Top Posts of 2010 (Midyear Edition)

This is the fourth year I have been reporting on the most popular posts at VIX and More. As of June 30^th, the 2010 posts which have been read by the largest number of unique readers are as follows:

1. Chart of the Week: CBOE Equity Put to Call Ratio Nears All-Time Low
2. Largest Pullback Since March 2009 Rally Began
3. Short-Term and Long-Term Implications of the 30% VIX Spike
4. Chart of the Week: Total Put to Call Ratio
5. Rule of 16 and VIX of 40
6. VIX Approaches Pre-2008 Record Highs
7. SPX Pullback Now Second Largest Since March 2009
8. Bears Emboldened By Low CBOE Equity Put to Call Ratio
9. Chart of the Week: VXX vs. VIX
10. Charting the Selloff with an Andrews Pitchfork
11. Technical Resistance Looms in the S&P 500 Index
12. Chart of the Week: The Flight-to-Safety Trade
13. Chart of the Week: Ten-Year Treasury Note Yield
14. SPX Historical Volatility at Two Year Low
15. Mamis Overbought-Oversold Indicator
16. Chart of the Week: VXX Celebrates One Year of Futility
17. VIX Implied Volatility Exceeds 2008 Crisis Levels
18. Are You Watching Greece?
19. Some Favorite ETF Sites
20. Correlation of VIX and “VIX Index” Searches on Google
21. Great Metaphor for the Financial Markets
22. VIX Price Channel Chart
23. Chart of the Week: SPX, Fibs and 200 Day MA
24. The Elusive Trading Range
25. The Art of Being Wrong

For more on related subjects, readers are encouraged to visit the posts tagged with the label archival or check out:

• Top Posts of 2009
• Top Posts of 2008
• Top 25 Most Read Posts of 2007
• The Post of the Month: An Informal History of VIX and More

…and perhaps investigate the more free-form…

• VIX and More 2009 Year in Review
• Chart of the Week: The VIX and Volatility in 2009

Disclosure(s): none

VIX Showing Signs of Progressive Desensitization

Since hitting a high of 1219 April, the S&P 500 index has fallen below 1045 on three separate occasions, most notably during yesterday’s session, when the SPX dropped all the way down to 1035.

Interestingly, each successive time the SPX has dropped below 1045, the corresponding VIX spike has topped out at a lower level, as highlighted by the green arrows. Back on May 25^th, when the SPX fell as low as 1040, the VIX spiked as high as 43.73. When the SPX fell to 1042 on June 8^th, the VIX only made as high as 37.38. Yesterday, when the SPX fell below a critical support level at 1040 and went as low as 1035, the VIX was only able to muster a spike to 35.39.

The increasing sluggishness in the VIX reflects what I call a progressive desensitization to fundamental factors (e.g., the European sovereign debt crisis, a potential double dip in housing, etc.) and technical factors (the breaching of support at SPX 1040) that investors experience after the novelty of various threats – including very serious ones – begins to wear off.

In fact, it is common for the VIX to be less responsive to subsequent breakdowns in stocks. This is a subject I discussed at some length in VIX Spikes and the 2002 Market Bottom and again on March 6, 2009 (what timing!) in Markets Continue to Fall, VIX Relatively Flat. The pattern of a progressive desensitization in the VIX is fairly common and can be seen once again in the chart below.

Note that in terms of implications, this means that once investors have become somewhat accustomed to a declining market, it will be more problematic to rely on the VIX spiking to a new high as a signal for a market bottom.

For more on related subjects, readers are encouraged to check out:

• VIX Spikes and the 2002 Market Bottom
• Markets Continue to Fall, VIX Relatively Flat
• The Significance of Double Tops in the VIX

[source: StockCharts.com]

Disclosure(s): short VIX at time of writing

Revisiting the Flight-to-Safety Trade

Once again the S&P 500 index approached the precipice at 1040 and for now at least has backed away and found a little breathing room.

With anxiety running high, investors have embraced the flight-to-safety trade once again. The current preference is for U.S. Treasuries, the dollar (UUP), and to a lesser extent, gold (GLD).

While the most conservative plays are necessarily on the short end of the U.S. Treasury yield curve (represented by ETFs such as SHV and BIL), note that in the chart below I have included the long bond ETF (TLT) to provide a higher volatility bond for comparison purposes. The trend is fairly well established at this stage. Of the flight-to-safety vehicles, U.S. Treasuries are attracting the most interest (perhaps due to deflationary concerns), followed by gold, with the dollar the least enticing alternative, today’s 0.8% rally notwithstanding.

