FINANCIAL ICEBERG
Always consider hidden risks
 TECHNICALS
SP500 CBOE SKEW Index: Too Long on Fear?
June 29 2016 ( From  TradeView, CBOE, Stockcharts )
If you would like to receive our free daily markets updates, please Sign-Up



​​The Situation



​​Financial assets like the SP500 had a very good performance indeed til August 2015 when the market shifted to a risk off pattern... Usually the market is following the VIX Index in search of risk factor.

​​But a less know Index, the SKEW Index from CBOE can tell us a different story from time to time...




SP500 CBOE SKEW Index: Too Long on Fear?  $SPY   #Trading #Investing #SP500 #skew
Daily CBOE SKEW INDEX​ ( Grey Line )
​20 DMA ( Yellow Line )
​50 DMA ( Red Line )

The CBOE Skew IndexSM - referred to as "SKEW" – is an option-based indicator that measures the perceived tail risk of the distribution of S&P 500 ® log returns at a 30- day horizon. Tail risk is the risk associated with an increase in the probability of outlier returns, returns two or more standard deviations below the mean.

For more details: ​​CBOE SKEW INDEX FAQ

The value of SKEW increases with the tail risk of S&P 500 returns.

​​A SKEW value of 100 means that the perceived distribution of S&P 500 log-returns is normal, and the probability of outlier returns is therefore negligible. As SKEW rises above 100, the left tail of the S&P 500 distribution acquires more weight, and the probabilities of outlier returns become more significant.

​​SKEW and VIX are different and complementary measures of the risk of 30-day S&P 500 returns. VIX is a close proxy for the standard deviation of those returns. The standard deviation describes the average spread of the distribution of returns around its mean. This is not a sufficient measure of risk because the distribution of S&P 500 log returns is not normal. SKEW describes the tail risk of the distribution. The daily values of SKEW and VIX are uncorrelated, but the range of SKEW tends to narrows for extreme values of VIX.

​​​​The option market is telling us to expect the market to a very atypical return profile since the SKEW is reaching the Major Resistance Trendline that started back in March 2011 and that the 20 and 50 DMAs (Day Moving Averages) are heading higher. The SKEW Index reached the highest level of the past 5 years. The SKEW Index (Grey Line on the chart below) is reaching a level at the resistance trendline and at near levels where we had previous upside corrections on the SP500. ​ ​(See first chart below - Red Trendline - Ellipse)

That tells me that the participants are starting to be more tahn fully hedge with too much protective options plays with the SP500 at that level.​ That is not surprising because of the high uncertainties associated with international risks now (Brexit, Emerging Markets, China, US Dollar...).  Previous fear phase in the Mighty SP500 have been associated with lower level of SKEW - feweroptions protection needed.

​​But the most interesting technical factor is that at the time when the SKEW is at the highest level of the past 5 years, the Mighty SP500 is only at 4.6% below the peak price reached on May 20 2015. ​(See chart below - Bottom Panel - Right Ellipse).


Financialiceberg.Com