The VIX Friday Close is a Red Flag for Stocks
"The S&P 500 Index (SPX - 2,553.17), while grinding out new highs, appears to have hit a wall at the 2,550 half-century mark. This follows the rally that began in late September after two weeks of similar sideways action in the vicinity of the 2,500 century mark. Long-time readers of this weekly commentary know to pay attention to half-century marks on the SPX, as they have historically acted as major hesitation and/or pivot points. In fact, from June through early September, the SPX's 2,450 level proved to have major significance, as the index danced around this area for weeks."
-- Monday Morning Outlook, October 16, 2017
After I made the above comments about SPX 2,550 in mid-October, the SPX did not hesitate to break out above this level. However, it revisited 2,550 on two separate occasions in the second half of October, per the hourly chart below. Last Wednesday, the index came within 7 points of again revisiting 2,550, with a low of 2,557.45. It's almost as if there was a price to pay for the immediate breakout above 2,550, as this half-century mark hasn't gone away -- even though the index has grinded higher in choppy action since mid-October.
Long-time readers are also very much aware of the importance of the SPX's closing levels on Federal Open Market Committee (FOMC) meeting days. Specifically, during the current tightening cycle, the FOMC day close following a rate hike has tended to act as a resistance level until at least the next FOMC meeting. And with the exception of the July meeting, the SPX has tended to rally in the immediate days after the Fed stands pat.
That said, the SPX closed at 2,579.36 on Nov. 1 after the Fed's decision to hold interest rates steady, and a rally immediately followed -- but the round 2,600 century mark held the post-FOMC rally in check. After a decline near the 2,550 mark, the SPX comes into this week trading back around its Nov. 1 close of 2,579.
The price action since the FOMC meeting in early November may be a hint as to what's in store for the weeks ahead. Headlines and rumors related to tax cuts may move the market one way or the other on any given day as Congress continues to debate reform, but until the next Fed decision in mid-December, we could continue to see the SPX experience choppy action around that Nov. 1 close just shy of 2,580, with support coming in at 2,550 and resistance at 2,600. And if the Fed indeed raises rates in mid-December, as expected, it could result in equity market weakness into January as some of the optimism we are seeing now begins to unwind.
"... the S&P 500 Index (SPX - 2,582.30) dipped below its 20-day moving average for just the second time in the past two months. Despite this uncharacteristic short-term drop, the index finished the week just slightly below breakeven, and remained largely unscathed."
-- Monday Morning Outlook, November 13, 2017
As Joe Bell mentioned last week, the SPX dipped below its 20-day moving average two weeks ago, but the index never closed below this popular trendline. However, on Wednesday, the SPX closed below its 20-day moving average for the first time in 54 trading days, its longest such streak since 2012.
As one might suspect, with the market hitting new highs during this stretch, there have been signs of optimism entering the market. Therefore, I was curious as to whether the SPX's break of this widely followed short-term moving average might put us at risk of some of this optimism unwinding in the short term. The first table below summarizes the historical implications of the SPX closing below its 20-day moving average after experiencing consecutive daily closes above this trendline for at least two months, or 42 trading days.
Our data goes back to 1928, with the first signal occurring in 1932. There have been 41 occurrences since then, and this perceived "bearish" signal has proven to be anything but, as the market tends to recover quickly after snapping lengthy streaks above its 20-day moving average. In other words, the intermediate-term momentum higher tends to trump the shorter-term weakness. And already, just a few days after this latest signal, the SPX is off to a good start, thanks to Thursday's rally after the House passed its version of the tax cut bill.
"... CBOE Volatility Index (VIX - 11.29) 20-day call volume is at its lowest level since January 2017. VIX calls profit when we see sharp increases in volatility, and have become popular equity hedges during the past several years. The fact that so few VIX calls are being purchased indicates some complacency. "
-- Monday Morning Outlook, November 13, 2017
Also, $VIX 2016 close is 14.04. https://t.co/xCnwjJll1H
- Todd Salamone (@toddsalamone) November 15, 2017Last week in this space,Bell mentioned the low VIX call volume, insinuating that we might be vulnerable to a volatility spike. To be fair, the VIX spikes we have experienced over the last several months have not been the kind that lead to a VIX 20, 30, or 40 reading. However, on a percentage basis, last week's intraday peak in the VIX at 14.51 was nearly 60% above this month's Nov. 3 closing low of 9.14.
As I observed on Twitter during Wednesday's sell-off, a big level on the VIX worth watching is around 14.04-14.07, which represents its 2016 close and one-half the 2016 closing high. While the VIX popped above these levels intraday on Wednesday, the move back below them proved to be a buy signal, as the VIX continued south into Friday's midday lows.
$VIX Today's lows and close above 11.25 a sell signal for Monday?11.25 is half the '16 pre-election high, with the 11/14 close above it preceding the 11/15 $SPX decline.
- Todd Salamone (@toddsalamone) November 17, 2017A VIX close above the 14.04-14.07 range might hint at a quick move to the 18.00-18.50 area, which is roughly double this month's closing low. And bulls should take comfort in a move back below the key 11.25 level.Continue reading:
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