(MarketWatch) -- Monday’s sharp selloff proved that the bears do have some life. But is it enough to actually cause a noticeable stock market correction? The bulls have gotten a little too full of themselves, pushing the market into an overbought condition that is somewhat unusual.
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 $OEX options (page 9 in this issue), as a sample of how the major index options are skewed. We also talk about skew in relation to individual stocks and for particular strategies (horizontal skews for calendar spreads, or vertical skews for ratio spreads, for example).
Stocks have been fairly dull so far in 2014, but some movement is probably setting up soon. Not much has changed with respect to the indicators that we follow, but let's review them anyway.
The Standard & Poors 500 index ($SPX) has pulled back modestly. As long as the support at 1810 remains intact, the trend is bullish for $SPX.
Equity-only put-call ratios continue to remain near the lower regions of their charts (Figures 2 and 3). This means they are in an overbought state.
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.
We all know that trading options is exciting, highly competitive, and can be very profitable. The key to long term and consistent profits in option trading is options education.
The new year started with a thud, as selling pressure that had been building up over the past few days was released. Even after the selling, the $SPX chart is bullish, as long as it remains above 1810.
Equity-only put-call ratios have rolled over to sell signals, from very low (overbought) levels on their charts.
Market breadth had been quite strong -- until January 2nd. Breadth was so negative today that the breadth indicators are just barely clinging to buy signals at this time.
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 rally that began last week with the Fed announcing tapering has broken out strongly to new highs. The fact that this occurred during a seasonally bullish period has certainly helped, too. $SPX will remain bullish as long as it holds above support at 1810.
Equity-only put-call ratios are shown Figure 2 & 3. Both are at new lows now, and as such they are both on buy signals (because they are declining) and they are overbought (because they are so low on their charts).
