Monday, June 30, 2014

Black Swan Index Rising Again

One of several things that stands out like a sore thumb in tonight's charts is the SKEW Index.

It was just June 20th when the SKEW Index hit +140 levels. The SKEW Index is published by the CBOE like the VIX, however it is a different measure, not so much of 30-day volatility, but of what is known as tail risks or what is more easily understood as a "Black Swan" event or market crash.

When the SKEW is around 100, the perceived probability of abnormal returns below the average of 2 standard deviations or more are negligible, as the SKEW rises, there's more concern of a sudden market crash, 140 is about as high as I've seen the SKEw since the CBOE has started publishing it.

a 3-day chart of SKEW since the CBOE started publishing it shows a very low perceived probability of a market crash through 2012 and 2013, but rises fairly dramatically through 2014, the last 2 weeks it has risen to extreme levels as you can see, it seemed to pullback for a week or so while window dressing was under way which may just be coincidence, but shot higher Friday to the 135 level and today to the 139.25 level, just off the 6/20 highs of 143.26, what is most concerning about the recent behavior is the rate of change and sudden extreme readings.

What does this all actually mean? It means that the premium being paid for out of the money, low strike Put options are rising as demand for low strike puts rises, essentially someone is bidding up low strike puts in an effort to either capitalize on a nasty fall to levels in which the strike is significantly lower than prices today or they are trying to hedge long exposure they may have or can't get rid of fast enough.

The bottom line is the premiums for these low strike puts is rising and above the normal Black Scholes model.


The last SKEW event saw highs of about 130 just before the July 2011 market beating of  almost -17% in a short period of 10-days, like then the VIX was fairly low as well, but started rising just before the market turned over.

We are now significantly higher in SKEW as far as SKEW ranges go, it has never been above 143.27 since it has been published, on 6/20 it was 143.26 and is now quickly rising again.

I've also noted recently the outperformance of the Flight to Safety, Utilities sector, for long only funds, it's one of the only places they can go. On several timeframes (in terms of days) I track the 9 S&P sectors, Utilities have outperformed every other sector for 1-day returning +0.82% today vs the SPX at +0.04%, the NASDAQ 100 @ +0.16%, the Russell 2000 at 0.26% and the Dow at -0.17%, also over the last 5 days, the last 10 days and is the #2 performer over the last 21 trading days.
 XLU 1-day

5-days, with Health care, another Flight to Safety sector coming in 3rd of the 9 sectors.

10-days with Healthcare coming in second behind Utilities.

And over 21 days with Energy at #1 with the trouble in Iraq, Utilities are in second place and Healthcare with a respectable return at 4th place.

The VIX is putting in what is very close to a bullish Rising 3 methods, it's only 1 candle off from a textbook chart, however the psychology is very much the same.
Coming off recent lows that haven't been seen since February of 2007, the VIX has a large up candle with 3 of the 4 proceeding days real bodies inside the real body of the large candle, a bullish consolidation pattern that is known to resolve to the upside. We have also seen the VXX, short term VIX futures as recently as Friday refuse to move lower despite the VIX index being hammered in to the close to ramp the market, the actual VIX futures are the traded asset while the VIX index is simply an index like SKEW that cannot be traded meaning there's real demand for VIX futures or protection.

After the heavy downside volume event from about 2:30-3:05 in Index futures I noted today, HYG which looked set to try to ramp the market in to the close, fell and closed red on the day.
 HYG (High Yield Credit) falls in to the close after the high volume selling event in Index futures which also saw extremely high volume in the 5,10 and 30 year treasury futures, a flight to safety trade as well.

 VIX outperforms the SPX (prices inverted to see the correlation) in to the close as well rather than being hammered as you'd expect on the last day of window dressing and the quarter.


Professional sentiment also falls in to the close along with High Yield Credit.

I'm not sure what that selling was about, but over the last few weeks selling has seen much heavier volume than any upside moves. It definitely stood out as it was occurring and all of the 3C charts deteriorated in to and during the event.

I believe the GLD and SLV moves today may have been head fake moves, they were certainly helped a lot by the week $USD which was at 2 month lows, but it has a pretty strong positive divegrence building in it so I'll be very interested to see how the PM's act tomorrow.

