I Hope You Bought Insurance

Given the fact that the ES futures have been proceeding lower overnight I will dispense with our usual morning briefing and instead present you with a few of my favorite momo charts. There’s a lot of confusion out there right now and it is important to remind ourselves of where we are in the long term trend in order to properly assess the odds for our respective trading activities.

Let’s start with a chart I already posted yesterday – the NYA50:NYA200 ratio which expressed market breadth across the NYSE. A drop in the signal tells us that we are seeing more symbols above their 200-day SMA in comparison to the ones above their 50-day SMA. If indices remain at elevated levels during such times it suggests that the intermediate trend may be weakening.

As you can see we dropped through a rising support line which in the past two 1/2 years has served as a launch point for dip buyers. That is interesting but the hidden message here that may not jump out at you is that a contracting breadth range in itself makes a statement about market sentiment. In essence dip buyers have been jumping in earlier and earlier. Where in previous years a healthy correction was necessary to generate buying interest it doesn’t take much of a drop these days to launch a veritable BTFD frenzy.

Skew measures the perceived tail risk of the market via the pricing of out-of-the-money options. Generally, a rise in skew indicates that ‘crash protection’ is in demand among institutional investors (institutional/professional investors are the biggest traders in SPX options).

Some folks prefer to plot the VIX and the SKEW against each other – for me the ratio of the two appears to be more predictive. Well, it used to be – a divergence between the SPX and the SKEW:VIX ratio has usually led to at least a small obligatory correction. I have posted a five year chart above and you can see how things have become more and more complacent over the years. As of right now we are in a pretty unique situation in that we have produced a very healthy divergent signal (indicating professionals are buying OTM protection) and that given a rising VIX! Nevertheless price has not moved a millimeter (yes, the lair has gone metric!).

But wait – there is more below the fold. Please step into my lair:

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So in short – I hope you bought insurance while it was cheap (like we told you).

Cheers,