Not shown in the chart below is VXX (iPath S&P 500 VIX Short-Term Futures ETN), which is more of a speculative bear market play or a hedge than a flight-to-safety alternative. During the period from the April 23^rd high through yesterday (June 28^th) VXX is up 53.4%, with a volatility level of 94.5.

For more on related subjects, readers are encouraged to check out:

• Chart of the Week: The Flight-to-Safety Trade
• Chart of the Week: 10-Year Treasury Note Yield
• Yield Curve Looks Just Like May 2003
• The Battle for Bond ETF Supremacy

[source: ETFreplay.com]

Disclosure(s): short VXX at time of writing

Great Metaphor for the Financial Markets

For the patience-impaired, this is one instance where the wait is worth it...

Disclosure(s): none

Chart of the Week: The Weekly SPX and Fibonaccis

This week’s chart of the week is simple and straightforward: weekly bars of the S&P 500 index.

In the chart below, I have added Fibonacci retracement levels to demonstrate that the rally off of the March 2009 lows has been stuck in a post-Lehman Fibonacci retracement zone (i.e., between the 38.2% and 61.8% retracement levels) for the past ten months.

The chart is essentially an updated version of a chart I showed on April 13 in Technical Resistance Looms in the S&P 500 Index. At the time I said, “This seems like a good time to play the Fibonacci retracement card and suggest that significant technical resistance looms for the SPX, particularly in the area of 1225 and above.” Now some eleven weeks later, Fibonacci levels are suggesting that we have a good chance of seeing range-bound trading in the area of SPX 1014-1229.

Of course, in order to define a trading range, stocks are going to have to do a more convincing job of establishing downside support. For the moment, at least, it is the bottom of this (potential) trading range that looks a little shaky.

For more on related subjects, readers are encouraged to check out:

• The Elusive Trading Range
• Sideways Markets, Covered Calls and the RUT
• One Approach for Volatile Sideways Markets
• Technical Resistance Looms in the S&P 500 Index
• Open Thread: Do Fibonacci Retracements Work?

[source: StockCharts.com]

Disclosure(s): none

A German Perspective on the Recovery

Yesterday, in Fundamentals and the Recovery, I offered up a snapshot of the recovery in the United States in terms of industrial production, income, employment, and retail sales.

Today, I thought I’d at least temporarily jettison my overly Americentric view of the investment universe and look at the recovery in the same areas through the eyes of Germany. As the graphic below shows, relative to past periods of economic recovery, the current recovery looks more typical than atypical. With a continued weak euro, I would not at all be surprised to see the performance of the German economy to begin to accelerate to the upside, which would bode well for the Germany ETF, EWG.

Of course, the bigger issue may turn out to be the exposure of German banks to Greece and some of the other troubled euro zone economies, per a recent Wall Street Journal, Data Show Big Exposure for Banks in Euro Zone.

For more on related subjects, readers are encouraged to check out:

• Recent Performance Divergence in European ETFs
• Fundamentals and the Recovery
• Chart of the Week: A Broader Look at the U.S. Economic Recovery
• Chart of the Week: Four Key Economic Indicators
• Chart of the Week: Retail Sales Recovering

[source: Federal Reserve Bank of St. Louis]

Disclosure(s): none

Fundamentals and the Recovery

On several occasions in the past, I have leaned on the Federal Reserve Bank of St. Louis for a graphical representation of the current state of the economic recovery. The last time around, about four months ago in Chart of the Week: A Broader Look at the U.S. Economic Recovery, I observed:

“Relative to previous recoveries, which typically follow a bottom that comes some 8-12 months after the top, the current recovery is by far the weakest in the 62 years of data for employment and real income. Industrial production has shown the sharpest rebound, but is still the weakest bounce in 62 years. The only one of the four indicators that is above the historical low is retail sales – yet even here the margin is a narrow one.”

Looking at an updated version of industrial production, income, employment, and retail sales, I am surprised by the signs progress. Now both industrial production and retail sales are near the historical averages for all a recoveries [prior graphs showed performance following a prior business cycle peak] and both employment and income have started to move above historical lows.

The data in the graphic below do not yet reflect the changes in the economy following the expiration of the federal housing tax credit, nor the recent developments in the European sovereign debt crisis. This is undoubtedly a weak recovery, but so far at least, not as bad as many feared it would be.

