Always consider hidden risks
SP500: A Nervous SKEW with Complacent VIX?
February 20 2017 ( From TradeView, CBOE, Stockcharts )
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Financial assets like the SP500 had a very good performance indeed post US election til a new high ever reached on February 17 2017 (up +9.8%) when the
CNN Fear and Greed Index reached the Extreme Greed zone at 77.
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: A Nervous SKEW with Complacent VIX? $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 above the 140 level and also the 50 DMA (Day Moving Average) reaching critical level for Bulls. The SKEW Index is reaching a level which indicate a lot of Nervousness into the market (highest 50 DMA since September 28 2016)... (See first chart below - Top Panel - Red Line)
That tells me that the participants are 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 (US foreign policies, Central Banks timing, Emerging Markets, China, US Dollar, US rates on the rise...). Previous nervousness 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 rising phase, the Mighty SP500 broke a Daily Rising Wedge Technical Pattern and reached a new high ever last week.
(See chart below - Bottom Panel - Red Trendlines).
Then looking at the SKEW to VIX ratio should be quite interesting as the SKEW is in a rising pattern lately 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 lowest level on November 3rd 2016 is now back above the resistance trendline and reached a zone last seen in July 2014! (See chart below - Top Panel - Red Trendline) The 50 DMA (Day Moving Average) on that ratio reached a level last seen on August 4 2014! Market participants must observe that the SP500 broke a Daily Rising Wedge with a high SKEW and little Volatility. (See Chart Below - Bottom Panel - Red Trendlines)
That shows how Traders are not in full comfort mode (into a too low volatility environment and paying agressively 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... As Trumpification of financial markets is in full throttle, the market start to feel uncomfortable with the pace of the rise in stocks prices.
CBOE SKEW INDEX vs CBOE VIX INDEX ( Grey Line ) 50 DMA ( Red Line )
SP500 ( Candles - Bottom Panel )
At a time the SKEW Index is showing a lot of Nervousness, the SP500 Index Volatility (VIX) is near from its Daily Support Trendline that started back since August 2015 and reached the lowest level for the 50 DMA (Day Moving Average) since July 29 2014 . (See chart below - Red Line)
Also we must take note that the seasonality for the VIX Index til mid-March is for a range trade, so not a lot more volatility expected on an historical basis...
Daily SP500 Index Volatility (VIX)