Yesterday's Action in Stocks Suggests Gains are Ahead 10-24-18

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The above scan looks at times in my data where the VIX/VXV ratio was above 1.0 and there was a bullish divergence on my "panic indicator" which combines data from put/call ratios, volume, volatility.

The VXV data only goes back to December 2007.  So it misses the very early part of the 2007-2009 bear market, which may be analagous to our market.  In order to attempt to remedy that, I looked at the year 2007 and filtered for the panic indicator bullish divergence, along with a VIX increase of 5% or more to just gauge some probable similar circumstances. 

The results of the 2007 sample were similar to what we are seeing in the data where we do have the VXV which is posted above.

There was a very strong positive skew looking forward on all time frames noted.  The 1 month time frame was very strong in the skew and the closing returns.

So while we could just see a short term rebound, or no rebound at all, it appears that yesterday's action could be a short or intermediate term bottom with a week or more ahead of gains.

As is the case in volatile environments, if the decline is not over, it could increase in intensity on further breaks to lower lows.  So stop losses are recommended!

VIX/VXV Ratio Study Suggesting a Rebound Into Next Week 10-18-18

The VXV (3 month volatility index) does not have a real long history, but has data going back about 8 years or so.

Today the VIX/VXV ratio closed a bit above 1.0 which is a theoretical imbalance in the ratio as the VIX is shorter duration and typically has lower volatility.

I ran a scan to look at the following:

• VIX/VXV > 1.0
• SPY closes down 1% or more
• Price is NOT at a 10 day low

So the idea here is that the volatility remains elevated with a sizable sell off, but price is NOT breaking to lower lows.  I wondered whether price being above recent lows had any difference in the past compared to price falling to new lows.

The data suggests a significant positive skew in the next week price action for the scan noted above.  

Compared to price making a new 10 day low on the day, our current conditions had both higher closing price action moving forward as well as a larger positive skew in MAX GAIN to MAX LOSS over coming days.

There was no positive skew in MAX GAIN to MAX LOSS over the next week when price was declining to a 10 day low with the other conditions listed above.

So in the scan above, 23 instances were returned, and in 20 of them, my option price model shows that the ATM put lost over 90% of its value by expiration 5 days forward.

This data suggests that currently there is an opportunity to sell premium or write a bull put spread with expiries either next Wednesday or next Friday as the data on both would be about the same.

I did write a credit spread near the close today with expiry of next Friday.

Pete

Market Pop and VIX Drop Suggests At Least Some Continued Bullish Trade - 10-17-18

I ran a few scans today on SPY past history looking at similar market conditions to the current one:

One simple scan is:

• VIX declines 15% or more
• VIX closes below 20
• SPY gains more than 1%

Going back to 1995 that left 24 instances which matched Tuesday's action in that fashion.

Out of those 24 instances only 6 had a MAX loss of 1% or more in the next 3 days.

The average closing price gain a week later was 0.71% with over 2/3 of instances being positive.

Only 3 out of the 24 shows closing losses of 1% or more 1 week later.

But 10 instances out of 24 showed closing gains of 1% or more 1 week later.


It wasn't an incredible put selling opportunity, but about 75% of the past instances showed 70% or greater loss in the ATM put at expiration 1 week later.

The average VIX close 1 week later was down about 5%

From looking at past instances of big VIX spikes (like +33% or more), once it was done there were significant rallies in almost all case.

I would expect SPY to close between 275 and 285 next Wednesday (2 weeks out from the VIX spike) based upon past similar instances.


So the outlook here is for some continue short-covering to be probable for a week or so.

Currently active time cycles on SPY suggest that there is upwards bias on the cycle until the middle of next week, which is why I am focusing on the 1 week time frame here.

After that, time cycles turn down until about November 5th-6th.


So my plan here is to continue to hold some option credit spreads that I recently sold with reasonable of collecting full value of the credit next week.

Then it would be a time to consider purchasing a Nov 7th put or sell a bear call credit spread if prices do rise into next week.


Pete

Stock Market Volatility - Big Pop or Big Drop Ahead? 10-11-18

I have spent considerable time today comparing current market conditions with past data in order to guide expectation and strategies for trading.

MOST of the extremes in VIX, put/call ratios, multiple gaps downs and back to back down days or down streaks have in the past led to strong short term rebounds with peak gains coming at 4-8 days later.  So I think it is possible and reasonably probable that stocks rally 2-6% over the next couple weeks on a closing basis from today's low.

However, and few of the conditions I looked at which indicate very extreme readings, like 3+ standard deviation from the norm, suggest there is also a real possibility of a short term "wipeout" move which will occur before any rally attempt materializes.

Currently, I would estimate the probability of a 5% or greater decline, over the next 3 days or less, to be around 40%.

There is currently no bullish divergence on the hourly MACD chart of SPY, and given the strength of the decline, I would expect for that to develop before the low is in. 

If there is a gap down tomorrow, then from past similar instances I would estimate that from tomorrow's open there is a 2:1 or greater MAX gain versus MAX loss after the open, with a high probability of a close above the open. 

This data is useful in particular for a Friday where if tomorrow gaps down, we could write an option credit spread ATM or slightly OTM with the expiration at tomorrow's weekly option.

Since volatility is very high, and the odds of a close above the open are well above 50% from past stats (more like 75% from what I am looking at), then this could be a nice time to SELL premium with the limited risk of a bull put credit spread.

I may update tomorrow.


Pete