For more on related subjects, readers are encouraged to check out:

• Chart of the Week: A Broader Look at the U.S. Economic Recovery
• Chart of the Week: Four Key Economic Indicators
• Chart of the Week: Retail Sales Recovering
• Chart of the Week: Four Key Sectors Struggle

[source: Federal Reserve Bank of St. Louis]

Disclosure(s): none

Expiring Monthly June Issue Recap

Just a quick note to remind readers and potential new subscribers that Monday marked the publication of the June issue of Expiring Monthly: The Option Traders Journal.

For those who may be interested in what this magazine is all about (hint: we don’t follow SCI, HI, STEI, STON and CSV), I have attached a copy of the Table of Contents for the June issue below. This month the magazine focuses on two subjects in particular: options strategy backtesting and volatility. The feature article, penned by Jared Woodard, puts three volatility trading strategies through their paces via backtesting.

My contributions to the June issue include a Follow That Trade segment consisting of a VIX bear call spread; my recurring column, Charting the Market; and the introductory Editor’s Note.

As a thank you to existing subscribers and inducement to potential new subscribers who may be on the fence, we are offering a “Guess where VXX will close on July 16^th” contest. There will be two winners: one existing subscriber is slated to win a Volatility Essentials package from iVolatility.com; and one non-subscriber will win a free one year subscription to the magazine. For details on the contest, follow the link above.

Subscription information and additional details about the magazine are available at http://www.expiringmonthly.com/.

For more on related subjects, readers are encouraged to check out:

• Expiring Monthly May Issue Recap
• Content Update
• Expiring Monthly: The Option Traders Journal Launches Today

[source: Expiring Monthly]

Disclosure(s): I am one of the founders and owners of Expiring Monthly

The Art of Being Wrong

Kathryn Schulz, a self-described ‘wrongologist,’ is the author of Being Wrong: Adventures in the Margin of Error.

I can’t say that I have read her book, but I think her interview with Victor Niederhoffer at Slate, Hoodoos, Hedge Funds, and Alibis: Victor Niederhoffer on Being Wrong should be required reading for all investors. One of the most difficult things to do in life is to learn from the mistakes of other people – and while Niederhoffer is famous mostly for his two large blowups, he is also reflective, insightful and a fun read. Perhaps more importantly, outside of those two blowups, Niederhoffer has a superb track record and is highly regarded for his trading skills. Many think that Niederhoffer’s blowups should negate the value of what Niederhoffer says. I think quite the opposite. Here is a trader we can all learn from, including both his successes and his failures.

For instance:

“Unfortunately I was so successful for so many years in that particular field that I began to believe in my own success. I thought that because my method worked in markets that I knew about and had quantified, I could apply the same methods to something I didn't know about.”

And later:

“I didn't have the capital to be strong enough to provide a backup in the case of unforeseen events. I didn't have a proper foundation. I was playing with adversaries who were stronger than me and who actually made the rules. My base of operations was not diversified enough, and I was vulnerable to forces I couldn't withstand. I was too vainglorious. In my opinion, those are recurring errors behind most disasters.”

But don’t stop at these excerpts. Click through to read the full interview at Slate.

If you are interested in Schulz thinking in a broad range of subjects outside of the investment world, Slate has captured a great deal of her content in her column The Wrong Stuff.

Many others have written about Niederhoffer. One of the better pieces I have encountered is John Cassidy’s lengthy feature in The New Yorker from October 2007 (coincidentally, right at the market top), with the title, The Blow-Up Artist: Can Victor Niederhoffer Survive Another Market Crisis? Another interesting article about Niederhoffer comes from James Altucher from February of this year and appeared in the Wall Street Journal as Ten Things I Learned While Trading for Victor Niederhoffer.

Niederhoffer has two books of his own that have quite a few valuable insights:

• The Education of a Speculator (1998)
• The Practical Speculator (with Laurel Kenner, 2005)

The prolific Niederhoffer also co-authors the Daily Speculations blog with Laurel Kenner. I am a big fan of that blog, but feel obliged to comment that the steady stream of content can be a little overwhelming at times.

For more on related subjects, readers are encouraged to check out:

• A Dozen Things My Trading Accounts Are Thankful For This Year
• On Trading Rules and Guidelines
• Chart of the Week: U.S. Open Scorecards
• Comfort Zones, Focus and Thinking Like a Biotechnology Firm

Disclosure(s): none

Chart of the Week: U.S. Open Scorecards

I was pulled in quite a few different directions when considering this week’s chart of the week. There was the rally in the euro, some positive debt offerings in Spain, new highs in gold, BP’s $20 billion escrow fund, etc. On the volatility front, the last week was the first time ever that the VIX fell more than 15% in consecutive weeks.

