Always consider hidden risks
SP500 SKEW Index: Complacency Zone?
October 11 2016 ( From TradeView, CBOE, Stockcharts )
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Financial assets like the SP500 had a very good performance indeed til June 23 2016 when the market shifted to a risk off pattern coming from the Brexit fears and rebounded violently a few days after to breakout on July 8 2016 to new highs ever...
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 SKEW Index: Complacency Zone? $SPY, $VIX #Trading #Investing #SP500 #vix #skew #stocks #risk
Daily CBOE SKEW INDEX ( Grey Line )
20 DMA ( Yellow Line ) 50 DMA ( Red 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 FAQThe 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 back below the 120 and also the 20 and 50 DMAs (Day Moving Averages) reaching critical level for Bulls. The SKEW Index (Grey Line on the chart below) is reaching near a level which indicate a lot of Complacency into the market...
(See first chart below - Top Panel - Amber Trendline)
That tells me that the participants are not at all starting the hedging phase 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 (Central Banks timing, Emerging Markets, China, US Dollar...). Previous complacency time in the Mighty SP500 have been associated with that level of SKEW - options protection needed.
But the most interesting technical factor is that at the time when the SKEW is in a strong crashing phase, the Mighty SP500 is near a Major Support Trendline. (See chart below - Bottom Panel - Blue Trendline).
Then looking at the SKEW to VIX ratio should be quite interesting as the SKEW is in a crahsing pattern since and the VIX is into a bottoming out phase.
(See chart below - Top Panel - Grey Line).
But the most interesting technical factor is that the Daily Ratio (SKEW to VIX) after reaching the one of the highest level since July 2014 is back at the previous breakout trendline (See chart below - Top Panel - Blue Trendline) Market participants must observe that the SP500 is within a Major Daily Rising Wedge with no SKEW and little Volatility. (See Chart Below - Bottom Panel - Red Trendline)
That shows how Traders are not in full comfort mode (into a too low volatility environment and still not paying for some options hedges) and still within a strong Complacent Phase for Market Participants...
We keep getting into Steady and Puzzled Markets, a kind of uncharted territory...
Watch the Rising Wedge on SP500 Index...
CBOE SKEW INDEX vs CBOE VIX INDEX ( Grey Line ) 7 DMA ( Red Line )
SP500 ( Candles - Bottom Panel )
At a time the SKEW Index is showing a lot of Complacency, the SP500 Index Volatility (VIX) is rebounding from its Daily Support Trendline that started back since July 2014. (See chart below - Red Trendline)
Also we must take note that the seasonality for the VIX Index til mid-October is for a rise, so more volatility expected on an historical basis...
Daily SP500 Index Volatility (VIX)