Until Friday of last week, the 200-day Moving Average supported the declining S&P 500 Index. However, while insufficient alone to turn more cautious, when combined with other indicators the bull picture faded noticeably last week. The Island Top Reversal pattern featured in Digest Issue 24"Island Top Reversal [Charts]" remains active along with other indicators flashing warning signs explained below.

S&P 500 Index (SPX) 3009.05 dropped 88.69 points or -2.86% last week closing below the 200-day Moving Average at 3020.94 and approaching the 50-day Moving average just below at 2980.07. While support at the 200-day Moving Average failed, it could easily bounce back somewhat since support is more like a memory foam mattress than a hard number.

CBOE Volatility Index® (VIX) 34.73 slipped .39 points or -1.11% 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, slid just .10 points or -.34%, ending at 28.96.

The spike up to 77.15% on Monday, March 16, the day SPX declined 324.89 points, likely marks the top for this market decline. Last week's slight decline is hardly noticeable on this chart.

VIX Futures Premium

This next chart shows our calculation of Larry McMillan’s day-weighted average between the first and second-month futures contracts as of last Friday.

With 17 trading days until July expiration, the day-weighted premium between July and August allocated 68% to July and 32% to August for a premium of -.87% stuck in the red bear zone.

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 the next monthly futures expiration on Wednesday, July 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. For comparison, this table shows the published volume-weighted premiums for last week

The relationship of the futures curve to the VIX, as measured by the premium, makes a good real-time sentiment indicator based upon actual commitments of large Asset Managers and Leveraged Funds.

Other Indicators

Adding to the breach of the 200-day Moving Average mentioned above consider:

The reliable VIX futures premium indicator presented above is still in the bearish red zone.

The Breakaway Gap forming the active Island Top Reversal pattern detailed at the link to Digest Issue 24 above, is still open and represents formidable resistance.

Market breath measured by our preferred McClellan Summation Indicator turned down Friday, June 19 and then quickly declined all week ending at 826.20, down 211.45 points or -20.38% for the week. Consider it the background of a motion picture.

And then last week's decider, the Invesco QQQ ETF (QQQ) 240.22 down 3.60 points or -1.47% broke out above the previous high Tuesday, then pulled back Wednesday, turning the breakout into a fake-out. In the SPX Island Top Reversal drama, QQQ played the role of designated decider, making the fake-out failure especially significant.

As for more option indicators, the 10-day VIX correlation, typically highly inversely correlated with movements to the SPX, moved up to -.58 on Friday from -.96 on Monday meaning the VIX didn't keep up with SPX price changes last week. In the past rising correlations preceded some SPX declines.

One more seldom seen but important indicator from the options universe measures price movements compared to the assumptions made by options pricing models using Skew and Kurtosis. This two-year chart shows two noticeable Kurtosis spikes, the first during the week of October 12, 2018, as SPX declined 152 points and now a second.

Friday's Skew at -1.6608 and Kurtosis of 5.0225 for a 6.6833 point spread resembles the status in October 2018

For reference Digest Volume 19 Issue 17 "3 Caution Signs [Charts]" includes an explanation with readings from October 10, 2018. The current Skew and Kurtosis Distributions are very similar to the ones shown in the earlier Digest.

Strategy

Since a picture is worth a thousand words, here are two.

While the first image warns a correction is coming the second suggests getting hedges ready, specifically SPY hedges.

Applied to options models, a Kurtosis greater than zero means fatter tails so option models under price both out-of-the-money and in-the-money puts and calls. Since options are underpriced relative to recent SPY price movement, hedges with more long puts than short puts will add some edge. Recent market fluctuations are like the movements of a runner approaching the starting line before a 50-yard dash.

Other than the Island Top Reversal pattern with a defined measuring objective, the other indicators just suggest increasing downside risk.

From last week ..." should QQQ turn lower, failing at the previous high, then expect another important down leg for all indexes."

The Digest started suggesting SPY put spreads and collars in Digest Issue 24"Island Top Reversal [Charts]" on June 15.

On the other hand, the bulls counter, it's all about liquidity, low-interest rates, and narrow credit spreads. In addition, they point out with fewer earnings reports to gin up enthusiasm, late June is often weak, but get ready for reports to begin again in mid-July since this bull market endures.

Summary

With continuing overhead resistance from the Island Top Reversal, last week, the S&P 500 Index closed below the important 200-day Moving Average, the Invesco QQQ ETF made a failed attempt to breakout, market breadth continued declining, the VIX futures premium remains bearish, the VIX correlation advanced while the spread between the Skew and Kurtosis measures widened in a similar manner as it did in October 2018. Since the odds favor a further decline, consider more hedging strategies. The bulls counter, just wait for July.