Of all the things that stuck in my mind this week, however, the one I found the most compelling was the course the United States Golfing Association assembled this week at Pebble Beach to test the world’s best golfers in the world for the U.S. Open championship.

While this was a relatively short course, the challenges posed by natural obstacles, difficult greens and the U.S. Open’s notoriously long and unforgiving rough were such that not one of the 156 golfers was able to break par. In keeping with tradition, the U.S. Open course was set up to extract the maximum penalty for any missed shot.

In fact, as I see it, the championship was decided not by how many birdies a golfer was able to make, but by how well he was able to avoid trouble. The scorecards of the top three finishers tell the story and together comprise this week’s chart of the week. In the end, the winner, Graeme McDowell, persevered by not allowing the course to bully him into anything worse than a bogey. Runner-up Gregory Havret had only one double bogey on his scorecard, but it was just enough to keep him one stroke back from McDowell. Third place finisher Ernie Els, who plays with the demeanor of someone who is always unflappable, ended up with two double bogeys and finished two strokes back. In the end, it was the disastrous double bogeys – and one’s ability to avoid them – that spelled the difference.

The reason the Pebble Beach odyssey stuck in my mind is that it reminded me that traders should approach trading the way they would approach a golf course like Pebble Beach. The goal should be to play for pars and look to capitalize on any birdie opportunities that arise. To the extent possible, this means keeping the ball away from hazards and obstacles, as well as avoiding low percentage plays. It also means not compounding small mistakes by pressing and trying to make up lost shots in a hurry. Impulsive play is almost always penalized; patience and discipline are the only way to survive.

In golf and in trading, it is better to be able to drive the ball into the fairway than to hit it 300 yards and not control where it is going. Consistency, precision, patience and opportunistic aggression. That is the recipe for winning golf and winning trading – at Pebble Beach or in your own back yard.

For more on related subjects, readers are encouraged to check out:

• Bernard Lagat and Trading Strategy
• Comfort Zones, Focus and Thinking Like a Biotechnology Firm
• What My Dog Can Tell Us About Volatility
• Dogs and Earthquakes: Dueling Metaphors?

[source: U.S. Open]

Disclosure(s): none

BP, Put Backspreads and the Disaster Trade

One of the more interesting trading setups is something I call the disaster trade. This type of trade typically sets up after a stock experiences a crushing blow, crashes once or twice and has shorts swirling all around it betting that the company will either fail or become permanently crippled.

This is exactly the type of situation BP is currently experiencing.

One different sort of way to use options to try to capitalize on the BP situation with limited risk is through the use of a put backspread or a call backspread. A put backspread involves selling a smaller quantity of puts at a higher strike and buying a larger amount of puts at a lower strike. Depending upon market factors, this trade can be either a credit or a debit. In the first graphic below, the trade costs $25 to enter (before commissions.)

The optionsXpress graphics below illustrate the logic of a put backspread trade, which was mapped out with BP trading at 31.64 and is structured here as short 10 BP July 30 puts and long 15 BP July 27.50 puts. From a high level perspective, three things can happen with this trade:

1. If BP remains above 30, then the trader loses the $25
2. If BP falls below 22.45, the trade begins to make money at the rate of $500 per point
3. The trade loses money if BP settles in the 22.45 – 30.00 range, with a maximum loss of $2525 at 27.50
   

In sum, a disaster pays off; a mild decline will be painful; and any move up, sideways or slightly down move just about breaks even. (In this case the 15:10 ratio means a $25 loss, but if the ratio were smaller, the sideways to up move would result in a profit. For example, buying 14 July 27.50 puts instead of 15 increases the profitability by $139, so any close over 30 would result in a $114 profit instead of a $25 loss.)

I have included the second graphic to show how optionsXpress uses a lognormal distribution to translate existing options data into an expected probability distribution at the time the July options expire. This helps to visualize the strategy and reinforces the fact that the put backspread is a fat tail disaster play.

Of course, one could flip these graphics around and have a call backspread trade, such as short 10 July 32 calls and long 15 July 35 calls. Here the small profit (about $700 in the example immediately above) would be on the down side and the upward sloping portion of the profit curve would be consistent with a rally instead of a crash.

If you see a beaten down stock that you expect to bounce back strongly, yet still want to make money if the stock continues to sell off, put backspreads are worth investigating. The can be done with out-of-the-money options, as is the case with the examples shown here, using in-the-money-options or with a blend of the two. More broadly, when disaster strikes and you want to place a bet on the situation worsening or improving, backspreads are an interesting way to do so with a defined risk approach.

