What a week for #TeamBears!
The Fed’s rate hike cycle finally broke the backs of small caps, as illustrated by BOTH the (#1) break and close below of the Summer low (which is also prior swing pivot) on the daily and weekly RUT charts, and (#2) the break of the up channel formed since Summer 2017.
Our beloved bear leader Tim Knight made massive profits, and Slope traffic rose validating his tremendous efforts to improve the website.
Yes all things seem great in bearland, with Marketwatch fueling the shorting fever on Friday evening with stats and a comment from Jeff Hirsch, editor of the Stock Trader’s Almanac.
But as Mr. Ed used to say… “Market dropped five points. Good things my money’s tied up in hay.”
No wait… “I love Christmas. Wilbur is so full of the spirit of giving, and I’m so full of the spirit of receiving.”
And this is Christmas for volatility (i.e. Options) traders.
Friday showed two data points that may point to a lessening of volatility moving forward: The VIX curve and VVIX.
We saw the beginnings of VIX curve reverting to backwardation, as the VIX 3-month level dropped back beneath the VIX 6-month level.
The VIX 9-day is still above VIX, and both are still above the longer term volatility measures.
VIX9D: 22.84
VIX: 21.31
VIX3M: 19.84
VIX6M: 19.87
Interpretation: Longer term options traders started to nibble on December and March SPX contracts. Historically this is not a bad idea, as the November through April six months are the most bullish period for $SPX.
Now to VVIX (the measure of volatility of the VIX).
VVIX held above its 120 level (124.81) for a third day in a row on Friday. The most recent time we saw the VVIX hold close the 120-level for three consecutive days in a row was February 2, 2018-February 21st.
Prior to the February sell-off, you have to go all the way back to August of 2015 to find a time when VVIX had 3 consecutive days of closes at/above 120. And most of us remember the great fun had trading during late August 2015.
Thinkorswim data on VVIX only goes back to Mid-March of 2012. In that time period, VVIX has seen 3 or more consecutive days of closes at/above 120 only 5-times, and each marked a significant bottom in the $SPX:
1. Oct. 13-16, 2014
2. Dec. 11-16, 2014
3. Aug. 21-Sept. 1, 2015
4. Feb. 2-21, 2018
5. Oct. 10-(Current), 2018
Conclusions: Short-term, expect better than average daily ranges in the SPX and /es. Farther out, this is likely a great time to sell high volatility ahead of a coming contraction.
