The S&P 500 closed out the week at 2184. It saw new all-time intra-day and closing highs on Thursday of 2188 and 2186 respectively.
The week had incredibly low range for the week, which pushed the 20-day historical volatility all the way down to 5.5 percent. That is the lowest since December of 2014. So even though the VIX is very low at 11.55, it is still anticipating a doubling of the actual volatility in the near term.
In the Simpler Cast, John discussed that August is typically a low volume time and therefore not much is going on. He followed that up today by commenting on the quiet, choppy August trade. “Although many stocks act really well here, there are a number of red flags on the overall market.”
He pointed out a few factors, include the skew – a relative measure of the cost of out of the money calls versus puts - is near 135, the fact that there is a squeeze on the daily VIX and that there are divergences all over the place. “Also, both bonds and yen futures are strong here. It is a recipe for, at the very least, a decent pullback.”
Tony remains bearish on the S&P 500 despite its new highs, but he still wasn’t short going into Friday. He spots some divergences as well as sell signals that he discusses in his premium videos.
Chris points out that the Emini S&P (ES) is still in a big bull market. But he remains cautious and slightly bearish. He is looking for a topping formation, but isn’t seeing it yet. He also pointed out the VIX action during the week.
During these very low volatility times, your best trading is likely to come from looking to specific strategies. One we were focusing on was the earning trades that John was doing. Another great area of potential is in unusual options volume. Chris has a webinar on just that topic next week. I have a lot of experience in that realm and got a sneak peak at his presentation – which is excellent and filled with information you won’t find other places.
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This article was written by Simpler Trading's Editor-in-Chief, Chris McKhann
Chris McKhann has been involved professionally with the stock market for more than 15 years and specifically with derivatives for 12 of those. He started as a stock broker, but quickly moved on to options and futures trading. He spent some time as the Derivatives Product Manager for TD Ameritrade. He was the chief analyst and hedging strategist for OptionMonster. He has been an options trading educator and content provider for many years. His writing and analysis has been featured on Reuters, the Wall Street Journal, Forbes, TheStreet, CNBC and internationally. He has also designed and traded option and futures strategies for prop trading firms and hedge funds as well as managed accounts.