A lot of the momentum and popular stocks didn't perform well and sold off in to the close like PCLN, FB, SCTY, FSLR, GOOG, APPL lost ground, TSLA, GILD, EXPE as well as several of the blue chips, although they seemed to fare better "specifically in to the close".








Unusual Behavior

It's not often that you catch these glimpses and if you didn't see it while it happened, chances are you wouldn't notice it on a chart after the close, looking back, but so many assets were effected at once on what seemed to be nothing more than a typical intraday correction in price, it apparently was something more as 3 of the 4 major averages went on to make a lower low on the last day of window dressing when they usually hammer the market the most with a VIX whack-a-mole. However tone all day has been weak, but there was something significant about this moment which came just after I had seen enough to fill out an SRTY position, actually a bit bigger than normal, Trade Management: SRTY which was posted  at 2:49 as the event was occurring around 2:30-ish to 3:05.


NOT the VIX slam you'd expect near the close, especially on the final day of the quarter...

 This isn't the afternoon norm for the VIX, t's moving toward the highs of the day when it's usually whacked around 3 p.m.

In fact...
VXX and UVXY (Short term VIX Futures) both saw disproportionately large positive divergences right at the same time, this is a 5 min moving to a leading positive divegrence intraday over the course of an hour or so (which is significant because 5 min charts are the first timeframe in which we typically se institutional size activity intraday.


 SPY (red) vs VIX (green), the move in VIS seems a bit disproportionately strong.

Even the Most Shorted Index being squeezed in to the last hour of the day couldn't keep the SPY, QQQ and DIA from making a lower low- these two almost never diverge.

The averages had been weak all day, but saw disproportionate moves at that period...
 DIA intraday weak all day


 However at that moment, the 5 min chart had been quite negative in to the move which is part of what I was seeing and why I filled out SRTY (3x short IWM), the move intraday in the 5 min DIA chart is quite extreme for that timeframe.

 The IWM 1 min saw a very sharp leading negative divegrence right in to the move or just before.

As the longer 2 min faded off the rest of the day

The Q's which had been closest to inline the longest saw a sharp move at the time as well

Followed by a lower low in price.

Even the 10 min chart reacted.

As did the SPY 5 min as shown earlier. which was already showing weakness, thus SRTY position, but even sharper in to the move.

And that carried all the way out to a 10 min chart intraday.

This is the huge volume spike in the 5, 10 and 30 year treasury futures right toward the end of the move down in the index futures and averages.
Huge volume at the same time in all 3 TReasury futures toward the lows of that move.

I'm going to update breadth and charts and see what else was going on.

More Disproportionate Action

Regarding the last post, Index Futures/Volume in which index futures saw heavier volume at the afternoon decline around 2:30 to just after 3 p.m., there was also a disproportionate move up in VIX, there was large volume on both the 10-year and 5 year treasury futures, a large move up in Gold which doesn't seem to have anything to do with today's overall weakness in the $USDX as well as some disproportionate 3C signals at the same area, I'm still looking, but this looks to be something more than a normal intraday dip or correction.

Index Futures/Volume

Around 2:30 - 3 p.m. all of the index futures dipped, this brought the SPX red for the day, there was a noticeable uptick in volume in the index futures on that decline, very much like we saw several times last week on selling bouts.


Intraday Market Tone Weak

If anything being the last day of the quarter, this is where and when they (smart money) want to push the market to a new high no matter what happens tomorrow, like returning 1/3 of a trillion in collateral to the F_E_D so Financial companys' books and financial position look a lot stronger than they are.

Rather tone has been very weak today, here are a few quick examples, as far as I can see, they'll need a VIX smash to move this market beyond mixed gains and losses no better than 0.28% (IWM).

 DIA intraday with continuing weak tone, now worse than ever in the flag area which it can't even duplicate.

DIA 2 min

DIA 5 min seeing some stronger intraday action in the afternoon

IWM 1 min, I didn't enter SRTY because of what might happen at the close, I'm not worried about SRTY with regard to what might happen at the close, I entered or filled out SRTY because of what might happen as the quarter ends tomorrow morning.

