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".