the current market upswing, when they stop pumping, market sentiment may change at least enough for a correction.

For further USMCA confirmation, watch the transports, especially the railroads like Kansas City Southern (KSU) 166.52 and Union Pacific (UNP) 185.32. For the implementation of China Phase One, watch copper and the big copper producer Freeport-McMoRan (FCX) 12.87 along with the still declining Baltic Dry Index (BDI) 754.00 or the thinly traded Breakwave Dry Bulk Shipping Index ETF (BDRY) 12.10.

Strategy

In bull markets, and the current advance above 3000 appears similar to the leg up that began in May 2017, the strategy is to stay long equities and/or ETFs and then tactically hedge declines as soon as they begin developing since ordinary pullbacks can become corrections when something unexpected happens. Then corrections can become downturns when something else unexpected happens, and downturns can become bear markets when many unexpected things change medium and long-term fundamentals.

Rather than waiting to see if a pullback will become a more serious downturn, consider hedging as soon as the first signs appear and consider it like the cost of insurance. If not needed, the long positions will continue higher and the insurance protection can be canceled. In addition, by watching and managing the put spread it will keep attention focused should the pullback develop into something more serious requiring, even more, put spreads.

As for hedging, by last Wednesday it became apparent the SPDR S&P 500 ETF (SPY) put spread hedge from Digest Issue 1" SPY Put Spread Again [Charts]" needed to be closed according to the trade plan, after declining from 1.94 on January 6 to 1.09.

One Volatility King

According to our Volatility Kings™ list in Digest Issue 2 "Volatility Kings Fourth Quarter 2019" Netflix (NFLX) 339.67 will report 4Q earnings after the close today. As of Friday, the implied volatility index mean, IVXM declined from 43 to 41 at .47 of its 52-week range along with the stock price. The implied volatility index mean/historical volatility ratio, IV/PHV using the range method for the historical volatility, ended at 1.79 comfortably below the 2.00 danger level for long Calendar Spreads.

After reaching 45 and then declining, the IVXM suggests results will be close to management's guidance for earnings of .51 on revenue of 5.442 billion. Earnings Whispers shows the consensus estimate at .50 with a whisper estimate of .58 on revenue of 5.44 billion. Regardless of the results, the IVXM should decline back toward 25.

Summary

Last week's multiple new closing and intraday highs in response to the signing of the Phase One China Trade Agreement and the Senate's approval of the USMCA along with support from Treasury bill buying by the Federal Reserve, seems to have set off another up leg of the long bull market. While a pullback or correction will eventually occur the usual warning signs have yet to appear.