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Market Commentary 4/15/2011

By Lawrence. G. McMillan

$SPX touched support and its rising 20-day moving average at 1310, and probed slightly below that level today before  rallying.

Perhaps more interesting is the fact that the equity-only put-call ratios have remained on buy signals throughout the pullback over the last week.

There was similar action in the volatility indices ($VIX and $VXO).  The calm in these volatility indices is another bullish indication, despite the falling broad market.

Only breadth is giving a negative signal at this time.

In focus: Bears try to take over

By Lawrence G. McMillan

The Standard & Poor’s 500 Index was not able to make new highs over the past week. In fact, selling set in and knocked the market down. However, there is still a general bullish overtone to the indicators, and so the bulls have certainly not capitulated yet. Ostensibly, the catalyst for this selling is the continuing, worsening situation in Japan. However, it is just as likely that the market had reached too much of an overbought condition, and that had to be worked off — which it has been, for the most part.

CBOE Launches Gold Volatility Futures and Options

Trading has begun on the CBOE Futures Exchange (CFE) in Gold Volatility futures. If you’ll recall, a VIX-like calculation can be made on any set of option prices on an individual stock, as long as there are continuous markets being made in the options.

The CBOE has been publishing a “Gold VIX” under the symbol $GVZ for some time. This calculation is based on the options on the Gold ETF (GLD).

Now, futures have begun to trade on $GVZ. Their base symbol is GV, and there are futures in the May, June, July, Aug, and Sept at this point.

Market Commentary 4/8/2011

The market has spent nearly the entire week in a tight range, frustruating both bulls and bears.

Equity-only put-call ratios have continued to remain on buy signals, despite some occasional heavy put buying during the week.

Market breadth has been strong, for the most part.  As a result, breadth remains on a buy signal, too.

Volatility indices ($VIX and $VXO) have drifted down to very low levels.  In general, the decline in volatity is bullish for stocks.

In focus: New highs in sight

Many of the major indexes have already made new post-2008 highs. This includes the Dow Jones Industrial Averag, the Russell 2000 Index, and the Value Line Index. The latter two are actually making all-time highs, having exceeded their 2007 highs.

Most people are not aware of just how strong the small-cap stocks have been. What has not made a new high (yet) is the Standard and Poors 500 Index (SPX 1,335, -0.85, -0.06%) . However, with these other indexes doing so, and with breadth being very strong of late, we expect to see new highs on SPX soon.

New volatility products make good hedges

Several new volatility products have recently entered the market or will soon be listed for trading. The most promising of these is the new set of contracts to be listed on the Chicago Board Options Exchange. Trading began on March 25 in Gold Volatility Index futures on the CBOE. Options on them will be listed on April 12. Many other new products will follow in due course.

Trade the Rumor, but Carefully

The rumor mill is running overtime lately, with takeover talk on the upswing in the markets. Most rumors don't lead to signed and sealed deals, and actual transactions aren't much discussed in advance. But mere talk about deals can lead to heavy and potentially profitable option activity, especially as one can attain a large amount of leverage if there is a big jump in a stock's price.

Stock Market Commentary 4/1/2011

$SPX has not made new highs (yet), but it has broken out above the 20-day moving average, the downtrend line from the highs, and the short-term resistance that had developed in the 1300-1320 area.

Equity-only put-call ratios have rolled back over to buy signals, which is a very significant positive intermediate-term development.

Breadth oscillators -- which are the most sensitive indicator of this group -- turned to buy signals over a week ago, and have remained on those buy signals ever since.

Futures in Volatility: Market Summary and Analysis

The broad stock market, as measured by the S&P 500 Index (SPXSM) finally had a pullback.  However, the CBOE Volatility Index (VIX) responded only in a modest upward fashion.  As a result, the VIX futures have retained the same steep slope to their term structure.  That is, it will likely be business as usual until either a) the market falls so sharply that the term structure flattens, or b) SPX (put) option buyers finally give up on their strategy and allow the implied volatility of those options to decline.

Two Major Signals Lurk

When a bullish market is too steady for too long, overbought conditions occur. These are normal and are usually worked off by a (perhaps) sharp, but short-lived correction. However, there are other kinds of extremes that arise that are not so easily worked off, nor so short-lived in their ramifications. Two of those are now building up, and they may signal a very volatile market in the near future. In fact, there is a third – the steepness of the $VIX futures term structure – but that’s something that we’ve discussed in detail before.


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