For more on related subjects, readers are encouraged to check out:

• Crossroads Options
• Turmoil in the Oil Patch

[source: optionsXpress]

Disclosure(s): none

The Elusive Trading Range

During the course of the last year or two, stock market pundits have reminded me a little of politicians in the sense that I have seen a dramatic increase in both the polarization of ideas and the stridency of the tone in which various points of view are presented. To some extent, the two are related and the bifurcation is understandable. Strong macroeconomic winds are blowing and the range of possible outcomes now seemingly includes quite a few more extreme scenarios than it did just a few years ago. The move toward a more decentralized media has also probably reinforced this trend.

When it comes to politics, the decline of the moderate thinker can be at least partly explained by the nature of the institutions and political processes that tend to herd voters into opposing camps. In the investment world, the shrinking of the centrist philosophy is more difficult to understand. After all, if two equally extreme scenarios each have the same probabilities associated with them, then the mathematical expectation is zero and represents no change at all.

All of this leads me to the chart below, which utilizes monthly bars in the S&P 500 index. Five strong trends jump out in this chart:

1. 1990s bull market, capped by the dotcom craze
2. 2000-2002 technology-led bear market
3. 2002-2007 rally, with easy money and the Greenspan put
4. 2007-2009 bear market, with real estate and financials leading the way down
5. 2009-2010 bouncing off the bottom

Based on the chart alone, investors can certainly be excused for being conditioned to expect stocks to trend strongly in one direction or the other. The truth is that we haven’t seen a good sideways market in a long time and investors just don’t expect a trading range to develop any more. The centrists have either slowly gone broke or have been banished to Extremia (just west of Siberia, if I recall correctly.)

Since nobody else is talking about a trading range, I thought I would stick my neck out and predict that SPX 666-1219 will likely define a trading range going forward, but perhaps more importantly, the tighter 1040-1219 range could also serve as a trading range for a surprisingly long period. Just because there are two large extremist camps doesn’t mean that both bulls and bears can’t be wrong.

If the markets do settle into a trading range, then options selling strategies are likely to perform well, particularly if high volatility persists. This means covered calls may soon be back in vogue, with more advanced traders looking at the likes of straddles, strangles, butterflies and condors.

For more on related subjects, readers are encouraged to check out:

• Sideways Markets, Covered Calls and the RUT
• One Approach for Volatile Sideways Markets
• The Value of Selling Covered Calls
• Can Selling Options Make You a Better Trader?
• The Options Opportunity Matrix

[source: StockCharts.com]

Disclosure(s): none

Bernard Lagat and Trading Strategy

Over the weekend I had an opportunity to watch on television as Bernard Lagat ran the 1500 meters in the adidas Grand Prix track and field meet in New York. Just one week after establishing a new American record at the 5000 meters distance in Oslo, Lagat ran a tactically strong race, but was outkicked at the end and finished in fifth place.

A world champion at both the 1500 and 5000 meter distances in 2007, Lagat’s 35-year-old body is now probably better suited to longer distances than 1500 meters, where he was once the second fastest man in history. The graphic below show’s Lagat’s progression over the course of the past dozen years or so. Note that Lagat peaked in 2001 in the 1500 meter distance and his times have gradually slowed since then. On the other hand, while Lagat's speed may be on the decline, his endurance is improving, with the proof that he is now 36 seconds faster in the 5000 meters than he was in 2001.

After watching the race, it occurred to me that something similar has happened to my trading – and at least anecdotally to a large number of other traders. Back in 2001, the majority of my trades were day trades, but as my opponents have become younger, faster and more technologically sophisticated, I find myself, like Lagat, refocusing my efforts on longer time horizons, where my skills and experience match up better than they do against the high-frequency trading crowd.

Whereas Carlos Lopes won the Olympic marathon at the age of 37, I can almost guarantee that Usain Bolt will not win the 100 meters at the 2024 Olympics. Similarly, it makes little sense for me to return to day trading when my skills are a better match for the longer distance events.

As traders, we each need to know our optimal time horizons. Of course, it is important to continue to experiment with strategies across a broad range of time frames, but ultimately we need to be specialists in a specific time frame that best suits our skills and personality, yet preparing for the possibility that our optimal time horizon may be a moving target as we accumulate new knowledge and expertise.

