Since stocks started to stumble last week, volatility has increased and a number of indicators have begun to look more negative.
The chart of SPX is still bullish, though. This week's low was 1640, and that is the first support level. There is also support in the 1625-1635 area, as well as at the still-rising 20-day moving average (near 1635).
Equity-only put-call ratios have started to roll over to possible sell signals.
The “collar” is an interesting and useful strategy – at times. This might be one of those times. With many high-yielding stocks having risen to dizzying heights, holders of those stocks may be somewhat leery of the gains that have taken place, but might also not be willing to sell the stocks because of the capital gains taxes that might be due on long-term holdings at low cost bases.
$VIX rose again yesterday (6 days out of 7), and its chart clearly shows the beginning of an uptrend. We had been saying that a close above 15.11 was necessary to confirm that uptrend, but it doesn’t really appear that way now. The uptrend is evident from blue line on the chart (below). A close below 14 would break that budding uptrend and return $VIX to a bullish state. But for now, I am grading $VIX as a negative indicator.
As a guest on CBOETV "In The Money" last week, Larry McMillan discussed hedging in the current market enviroment. Watch the interivew by Angela Miles below.
The stock market finally took a hit this week, but it hasn't really changed the overall picture -- yet.
First, as far as the chart of $SPX is concerned, it is still bullish. Yesterday's low at 1635 has to be considered a support level as well as 1625-1630, and then the more important support at 1600. if THAT were violated, it would be bearish.
Some wild action in the U.S. yesterday, coupled with a 7% decline (!!) in Japan overnight, has put traders on edge. Yesterday saw $SPX gain about 1% (up 18), then lose most of it, then gain about 10 again, and then just collapse, finishing 32 points off the high of the day. Overnight, after the debacle in Japan, S&P futures were as must as another 23 points lower, but at this writing, they are off about 14.
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).
