Several Conditions Suggesting A Probable Rebound Coming In Stocks Over 1-2 Weeks or More

I spent considerable time testing current market conditions against past data, and while it does not appear to be a screaming bottom, there are several factors which I rate to be significant that produce some very strong short skew results to the upside.

Some of the condition combinations below produced significant upside skews over the coming 1-2 weeks.

VIX up 20%+
Equity P/C ratio 21/84 avg. >= 1.05

VIX up 20%+
VIX/VXV >= 0.95
VIX/VXV 10 avg. >0.95

Total P/C 5avg. < -1 st. dev
SPY down >= -1%

Based on the large increase in the VIX yesterday as well as an extended period of VIX/VXV elevation one of the more highly probable plays here would be writing an OTM bull put credit spread with 1 to 2 weeks until expiration.

I am looking at spreads that are ATM or about 1% OTM.

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

Click on Stats to Enlarge

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

Gold Short Covering Rally Looks to Me Like It Will Continue

Click on Chart to Enlarge

The chart here is of GLD etf and shows projections of a continued advance up from the recent lows.

Since the lows over the last week or so, the rally in gold has been notably larger than any counter trend advance going back to the April highs.  So by this measure, the rally has overbalanced previous moves in the leg down, and indicates by objective measures that a larger phase of upward market movement may occur.

I have drawn lines on 3 of the major short covering moves off of lows over the last 2 years, and then projected them up from this August's low.  And we see what looks like an 10%+ move as realistic coming off of the current low if it holds.

The sentiment at this year's lows was at a historically extreme level and would argue for the possibility of a major low occurring here.

The Commitment of Traders data showed that large speculators went net short at the recent bottom, which is very rare in gold historically.  It does not mean that the low is in, but would indicate the possibility of a historically large amount of speculative short interest to unwind which could fuel major legs up in months to come.

Other precious metals look to me to be in similar set-up, and so this complex I view as having explosive potential.  Just based on the moves over the last couple years, there may still be 3:1 reward to risk using a stop below this month's low, if the rally were to continue and reach gains similar to the amounts of previous rallies in recent years.


Pete

VIX and SPY Bollinger Bands Suggest at Least a Minor Pullback is Right Ahead

The VIX has closed 2 days in a row below its lower bollinger band, which is not a common occurrence.

I have looked at this data and combined it as a filter in a few different ways with other data.  The message is consistently that in the past after similar occurrences there has been a relatively strong skew to the negative in the short term.

Over the next couple weeks the MAX loss has been greater than 2 times the MAX gain on average. 

However, in this LOW VOLATILITY environment, a strong skew does not really mean big price action.  So over the next couple weeks, the average decline to be expected from past data may be ~1.5%.

The cycle analysis timing that I use, also suggests that there may be 1-2 weeks of downward pressure still in stocks.  So these perspectives are consistent and would suggest weakness (or at least NOT strength) through roughly August options expiration.

There are enough divergences showing up here that I feel a high confidence that in the short to intermediate term the market may cool off and not make much more net gains for a few weeks.


I don't have much of a longer term perspective to offer from the data.  I would suggest that in the quest for investment yield, the odds seems to be tipping in favor of money flowing to bonds and away from stocks.

Bonds and notes have major short interest accumulated, and the SP500 dividend yield has fallen below very short term yields on Treasuries.  The suggestion here is that there may be money ready to flow back into bonds rather than piling into stocks on a breakout to new highs in the SP500.

For those who may have interest in commodities and currencies, there is much evidence in the underlying positions that we are quick approaching a commodity rally and probable decline in the US Dollar index.

Some notable markets with extreme short interest and probable sharp rallies to come are gold, silver, coffee, sugar, among others.

Oil actually is more the opposite.  It has come off of record long positions and extreme bullish sentiment, and so from a pairs trade perspective, a long gold/short oil trade may make sense.


Pete