[As an aside, I intend to stray more frequently into the realm of metaphor and analogy in the future in order to provide a broader context in which to discuss trading in general and volatility in particular. With this in mind, I have decided to tag these posts (as well as today’s post and some previous efforts) with the label of “farther afield.” Let the journey begin.]

For more on related subjects, readers are encouraged to check out:

• Comfort Zones, Focus and Thinking Like a Biotechnology Firm
• What My Dog Can Tell Us About Volatility
• Dogs and Earthquakes: Dueling Metaphors?
• The Importance of Time Horizons

[source: DiamondLeague.com]

Disclosure(s): none

Chart of the Week: VXX Options

Launched just two weeks ago, VXX options have already attracted a great deal of interest, averaging approximately 17,000 contracts traded per day. While this number is impressive for such a short period of time, it still pales when compared to the 260,000 or so contracts in VIX options that are traded on a typical day.

As the chart of the week below (which uses VXX data from May 23 to the present) shows, VXX call volume has been running at about twice the rate of VXX put volume. It is far too early to determine whether VXX options data may flag smart money or dumb money, but it is worth noting at this juncture that the biggest spike in VXX call volume (green bars at bottom) preceded a nice jump in VXX. On the other hand, the second biggest single day volume in VXX calls came last Wednesday, the day before the SPX jumped 3.0% and caused volatility to plummet.

Going forward, I am likely to make VXX options a favorite topic in this space, particularly as VXX options can be used in combination with the underlying, the VXX ETN.

For more on related subjects, readers are encouraged to check out:

• CBOE Launches Options on VXX and VXZ
• Chart of the Week: VXX Celebrates One Year of Futility
• Chart of the Week: VXX vs. VIX
• Why the VXX Is Not a Good Short-Term or Long-Term Play
• VXX Calculations, VIX Futures and Time Decay

[source: Livevol Pro]

Disclosures: short VXX at time of writing

The Week in VIX and Volatility Posts

I have seen more excellent posts and articles on the VIX and volatility in various corners of the internet this week than I can recall seeing in any previous week. There were so many nuggets that I probably overlooked several of them, but off the top of my head, here are a few volatility links that I feel are among the best of the bunch:

• Extreme Fear in S&P 500 Options Skew (SurlyTrader)
• So You Think You Know How to Trade the VIX? (Adam Warner, OptionsZone.com)
• On the Recent Volatility Predictions Using Interest Rates (Don Fishback)
• VIX Skew - What It Indicates and How Accurate It Is (Ophir Gottlieb, LiveVol.com)
• Probably Get Ready for Another Upturn (Francisco Lorca-Susino, Volatility Forecasting)
• Beware of the Pitfalls of Selling Volatility (Chris McKhann, OptionMONSTER)
• Entering the Volatility Fray (Tyler Craig, Tyler’s Trading)
• And They Trade VXZ Too (Adam Warner, Daily Options Report)
• What an Up Day (Mark Sebastian, Option911)
• VIX Mid-Term Futures (VXZ) – Butterfly Bets on Vol Drop (Ophir Gottlieb, LiveVol.com)

Readers, feel free to flag any others that I missed in the comments section.

Disclosure(s): short VIX at time of writing

Interesting Chart Utilizing Put to Call Ratios and Volatility

I received quite a few excellent submissions for last week’s chart of the week contest and three subjects seemed to attract the most attention of chartists: put to call ratios; volatility and market breadth.

One chart that did a superb job with put to call ratios and volatility was submitted by Greg Neal. Actually, this was not a single chart, per se, but more of a series of charts which tell a compelling story. Whereas Greg submitted his chart over the weekend, I have used updated data through today and have cut Greg’s chart to two sections to make for easier reading below. In terms of key takeaways, I’ll let the chart and Greg’s annotations speak for themselves.

To find a live version of this chart that is continuously updated at StockCharts.com, click here. The full complement of Greg's public charts at StockCharts.com can be found here.

For more on related subjects, readers are encouraged to check out:

• Yesterday’s Unusually Low ISEE Equity Number
• Chart of the Week: CBOE Equity Put to Call Ratio Nears All-Time Low
• Chart of the Week: Weekly Volume Flow (June 2010 contest winner)
• Chart of the Week: Total Put to Call Ratio (March 2010 contest winner)

[source: StockCharts.com and Greg Neal]

Disclosure(s): none

Weekly Chart of VIX and SPX

As I did the last time around, I have elected to share some of the many excellent entries I received in connection with last week’s chart of the week contest.

