Always consider hidden risks
SP500 CBOE SKEW Index: Near Complacency Zone?
July 14 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...
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: Near Complacency Zone? $SPY, $VIX #Trading #Investing #SP500 #vix #skew
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 bottoming out since July 6 2016 and that the 20 and 50 DMAs (Day Moving Averages) did not adjust yet after the highest level ever reached on June 27 2016. The SKEW Index (Grey Line on the chart below) is reaching a level at the support rendline and at near levels where we had previous corrections or consolidation on the SP500.
(See first chart below - Top Panel - Blue Trendline - Ellipse)
That tells me that the participants are 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 lower level of SKEW - options protection needed.
But the most interesting technical factor is that at the time when the SKEW is in grinding phase, the Mighty SP500 is at 0.8% above the peak price reached on May 20 2015. (See chart below - Bottom Panel - Right Ellipse).
But the SKEW to VIX ratio (see chart below - Red Line) was at the beginning of June 2016 near a level were in the past have been associated with short term peaks in the SP500 after rejecting the Major Resistance Trendline that started back since September 19 2014. (See chart below - Bottom Panel - Blue Trendline - Ellipse).
But the most interesting technical factor is that at the time when the SKEW is testing near the Support Trendline near its previous bottom, that bring that SKEW to VIX ratio behavior quite the same pattern as what happened in June 6 2016, April 20 2016 and March 29 2016; some options protection needed by market participants because SP500 reaching its or near a new high, so little SKEW but so little Volatility yet in the financial markets ... (See Chart Below - Top Panel - Blue Trendline)
That shows how Traders are not in full comfort mode (into a too low volatility environment but paying for some options hedge) and still within a Complacent Phase for Market Participants...
CBOE SKEW INDEX vs CBOE VIX INDEX ( Grey Line ) 7 DMA ( Red Line )
SP500 ( Candles - Bottom Panel)