The stock market continues to hover in its trading range. Despite some promising buy signals from sentiment extremes in put-call ratios and $VIX, there was no follow-through by the Standard & Poors 500 Index ($SPX). We have often said -- and still maintain -- that price is the most important indicator. Regardless, as long as $SPX remains in the broad 2040-2135 trading range, the chart is neutral.
We have been operating an event-driven straddle buying strategy in advance of earnings for several months now, with mostly favorable results. However, this week something happened that we haven’t seen before: the straddles increased greatly in value before the earnings were announced.
The chart of $SPX is the least bullish of the indicators. SPX remains in the 2040-2135 trading range that has bound it for most of this year. Basically this is a neutral chart.
Put-call ratios are much more encouraging. A strong buy signal has been generated by the standard put-call ratio (Figure 2). The weighted equity-only put-call ratio is also bullish (Figure 3).
Market breadth remains mixed, with the NYSE-based indicator now on a buy signal, but the "stocks only" is not.
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With this issue, we attempted to return to the normal publishing schedule – the 2nd and 4th Thursdays of the month. However, due to some scheduling issues, the full newsletter was not available until Sunday, July 26th, although the Hotline was published on time on Friday, July 24th.
$SPX now appears to failing at the top of the range, thereby remaining within the 2040 - 2135 trading range. Hence, the $SPX chart remains neutral as long as it's in that trading range.
Put-call ratios are mixed, but generally are in an oversold state. The standard ratio continues to rise and is thus on a sell signal. The weighted ratio, however, has rolled over to a buy signal.
The CBOE has listed $VIX weekly futures – their third attempt at a weekly volatility product that might compete with VXX weekly options. Trading began on July 23rd.
It is estimated that options on the new $VIX weekly futures will begin trading in three or four weeks, although that isn’t set in stone. Certain details have to worked out with the OCC, such a margin requirements. Typically, in the past, those things have taken three or four weeks.
The oversold conditions that existed last week generated a strong week-long rally. The move above 2100 was constructive, but the chart won't really turn bullish until new highs are made and held.That would require a move above 2135.
Put buying has remained relatively heavy, despite the rally. As a result, the equity-only put-call ratios remain in an uptrend and thus remain on sell signals.
The $SPX chart is now negative, although not terribly so. $SPX traded down to 2045 a couple of days, and has generally found support in the 2040-2050 area. Overhead, there is resistance at 2080-2085, where most trading days in the last week have topped out. There is a series of lower highs on the chart, and the 20-day moving average is declining. All of that adds up to a bearish chart.
Equity-only put-call ratios are bearish, as they continue to rise daily.
It’s been quite some time since we’ve seen the CBOE Volatility Index ($VIX) rise above the 17 level – since early February, in fact. But it did so this week, accompanied by strong advances in the other CBOE Volatility Indices, as well as Volatility Futures, ETFs, and ETNs. These advances in volatility create trading opportunities, mostly when they reverse. In this article, we’re going to review the most pertinent signals, and look at their track records.