Building on the long-term perspective of the winning entry, Shift CTRL Group submitted an excellent VIX chart that was featured in a recent post, Is the VIX Signaling a Possible (Short-term) Bottom? I have reproduced the chart in full below, but in the original, the author comments:

“The lower study shows a 3,13 MACD (without the signal), a reading of ~9 shows to have previously been indicative of a rebound (if at least for a short time)…”

Click through for the full commentary and some dialogue about this chart in the comments section.

For more on related subjects, readers are encouraged to check out:

• Chart of the Week: Weekly Volume Flow (June 2010 winner)
• Chart of the Week: Total Put to Call Ratio (March 2010 winner)

[source: StockCharts.com and ShiftCTRL Group]

Disclosure(s): short VIX at time of writing

Chart of the Week: Weekly Volume Flow

Thanks to Charlie Thompson for submitting this week’s winning chart of the week entry. Once again there were quite a few very strong entries. Perhaps because I have lately been focusing much of my trading research and development in the area of volume and perhaps because I see so little top notch analysis of volume patterns, I found Charlie’s chart to be particularly compelling. Also, I tend to place most of my emphasis on short and intermediate-term data and analysis in this blog – and given the events of the past month or so, I think the present is an excellent time to step back and view the investment landscape with a wide angle lens.

For the record, $NYUPV is the total volume of all advancing stocks on the NYSE and $NYDNV is the total volume of all declining stocks on the NYSE. The green bars thus represent a ratio of $NYDNV to $NYUPV. The TRIN is also known as the Arms Index. I discuss the how the index is calculated in Bullish TRIN as Year Winds Down.

For his efforts, Charlie also wins a free one year subscription to Expiring Monthly: The Option Traders Journal.

As I did the last time around, I will also highlight some of my other favorite entries in the next few days. For those who may be interested, the March winner and three honorable mention charts can be found in the links below.

• Chart of the Week: Total Put to Call Ratio (March winner)
• Correlation of VIX and “VIX Index” Searches on Google (honorable mention)
• Annotated VIX Downtrend Symmetry Channel (honorable mention)
• VIX Price Channel Chart (honorable mention)

For more on related subjects, readers are encouraged to check out:

• Chart of the Week: Extreme Readings for Up Volume vs. Down Volume
• Chart Porn
• Arms Index [TRIN] Going Back to 1992
• Chart of the Week: NASDAQ TRIN
  

[source: StockCharts.com and Charlie Thompson]

Disclosures: I am one of the founders and owners of Expiring Monthly

Chart of the Week Contest Reminder

Well, it certainly has been an interesting trading week.

Since most of you will spend part of the weekend reviewing your own charts and seeking out some of the best of what others have to offer, let this be a reminder that I will be accepting entries in the chart of the week contest through Sunday at 6:00 p.m. PT.

As noted previously, in addition to anointing the winner as official VIX and More chart of the week, I will also award a free one year subscription to Expiring Monthly: The Option Traders Journal to the winner.

Readers can submit a chart of the week entry in the comments section of this post or by emailing me directly at bill.luby[at]gmail.com.

For more on the chart of the week contest, readers are encouraged to check out:

• Chart of the Week Contest: Win One Free Year of Expiring Monthly

Disclosure(s): I am one of the founders and owners of Expiring Monthly

Highest Intraday VIX Readings

With stocks suffering a minor meltdown as I type this (DJIA 9997), I thought I might use the ongoing European sovereign debt crisis and recent May 21^st VIX spike to 48.20 to put the recent VIX spike in the context of the all-time highest intraday VIX readings.

The graphic below captures the six crises which have resulted in VIX spikes above the 40.00 level since 1990. Notably, the 2008 financial crisis stands well above the crowed with an intraday high of 89.53. The other five crises have all seen intraday VIX spikes that have topped out in the 48-50 range, with last month’s spike to 48.20 making the European sovereign debt crisis the 6^th highest threat – at least as far as an implied volatility proxy is concerned – in the past 20 years.

If one were to use reconstructed data going back to 1987, the best estimate is that the VIX (actually the VXO) would have hit about 170.

For more on related subjects, readers are encouraged to check out:

• VIX Approaches Pre-2008 Record Highs
• VXO Chart from 1987-1988 and Explanation of VIX vs. VXO
• Volatility History Lesson: 1987
• Chart of the Week: VXV and Systemic Failure
• Forces Acting on the VIX

Disclosure(s): short VIX at time of writing

Yesterday’s Unusually Low ISEE Equity Number

Yesterday’s ISEE equities only closing value of 100 was sufficiently low that only once in the last year has there been a lower number.

