Fear of undefined potential damage to the global economy from COVID-19, declining crude oil prices and government fiscal actions dominated the news last week pushing all asset prices around, some in unexpected directions. The S&P 500 Index continues fluctuating in wide trade ranges, reflecting uncertainty along with short covering activity again for the second Friday in a row. In an effort to display what now appears as extremes, this week's Market Review includes a few more volatility charts than usual along with more SPDR S&P 500 ETF (SPY) put spread commentary.

S&P 500 Index (SPX) 2711.02 dropped 261.35 points or -8.79% last week including a 230.38 gain Friday on what was mostly likely short covering before the weekend since various fiscal measures and direct governmental actions will likely be announced.

While the media claims the bull market ended when the major indices declined 20%, a better measure compares the decline to the uptrend from the March 2009 low as illustrated by the third chart in Digest Issue 9 "Big Picture Trend [Charts]" showing the bull market will end on closes below the December 26, 2018, 4-wave low at 2346.58. Until then claims the long uptrend ended last week are premature. This trendline could very well hold and be enough, along with some positive news, to turn SPX higher once again. However, more negative news will mean the media was right.

CBOE Volatility Index® (VIX) 57.83 added another 15.89 points or +37.89% 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, advanced 15.35 points or +41.36% to end at 52.46% after spiking as high as 71.58% on Thursday when the S&P 500 Index declined as low as 2478.86 before closing at 2480.64 down 260.74 points on the day. Then, with some short covering Friday, IVXM declined 19.12% to end at 52.46% as shown in the chart below. In implied volatility terms, it sure looks like a spike top far exceeding any others since 2009.

However, it does have a tendency to retest or challenge the highs, see May, August, and October above.

Put Volume and Put/Call Ratio

SPX put volume and put/call ratio are not reaching extremes associated with previous market bottoms. While it could mean less need for hedging activity last week, an alternative interpretation could be peak put volume will occur on the next leg down.

From 2.33 on last Monday then 1.58 Friday and 1.56 Thursday, it remains well within the recent range and like the put volume above, suggests no rush to add hedges.

Historical Volatility

The spread between the SPX Historical Volatility also called Realized Volatility calculated on a year-over-year rate of change basis and the alternative range calculation method reached 58.22% and 31.62% the highest levels since March 2009 at 80% and 70%. Although at the highest levels since 2009, they could still go higher if the SPX makes another leg down.

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 as of last Friday.

With two trading days until March expiration, the day-weighted premium between March and April allocated 10% to March and 90% to April for a premium of -20.86% stuck in the bearish red zone vs. -22.31% for the week ending March 6. However, this was the Friday before options expiration when the near term future remains abnormally high then collapse on Monday and Tuesday. For comparison the volume-weighted version was -15.76%, still in the red zone, but not quite as low (VIX above the futures curve).

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 futures expiration on Wednesday.

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.

VIX Options

The put and call volume on VIX futures options has a pattern similar to options on SPX above, with Friday's volume of 2,055,150 contracts.

Put open interest closed Friday at an unusual high at 12.8 million contracts slightly less than 14.1 million reached on February 18, 2018, suggests trading strategies anticipate a VIX decline.

Put Spread Hedges

SPDR S&P 500 ETF (SPY) 269.32 down 28.14 points or 9.46% for the week.

After adjusting the strike prices lower, last week's conditional put spread was booked after SPX gapped lower on Monday. Long one April 17 270 put at 15.43 and short one April 17 260 put at 11.77 for a debit of 3.66.

This new conditional SPY put spread adds to the series of suggested put spreads beginning with an intraday tweet on February 20. On an opening or trade below 248, long on May 15 265 put 20.39, IV 49.65 and short one May 15 255 put 16.54, IV 52.53 based on Friday's closing prices. Set the SU (stop/unwind) at a close above last Tuesday's pivot at 289. Adjust the strike prices lower should it open with another gap lower.

Strategy

Consider SPY put spreads or collars for long individual stocks or ETFs by selling an out-of-the-money call and buying and out-of-the-money put with the sale proceeds.

Iron Condors are another strategy to consider when implied volatility is abnormally high. Although it involves a lot of trading, for this strategy sell and out-of-the-money call spread, along with an out-of-the-money put spread. Using spreads will limit and define any potential loss. Look for stocks or ETFs with good options volume and liquidity that are near the center of their 52-week range, and then place the spreads near the extreme highs and low. April 17 options are about right although shorter-dated ones will be more responsive to both price movement and time decay.

Although the COVID-19 news still seems bleak along with news from OPEC+ and crude oil prices, the Federal Reserve could announce another interest rate cut Wednesday after blowing the doors off with a bazooka last Thursday, adding $500 billion to the 3-month repo facility. Accompanied by more fiscal stimulus actions the tide (and sentiment) could begin turning.

While the SPX may not have reached the bottom, contrarians are likely dusting off their playbooks. Consider.

"Skepticism calls for pessimism when optimism is excessive. But it also calls for optimism when pessimism is excessive." – Howard Marks, The Most Important Thing Illuminated

Summary

Although the media claims the long bull market ended last week, an alternative technical analysis measure using the long-term trendline from the March 2009 low, suggests until it closes below 2346.58, bear market calls seem premature. High implied volatility levels not seen since 2009 could mean the low for S&P 500 Index occurred last Thursday or there is more to go depending upon the news flow this week. In the meanwhile, consider SPY put spreads, collars on individual positions and perhaps even some out-of-the-money Iron Condors.