SKEW Pointing to a Black Swan

We haven't had a lot of data to backtest the CBOE's newer product, the SKEW Index which has been available since about April of 2011, but the CBOE has had enough data to test it and believe it's worthwhile as an indicator.

Basically the SKEW Index attempts to predict the probabilities of the unpredictable and by that I mean specifically a Black Swan event in which the market suddenly falls hard, along the lines of what we saw last night in futures, but with a little more 1929 flavor to it.

 Usually the SKEW hovers around 115, the higher it goes, the more probable an improbable event is. The last two peaks brought about a 10% and 8% decline in the SPX. The level right now at 124 is elevated, but it's not the level that is the scariest for the market, it's the rate of change in which SKEW is moving up.

The orange indicator is a simple ROC -Rate of Change of SKEW's price and as you can see, it's changing fast as it moves to the upside.

Typically the 140-145 area has been associated with past Black Swan events, SKEW rarely rises much more than 150 although it can.

As this Fiscal Cliff now really becomes an issue as the thing that scared the market the most was not whether Obama and Boehner can agree and do it in time, but whether Boehner has enough control over his party to deliver on any said agreements, last night's vote on Boehner's plan "B" showed that the Tea Party and other elements of the Republican establishment are as I said yesterday, "independent thinkers" and the failure of Boehner to pass his own bill among his own party is what really scared the market.