Recently, the “Skew Index” published by the CBOE shot upward, creating discussions around the option trading community as to its meaning. In the feature article, we take an in-depth look at whether a high $SKEW reading should call for caution in the stock market.
We always publish a table of the skew in $OEX options (page 9 in this issue), as a sample of how the major index options are skewed. We also talk about skew in relation to individual stocks and for particular strategies (horizontal skews for calendar spreads, or vertical skews for ratio spreads, for example).
Two days ago, I received notification from the United States District Court, Southern District of New York, regarding the matter of MF Global Holdings Ltd. Investment Litigation. The notice says that the Class (former commodity futures customers of MF Global) has settled for 100% of the net equity claims in the lawsuit. In other words, eventually people got their money back, but it took over two years.
The feature article is our annual market review and forecast issue. Forecasting has taken a back seat to Fed watching these days, but we present some data on how markets in general have fared after two strong years, such as the two that have just concluded.
The feature article was designed to be a piece about the January Effect (the period of time when small-caps outperform big-caps, after tax loss selling has ended). But the study revealed some new facts about seasonality, and we make a modification to our Post- Thanksgiving trade because of it.
You’d have to be a pretty long-term subscriber to remember when we used to trade the January Effect. For a long time, it worked like a charm, but then traders started to anticipate the effect, shifting its time frame, and then it stopped working altogether – obliterated, it seems, by conflicting forces, seasonality, and changing market conditions.
There are a number of systems and indicators that we follow – some with frequent signals, others with as few as annual signals – that are worth noting, as the broad stock market makes new all-time highs. Some of these are related to market prediction, while others have nothing to do with stocks. So, in that sense, this article is a bit of a potpourri.
In a recent issue of The Option Strategist Newsletter, we deatailed a trading system based on a modified version of John Bollinger's Bollinger Bands. We have since received numerous inquiries asking how we calculate and plot our "modified" version.
The stock market is once again overbought, and we have done more research into what we hope will be effective systems for taking advantage of these conditions. Most of the article is devoted to creating a trading system around the “modified Bollinger Bands,” but market breadth and volatility are “overbought,” too. A recommendation is made on page 4.
