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Today


IVolatility Trading Digest™


Volume 18, issue 29
Sector Rotation RORO [Charts]

Sector Rotation RORO [Charts] - IVolatility Trading Digest™

Trade selection using volatility as the primary criteria. Different trades for different volatility opportunities.
Please read IVolatility Trading Digest™ Disclaimer at the very bottom of this page

To add comments or to ask questions please click here (or use the blog "COMMENTS" link at the very bottom of the blog page).

Although not yet widespread, signs of increasing market sensitivity to trade, tariffs and political rhetoric are beginning to appear in the indicators including sector rotation into defensive sectors such as consumer staples, utilities and the CBOE S&P 500 Skew Index (SKEW) explained below in the market review.

Review NotesS&P 500 Index (SPX) 2801.83 inched up .52 points or +.02% for the week closing well above the June 13 high of 2791.47 and just below the March 13 high at 2801.90. The range between 2790 and 2800 should provide support followed by the 50-day Moving Average down at 2751.52 then the operative USTL around 2700. In lieu of a SPX chart take a look at this helpful rotation measure.

"Risk On" - "Risk Off" or RORO

XLY Consumer Discretionary/ XLP Consumer Staples Ratio.

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Currently at 2.12 and declining toward the upward sloping trendline from December.
By this indicator a close below the upward sloping trendline (USTL) would put it in "Risk Off" territory at the closing stage of the current market cycle.

VIXCBOE Volatility Index® (VIX)12.86 up .68 or +5.58% last week. Our similar IVolatility Implied Volatility Index Mean, IVXM using four at-the-money options for each expiration period along with our proprietary technique that includes the delta and vega of each option, gained a slightly less dramatic .14 points or +1.60% ending at 8.88.

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VIX Futures Premium

The chart below shows as our calculation of Larry McMillan’s day-weighted average between the first and second month futures contracts. With 22 trading days until August expiration, the day-weighted premium between August and September allocated 88% to August and 12% to September for a 12.31% premium, in the bullish green zone between 10% and 20%.

The premium measures the amount that futures currently trade above or below the cash VIX, (contango or backwardation) until front month future converges with the VIX at expiration. At the extremes, declines below 10 and advances above 30 are both unstable.

table

12.31% vs. 16.02% last week ending July 13, 2018.

CBOE S&P 500 Skew Index (SKEW) 152.72 up 10.24 points or +7.19% for the week, reaching the highest level since the beginning of 2017. Confined to a range between 148.16 and 154.25 it was higher every day last week than the previous one day peak that occurred on March 16 at 147.35.

SKEW measures purchases of out-of-the-money S&P 500 Index puts that require a very large downside move to profit from long put positions.

An increase of this index indicates greater expectations for an extreme down move. The CBOE explains further, a Skew value of 100 means the perceived distribution of S&P 500 Index log-returns is normal so the probability of outlier returns is negligible. Calculated from SPX option prices it describes "tail risk." As Skew rises above 100, the left tail of the distribution acquires more weight increasing the probability of outlier returns.

Typically SKEW spikes up above 140 in anticipation of specific events and then quickly declines as the perceived risk fades. Remaining above 140 for the last week reflects hedging activity likely related to trade and tariff chatter as well as increasing political uncertainty.

The chart below shows the weekly average at 151.44 compared to last week ending July 13 at 139.15.

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Crude OilWTI Crude Oil (CL) 68.26 basis September futures declined 1.69 points or -2.42% for the week. Between the July 10 and July 17 Commitments of Traders reporting dates, WTI cash declined 6.09 points or - 8.29%.

Summary for the Disaggregated Commitments of Traders - Options and Futures Combined report as of July 17 shows both "Managed Money" often called hedge funds and "PMP" defined as Producers, Merchants, Processors and Users, materially reduced their long positions by a combined 56,117 contracts. Although both "Managed Money" and "PMP" closed some of their longs the total open interest also declined 218,869 contracts as August futures expiration approached.

Since "PMP" are involved with both producing and processing they should be best informed about current market conditions. With substantial financial risk and a vast information network, "Managed Money” is the group that best correlates with crude oil price changes and arguably the most important, as they speculate on future prices taking the most risk at turning points.

This chart showing longs contracts for the two groups as a percentage of total open interest, suggests a continuing long bias.

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29.27% vs. 29.00% week ending July 10, 2018 and well above the upward sloping trendline (USTL) despite a 6.09 cash price decline for the week.

For the July 17 report both "PMP" and "Managed Money" reduced thier short positions; for "PMP" 14,832 and 1,397 for "Managed Money." Until both groups begin increasing their short positions the WTI price should remain supported.

For example, here is the "Managed Money" short position in number of contracts at just 17,353 the lowest in four years.

table

Prices will likely remain firm until one or ideally both important groups begin increasing their short positions. Although this is the time of the year when prices typically decline, so far there has been little evidence of increased hedging, or unusual long liquidation by producers and processors or increased shorting by hedge funds.

Summary

Although the S&P 500 Index continued higher last week, there is growing evidence of risk reduction by rotation into more defensive sectors and increased hedging activity using out -of-the-money puts likely associated with endless trade and tariff rhetoric as well as increasing political uncertainty.

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Actionable Options™
We now offer daily trading ideas from our RT Options Scanner before the close in the IVolatility News section of our home page based upon active calls and puts with increasing implied volatility and volume.

Next week the plan is for less market commentary and more trade suggestions to consider.

Finding Previous Issues and Our Reader Response Request

PreviousIssuesAll previous issues of the Digest can be found by using the small calendar at the top right of the first page of any Digest Issue. Click on any underlined date to see the selected issue. Another source is the Table of Contents link found in the lower right side of the IVolatility Trading Digest section on the home page of our website.

CommentAs always, we encourage you to let us know what you think about how we are doing and what you would like to see in future issues. Send us your questions or comments, or if you would like us to look at a specific stock, ETF or futures contract, let us know at Support@IVolatility.com or use the blog response at the bottom of the IVolatility Trading Digest™ page on the IVolatility.com website. To receive the Digest by e-mail let us know at Support@IVolatility.com

 

Comments:

" At the extremes, declines below 10 and advances above 30 are both unstable."
Should that be -10 (negative 10) ?

Posted by Trader VXX on July 23, 2018 at 02:19 PM EDT

Trader VXX,

Thanks for your question about the day-weighted VIX Premium. For most of 2016 and 2017 declines below the positive 10 level were brief and therefore unstable as it returned to the bullish zone between 10 and 30. There were even a few that declined as far as below minus 10 then quickly recovered. However, in 2018 the pattern seems to be changing since in January it declined to almost minus 30 and has been struggling to stay above plus 10 all year. We may very well need to change the commentary for the level to zero from positive 10 if the VIX remains in a higher range.

Thanks for taking the time to send your question.

Jack

Posted by Jack (52.6.122.109) on July 24, 2018 at 05:48 PM EDT


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IVolatility.com is not a registered investment adviser and does not offer personalized advice specific to the needs and risk profiles of its readers.Nothing contained in this letter constitutes a recommendation to buy or sell any security. Before entering a position check to see how prices compare to those used in the digest, as the prices are likely to change on the next trading day. Our personnel or independent contractors may own positions and/or trade in the securities mentioned. We are not compensated in any way for publishing information about companies in the digest. Make sure to due your fundamental and technical analysis homework along with a realistic evaluation of position size before considering a commitment.

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