SRTY=3x short IWM/Russell 2000

 IWM 2 min with continued weak tone that has grown worse in this 2-3 day flag area.

The Q's were in line for the first 2 days and started to show cracks Friday, that has grown worse today.

QQQ 2 min shows a little better how the deterioration has taken shape since Friday.

SPY with more 5 min intraday weak trade.

The TICK has been very mellow today, especially considering the last day of Window dressing, but the trend that has been in place today looks to be weakening.

SRTY intraday changes
 SRTY 2 min, this is after I put out the last SRTY trade mention.

SRTY also seeing some heavier 5 min intraday positive trade, opposite the averages.

 The recent 15 min chart and what would be natural accumulation areas with leading positive divergences.

And some very sharp 60 min positive action in SRTY. I like this as it covers a pretty broad range of asets from small caps to tech and the general economy as a whole which is looking to become more and more problematic, perhaps even a recession.

Trade Management: SRTY

The overall tone of 3C today has been very weak on the final day of window dressing when they need to push the market the hardest, I'm inclined to add to FAZ, but with small caps looking the way they do, Tech as well and Financials, I think I'm going to fill out the SRTY position recently added, Trade Idea: Adding SRTY Long. I don't have a great feeling about the market going in to the new quarter or out of window dressing at today's close.

Looking for signs of a 3 p.m. VIX Slam for the End of Qtr. Today

Being it is the end of the quarter, I'm sure funds would like to have the best close possible the last day of the quarter, what happens tomorrow, especially as the banks return several hundred billion in assets to the F_E_D, well that's another story.

I'm looking at HYG, VXX and TLT as they are the most common levers for a VIX slam at 3 p.m. The dollar has also been beaten down all day, but it doesn't look like it's going to hold too much longer (sends precious metals and typically oil higher)

 HYG has been underperforming the SPY/SPX all day, however looking at the intraday 3C charts...

The longer term is in bad shape, 60 min, but this is a short term lever...


 The HYG 2 min has a positive divegrence in it which would be used in combination with a VIX slam end of day.

TLT is another asset in SPY Arbitrage, it has an intraday negative divegrence even though it has been outperforming it's correlation, likely related to banks trying to fill their collateral shortage for Window dressing related as this is the 20+ year Treasuries.

VXX is the third asset, but it doesn't look negative, which is what we saw Friday as the VIX was hammered at 3 p.m., but actual VIX futures stayed steady, not making a lower low at all for the day in to the VIX slam as there's obvious demand for protection.

The averages themselves aren't showing anything  very impressive, actually they've been trading quite weak all day (3C charts), I'll update them in a moment.

Maybe Financials Are the Way To Go, Record Window Dressing via Reverse Repo

The last day of April the F_E_D saw the second largest reverse repo (banks buy collateral from the F_E_D and sell it back the next day), this was done the last day of April which is pure window dressing to fool regulators and investors in to thinking the bank is healthier with more collateral than it actually has.

That second highest number ever for the last day of April (monthly ,window dressing) was just trumped today with a new record of $340 Billion in reverse repos submitted to the F_E_D for the last day of the quarter, remember these will be bought back by the F_E_D tomorrow through their open market's desk at the NY F_E_D. This was a $200 billion dollar increase overnight submitted by 97 financial institutions, setting a new record...WINDOW DRESSING AT ITS MOST EXTREME AND A CLEAR SIGN THE FINANCIALS ARE NO WHERE NEAR AS STABLE AS THEY TRY TO PORTRAY AS THESE SAME ASSETS GO RIGHT BACK TO THE F_E_D TOMORROW AS THE NEW QUARTER STARTS!

The bottom line is there's nearly 1/3rd of a trillion dollars in collateral shortfall among these 97 financial institutions ALONE! The irony is the banks do this the last day of the month, quarter or year end to fool investors and the banks' regulator which is THE F_E_D ITSELF!

Now you have an idea why I prefer the idea of a general short on Financials rather than trying to pick out which one has the worst balance sheet/collateral shortfall.



XLF, XLK, Small Caps

I'm looking at 3 asset groups very seriously, I think they are very near an add-to or new position area. Financials (XLF) or FAZ (3x short Financials) is one, XLK (Tech) and TECS (3x short Tech) is another, the 3rd is small caps, TZA (small cap bear 3x) is the third. I like SRTY as well as you know as it was added last week as this market has a very dangerous feel to it.

