Always consider hidden risks
SP500 Index: Steady and Puzzling Markets?
August 22 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 Index: Steady and Puzzling Markets? $SPY, $VIX #Trading #Investing #SP500 #vix #skew #stocks
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 strongly since July 6 2016 and got over the 20 and 50 DMAs (Day Moving Averages). The SKEW Index (Grey Line on the chart below) is reaching a level which indicate some nervoursness into the market...
(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 a strong grinding phase, the Mighty SP500 is at only 2.3% above the peak price reached on May 20 2015.
(See chart below - Bottom Panel - Right Ellipse).
Then looking at the SKEW to VIX ratio should be quite interesting as the SKEW is in a grinding pattern since July 6 2016 and the VIX is into a free fall since June 27 2016.
(See chart below - Top Panel - Grey Line).
But the most interesting technical factor is that the Daily Ratio (SKEW to VIX) is now at one of the highest level since 2013; more precisely, it reached a level last seen in September 2014. That bring that SKEW to VIX ratio behavior quite the same pattern as what happened in 2013 and 2014; some options protection needed by market participants because SP500 reaching its or near a new high, so some SKEW but so little Volatility.
(See Chart Below - Top Panel - Red Trendline - Ellipse)
That shows how Traders are not in full comfort mode (into a too low volatility environment but paying for some options hedges) and still within a Complacent Phase for Market Participants...
We keep getting into Steady and Puzzled Markets, a kind of uncharted territory...
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 some nervousness, the SP500 Index Volatility (VIX) is testing its Daily Support Trendline thta strated back since July 2014. (See chart below - Red Trendline - Ellipse)
Daily SP500 Index Volatility (VIX)