While still focused on Jay Powell's comments from Jackson Hole, President Trump sent the markets a bolt from the blue by announcing he would respond to China's new tariff declaration by the end of the day and the S&P 500 Index immediately headed lower. And indeed, he did. With ample commentary and analysis available elsewhere, our attention turns to what comes next. Since many indicators were already reflecting weakness expect more downside. First the Market Review, followed by an update for Wheaton Precious Metals (WPM).

S&P 500 Index (SPX) 2847.11 dropped another 41.57 points or -1.44% last week after a 1.03% decline the week ending August 16. The chart below includes the still important 10-2 Treasury Note yield spread at the bottom; still positive by one basis point.

The upward sloping trendline, USTL, and the 50-day Moving Average at 2946.81 represents upside resistance, while the 200-day Moving Average at 2802.52 should provide some support followed by 2725 equal to the pivot made at the end of May marked with the blue line and blue arrow in the right margin. While a breach of the 200-day seems likely based upon Friday's unexpected new tariff developments, a close below 2725 would greatly discourage any remaining bulls looking for a reversal day.

CBOE Volatility Index® (VIX) 19.87 added 1.40 points or +7.58% 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, gained 2.06 points or +12.65%, ending at 18.34. The one-year charts below show the IVXM still in a range between 15% and 20%. More closes above 20 will add support to the bearish view.

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 September expiration, the day-weighted premium between September and October allocated 85% to September and 15% to October for a premium of .08%, barely in the yellow caution zone, compared to 4.76%, for the week ending August 16, with the four-week moving average at 1.90%.

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 VIX at expiration on September 18.

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.

While there is always a worry list, China tariffs now occupies the top spot closely followed by the 10-2 Treasury Note yield spread.

Three weeks ago Digest Issue 31"Hedge Report [Charts]" included two suggestions for Wheaton Precious Metals (WPM) 28.73, now up 2.33 points or +8.82% for the week. With gold trading well above 1500 an ounce, on Friday silver broke out above a gap open consolidation pattern that began on August 7, as it attempts to narrow the gold/silver ratio.

While the WPM calendar spread didn't work out, the buy-write idea did very well.

Opened long 100 shares at 26.34, the August 9 26.50 call was sold for .45 reducing the basis to 25.89. On August 9, the stock closed at 27.65 so it was called away at 26.50 for a gain of .61 in 5 days. However, a simple long 100 share position would have done even better since the stock closed Friday at 28.73 after trading x-dividend of .09 Thursday.

As hedge trades, both gold and silver are doing well, with SPDR Gold Shares (GLD) 144.17 negatively correlated .83 with the S&P 500 Index and iShares Silver Trust (SLV) 16.35 negatively correlated .65, since the first of August.

Strategy

As long the S&P 500 Index remains below the operative upward sloping trendline labeled USTL in the chart above, hedging long risk remains the principal portfolio strategy by rotating into stocks and sectors that are negatively correlated to the S&P 500 Index while adding long put spread using SPDR S&P 500 ETF (SPY) like those described in Digest Issue 29 "Hedging Strategies [Charts]."

As for the still important spread between the 10-Year and 2-Year Treasury Note, Friday's Daily Treasury Yield Curve Rates report from the U.S. Department of the Treasury shows it closed the week barely positive at .01, likely due to Permanent Open Market Operations by the New York Federal Reserve Bank.

Summary

Last Friday when China tariff news upstaged both Jay Powell's comments and the spread between the 10-Year and 2-Year Treasury Note, the S&P 500 Index immediately headed south closing the week down 1.44%, after closing lower the previous week by 1.03%. The 200-day Moving Average at 2802.52 should provide some support followed by 2725, equal to the pivot made at the end of May. Last week it was about China tariffs and since there could be more this week, consider hedging more long risk.