Stocks continue to rise almost daily. $SPX has gone on a tear since successfully testing support at 1540 about a month ago.(April 18th). This latest upside breakout now leaves the 1623 area as minor support.
Equity-only put-call ratios have plunged recently. That is caused by heavy call buying. Consider Figures 2 and 3: these 21-day moving averages rolled over to buy signals in late April, and they are overbought by the fact that they are at the lower regions of their charts.
Stocks had a small change to their regular pattern yesterday: they didn’t close at the day’s highs. However, they did open slightly lower and then rallied strongly into mid-day. After that there was modest selling, but a late rally kept most of the day’s gains intact. $SPX is now in a bit of a rarified situation.
This year, there have been three occasions where seemingly stable, large-cap stocks suddenly saw their puts expand tremendously in terms of implied volatility. We took advantage of the first two – Kimberly-Clark (KMB) and Walgreen (WAG) – in The Option Strategist Newsletter and now another has arisen: Estee Lauder (EL).
It is well-known to our subscribers and somewhat known to the trading public in general that a spike peak in $VIX is a buy signal for stocks. In fact, it goes farther than that – a volatility spike peak in any entity is a buy signal for that entity. In this article, we're going to try to quantify such buy signals. This is being done partially to construct a trading system from them, but also to gain some more understanding as to just how important these signals are.
The stock market continues to make new all-time highs for most of the major indices, including the Standard and Poors 500 Index ($SPX). The speed of the advance has accelerated in recent days, after minor resistance at $SPX 1600 was overcome.
1600 and 1550 are both strong support levels. There has been enough publicity about the 1600 support level that, if it were broken, some sharp accelerated selling would likely take place.
Variance futures are attractive to institutions, but apparently for individuals: not so much. The CBOE Futures Exchange (CFE) delisted its variance futures contracts (on $SPX) a few months ago. They are supposedly working on a new contract in a somewhat different format.
Meanwhile, the CME has announced its intention to introduce variance futures on a wide array of 9 different futures markets. The following table summarizes these new listings:
Individual indicators are bullish in their own right, but price (i.e., the chart of $SPX), is without a doubt the number one factor for consideration. There is support in the 1575-1580 range -- generally in the area of the lows of the past couple of weeks.
Equity-only put-call ratios are both on buy signals.
A new ETF by Credit Suisse, trading with the symbol GLDI, is called the “Gold Shares Covered Call ETN." The product will hold a long position in GLD (the Gold ETF) and sell one-month out-of-the-money calls. The process is complicated and not at all straightforward.
It’s almost unfathomable to me that it was 40 years ago that listed option trading began on the CBOE: April 26th, 1973. Many of the people associated with the inception of option trading are still active – or at least alive – today, which makes this a very unique market.
A week ago, a correction was underway, but the bulls were having none of that, and $SPX support held in the 1540 area for the third time in the last two months. The correction measured about 60 $SPX points, which is small considering how much the index is up this year, but it had the effect of relieving overbought conditions and paving the way for new buy signals on some of the indicators.