Uptrend Continues
The S&P 500 Index scaled the mountain last week making three new highs along with a key reversal, all detailed below in the Market Review, followed an update to last week's prescient VIX Correlation Indicator and then finally a look at the delayed XLY/XLP sector rotation indicator.
S&P 500 Index (SPX) 2945.64 gained 5.76 points or +.20% last week reaching a new intraday and new closing high Monday, then another new closing high on Tuesday, followed by a new intraday high Wednesday at 2954.13, before closing lower making a key reversal. Then the lower closes Wednesday and Thursday hardly qualify as a pullback as it turned higher again Friday, after a better than expected employment report.
CBOE Volatility Index® (VIX) 12.87 gained .14 points or +1.10% 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 .31 points or 3.20% to close right at 10.00%.
At the top of the range, before the correction began last October, this indicator remains friendly to the bulls.
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 12 trading days until May expiration, the day-weighted premium between May and June allocated 48% to May and 52% to June for a 16.10% premium vs. 16.21% for the week ending April 26, still in the green zone between 10% to 20% associated with S&P 500 Index uptrends.
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 Update
As detailed last week in Digest Issue 17 "3 Caution Signs [Charts]" the VIX and the SPX are usually negatively correlated, as the SPX rises, VIX declines. When the VIX rises along with the SPX the correlation turns positive. At April 26 it had advanced to +.53 and well above the two previous highs on January 24 at -.15 and March 4 at -.22 when both gave advanced pullback warnings as they began rising. This time it topped out at .63 on April 30, the day before SPX made a key reversal and closed lower as the VIX advanced. While not all episodes of less negative correlation precede pullbacks they do they do give an advanced warning especially when it turns positive as it did on April 23 at .18 shown above, 5 trading days before the key reversal on May 1.
Rotation Review
Attempting to follow all eleven sectors of the S&P 500 Index daily can often be confusing since they don't always seem to track what's expected based on the headline news for the day. One easy solution compares the relationship between the two consumer sectors, Consumer Discretionary to Consumer Staples, using ETFs, in an effort to find a trend.
Consumer Discretionary Select Sector SPDR Fund (XLY) includes many of the popular internet and direct marketing companies like Amazon.com (AMZN), Netflix (NFLX), Walt Disney (DIS), Home Depot (HD), and many more providing goods and services considered "want to have."
Consumer Staples Select Sector SPDR Fund (XLP) consists of companies like Proctor & Gamble (PG), Wal-Mart (WMT), Costco (COST) and others providing " need to have" products.
The rising ratio and the upward sloping trendline, (USTL above) since the December bottom reflects consumer optimism now testing the uptrend. Also, notice the period between November and late December at the left when rising interest rate concerns muted consumer optimism.
Late in the cycle when valuations are stretched based on price-to-earnings ratios it may be more difficult for the stocks of slower growing companies in the staples sector to advance very much. For now, follow the ratio and the trend.
Strategy
Two of the cautions in Digest Issue 17 "3 Caution Signs [Charts]" were resolved last week as the VIX 10-day Correlation turned lower and the Skew & Kurtosis spread began narrowing with Skew advancing slightly and Kurtosis declining slightly. However, market breadth as measured by our preferred gauge, the NYSE ratio adjusted Summation Index declined 52.14 points. The two limited lower closes by the S&P 500 Index last Wednesday and Thursday along with a new intraday high on Wednesday, May 1 at 2954.13 were enough to redraw the uptrend line from the December 26, as shown by the trendline marked USTL on the SPX chart above.
Summary
Last Friday's better than expected employment report generated enough enthusiasm to curtail a pullback after the S&P 500 Index made a key reversal on May 1, thereby renewing the uptrend from the December 26 low, although market breadth declined slightly. While options prices remain relatively inexpensive, fewer indicators reflect another pullback will begin anytime soon.
Disclaimer: IVolatility.com is not a registered investment adviser and does not offer personalized advice specific to the needs and risk profiles of its readers.Nothing contained in this letter ...
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