Always consider hidden risks
SP500 CBOE SKEW Index: Critical Zone Again ?
November 4 ( From TradeView, CBOE, Stockcharts )
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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: Critical Zone Again ? $SPY, $VIX #Trading #Investing #SP500 #vix #skew
CBOE SKEW INDEX ( Grey Line )
20 DMA ( Red Line ) 50 DMA ( Green Line )
SP500 ( Candles - Bottom Panel )
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 an atypical return profile since the SKEW is spiking since October 23rd and that the 20 and 50 DMAs ( Day Moving Averages ) are heading higher. The 20 DMA on the SKEW ( Red Line on the chart below ) is reaching levels not seen since July 2014 and at near levels where we had previous corrections on the SP500. ( See 1rst chart below - Yellow Horizontal Line and Ellipses )
That tells me that the participants are hedging with some protective options plays with the SP500 at that level. That is not surprising because of the high uncertainties associated with international risks now ( Emerging Markets, China, US Dollar Strenght...) Previous peaks in the Mighty SP500 have been associated with higher level of SKEW - some protection needed.
But the most interesting technical factor is that at the time when the SKEW is spiking at the highest level of the past 3 years, the Mighty SP500 is near testing the Major Resistance Trendline that started back since May 20 2015. ( See chart below - Bottom Panel - Grey Trendline - Ellipse ).
But the SKEW to VIX ratio ( see chart below - Red Line ) is at the moment at a level were in the past have been associated with short term tops in the SP500. The Mighty SP500 is near testing the Major Resistance Trendline that started back since May 20 2015. . ( See chart below - Bottom Panel - Grey Trendline - Ellipse ).
( SKEW to VIX Ratio: Chart Below - Top Red Trendline Ellipses )
But the most interesting technical factor is that at the time when the SKEW is spiking at the highest level of the past 3 years, that bring that SKEW to VIX ratio is near reaching a zone where we had previous corrections on the SP500. ( See Chart Below - Blue Trendline -Amber Vertical Lines )
That shows how little confidence Market Participants have in the SP500 at those levels....
CBOE SKEW INDEX vs CBOE VIX INDEX ( Grey Line ) 7 DMA ( Red Line )
SP500 ( Candles - Bottom Panel)