Small Caps (TNA 3x Long Small Caps)  has the exact same H&S type price pattern that the IWM so being long SRTY (3x short IWM) and TZA (3x short Small caps) defeats the purpose, take a look, it's pretty amazing how tight the correlation is.
TNA (Small Caps) in green vs. Russell 2000/IWM (red) they are virtually identical so you gain nothing really being in both trades unless you want to try for some minor diversification and take on both positions, but in such size that together they'd represent 1 position for risk management purposes, you never know, you might get a little better relative performance here and there. You definitely get better relative performance with TZA vs short IWM as it has 3x leverage, the comparable trade would be TZA or SRTY, both 3x leveraged (small caps and Russell 2000 respectively).

Since I've already started a position in SRTY, I'll probably stick with it, but the H&S tops and being at the top of the right shoulder is VERY enticing for a new or add to position in either.


As for confirmation (volume) of TNA's (3x long Small Caps) H&S pattern, here's the same quick custom cumulative volume indicator I put together so you don't have to trace volume bars at each rally and decline. The importance of volume confirmation with a H&S top and even more so with a H&S bottom is paramount, there are a lot of traders who got slapped hard from the 2010 H&S top price pattern which DID NOT show volume confirmation.

What you are looking for is falling volume (red arrows) on rallies, especially at the head and right shoulder and rising volume on declines, especially at the decline from the head and to the right to the decline from the right shoulder which we haven't seen yet. This is reversed for an inverse H&S, but volume confirmation is even more critical with an inverse H&S and both MUST have preceding up trend (for a top) and downtrends (for a bottom).

This is a solid H&S pattern, as good as it gets and with confirmation everywhere in multiple assets.

In any case, this first look is at XLF, Financials which I like a lot, the trade of choice for me on an initial break is FAZ, 3x short Financials. Getting the sector and timing is hard enough with a top, picking the right stock can sometimes be too much so going broadly with the sector, especially with some leverage (SKF offers 2x leverage short financials, FAZ offers 3x leverage short financials) for me is a better choice than an individual asset, especially if it has dividends, but there are areas and times when I prefer the individual stock over the ETF, usually after the first decline so I can see what is struggling the most with relative performance and the first consolidation/correction, then I want to move to individual names as the margin situation is better as you are actually short rather than long an inverse ETF.

 XLF is a different pattern altogether, it's much more like the SPX's 3-month range and the move above that area, but quite a bit weaker with a small double top (not a true double top) which has declining volume and RSI as well. Stops would be lined up just below support, back in the range and more hardcore longs will have stops below the range, that's also where most retail shorts would likely come in so that's an area I'd avoid if I were looking to short XLF or go long FAZ.

Just like small caps and the IWM are very closely related, the SPX has substantial financial exposure among component stocks , not as tight of a correlation as the previously mentioned, but if I were very short Financials , I'd consider that in shorting the SPX.

 XLF 60 min

XLF 15 min, I'm looking more to the far right on this chart at the small double top area.

XLF 10 min at the small double top area, there was strong distribution on the first top and then some smaller accumulation to create the second which is seeing a negative divegrence in to it, I'm also looking far to the right at the bear flag that we have seen in the market since last week, it's a bit more clear here than in most of the averages.

 This is the 5 min chart, this is the one I am watching the most before taking any new action, the flag to the right specifically is what I'm most interested in as far as any tactical entries.

The intraday charts at 1 min as it is the fastest, would go negative first and if the divergence in the flag area is strong enough (negative), that 5 min chart should go negative and then we have more or less a full house across all the timeframes, here you can see that process has begun.

And at the 3 min chart, just below the 5 min, it is migrating to that chart so I suspect it will hit the 5 min chart soon, perhaps later today or tomorrow. I also have to consider the resistance formed by the two small tops, as that is a possible head fake area as the resistance is very close at both, so I'll be watching that. If there's a head fake move above those two tops or bounces, I'd seriously consider XLF puts so long as there's solid confirmation that it's a head fake move.

More to come...