Recall that the ISEE is a call to put ratio (or an inverted version of the more common put to call ratio) and that the equities only variant is probably the best way to tap into the options habits of the retail options trader.

The chart below goes back to February 2009 to highlight with a green arrow the only two instances where the ISEE equities only index closed below 100. Note that both instance occurred just prior to an important bottom.

In the current context, the fact that the low ISEE equities only number appears just after what I think may be an important bottom raises two distinct possibilities:

1. SPX 1040 may not turn out to be a bottom…OR
   
   
2. SPX 1040 has a very good chance of holding as many investors are still firmly in the bear camp and have yet to come around to the long side

For more on the rationale behind the second alternative, which is the direction I am leaning in at the moment, Checking for Athiests (and some of the other posts linked below) may be of interest.

For more on related subjects, readers are encouraged to check out:

• Checking for Athiests
• Equity Put to Call Ratio Hits Ten Month Low
• Chart of the Week: Total Put to Call Ratio
• CBOE Equity Put to Call Ratio Poised to Print Warning
• A First Look at the ISEE

[source: StockCharts.com]

Disclosure(s): none

Chart of the Week Contest: Win One Free Year of Expiring Monthly

I had so much fun with the first reader submission edition of the chart of the week back in February that I have decided to make the contest a recurring feature on the blog. So this Sunday, I will be publishing a reader submission as the official VIX and More chart of the week. As a further enticement, I will also award a free one year subscription to Expiring Monthly: The Option Traders Journal to the winner.

I do my best to keep the “rules” at a minimum for this endeavor, but for the record:

I will select one winner in my own idiosyncratic and arbitrary manner, but will give strong preference to ideas and graphics that are insightful, topical, creative and fresh. Extra points will also be given to provocative and/or humorous submissions. In terms of subject matter, I am open to anything that is at least loosely associated with investing and economics. Back in February, the majority of the submissions were related to the VIX, but given all the interesting developments in the markets in the last month or so, I would hope to see charts covering a broad range of ideas. All graphics should be submitted no later than 6:00 PT on Sunday, June 6^th.

Readers can submit a chart of the week entry in the comments section of this post or by emailing me directly at bill.luby[at]gmail.com.

The last time around, Amir from Las Vegas took top honors and won the free subscription. His winning chart is below. Since there was a strong clamor to see some of the other entries, I subsequently published three charts with an honorable mention designation. All four charts are linked below:

• Chart of the Week: Total Put to Call Ratio (winner)
• Correlation of VIX and “VIX Index” Searches on Google (honorable mention)
• Annotated VIX Downtrend Symmetry Channel (honorable mention)
• VIX Price Channel Chart (honorable mention)

For more on related subjects, readers are encouraged to check out:

• Top Submission for Chart of the Week Wins One Free Year of Expiring Monthly
• Expiring Monthly May Issue Recap
• Content Update
  
• Introducing…Expiring Monthly: The Option Traders Journal
• Charting 101

Disclosure(s): I am one of the founders and owners of Expiring Monthly

Turmoil in the Oil Patch

Several factors have combined to create turmoil in the oil patch. Most notably, the Deepwater Horizon oil spill has hammered the stocks of BP and Transocean (RIG), while tainting the entire oil and oil services (OIH, XES) sector. On top of the spill, the European sovereign debt crisis has generated concerns about an economic slowdown of the European region and beyond, while manufacturing data and other news out of China hints at the possibility of weakness in the most significant area for future growth in energy demand.
In short, valuations across the sector are way down and yet the long-term supply and demand imbalance will likely suffer no more than a small dent as a result of the events of the last couple of months.
The energy sector has a very promising future and I am looking to add to existing positions on weakness. As the chart below shows, there are some indications that crude oil (USO) may have put in a bottom and the exploration and production ETF (XOP) may also be beginning a bottoming process as well. Outside of fossil fuels, alternative energy plays in solar (TAN, KWT) and wind (FAN, PWND) are somewhat suspect in that critical governmental subsidies from the likes of Spain and Germany appear to be a victim of the sovereign debt crisis. Still, these alternative energy plays, including some broad-based alternative energy ETFs (GEX, PBD), have also been marked down dramatically and should also benefit as crude oil prices start to rebound and governments come under increasing pressure to make use of ecologically sustainable energy sources.
For more on related subjects, readers are encouraged to check out:

• Clean vs. Not-So-Clean Energy
• Energy ETFs and Katrina
  
• Chinese Solar Stocks on the Rise
  

[source: ETFreplay.com]

Disclosure(s): long OIH and XOP at time of writing