06/08/2013 Weekend Update

[Al_Dente]

CORRELATION STUDIES:

In McClellan daily letter, his wit wrote about "trader logic", I posted a few charts friday am (on thursday nite forum, charting the discrepancy between CPCE (equity only) and CPCI (index only), his point seemed to be that participants do not expect stock prices to go down but they do expect
index prices to go down.

Thanks joe
That sounds like option traders buying calls on single stocks (CPCE),
while buying put-protection on the whole index (CPCI).
That makes sense.
Could u re-post that McClellan link pls thx

[Heck]

CORRELATION STUDIES:
The Volatility indices were designed by dyslexics (the Put/Call Ratios were too).
So I usually invert them so that a spike up in inverted-volatility should correspond with a spike up in SPY, and the opposite with spikes down. It’s just easier for me to “read”.
So this correlation study is also inverted. Top panel is inverted-VIX with SPY in grey behind, and second panel is inverted correlation, which should be in agreement with the top panel.
THE POINT IS that this year appears to be very different from last year.
Note that last year, SPY liked to BOTTOM when 1/VIX was at 100% perfect correlation (neon green boxes = 100% perfect correlation, and the vertical dashed lines represent SPY bottoms)
Meaning: when everybody is perfectly aligned…. they’re wrong…. when the options traders (VIX) get 100% perfectly aligned with SPY…. it turns….
However this year the correlation hit 100% only once, in Feb, and it was a fail [blue box].
Otherwise, the options traders (VIX) have not been in 100% perfect sync with SPY all year [aka: they have not believed in this rally….. they have been more inclined to buy put-protection rather than long calls for much of the year…]

I AM REQUESTING comments on this, especially from folks who study correlations, as I don’t really understand the current implication here.
[I don’t need any comments on inverting the VIX…. It’s just easier for me…. that’s all]
[ps: vote snake sunday: https://stockcharts.com/public/1684859]

69correlation_png.png

Speaking of correlations, whether or not opening long options transactions are direct or inverse sentiment indicators may depend on implied volatility option premiums.

(When premiums are overvalued, they tend to be sold. When they are undervalued, they tend to be bought.)

This could account for high volatility Equity Options being a contrary indicator and low volatility Index options being a direct indicator.

With VIX 15.14 on the SPY and ISE ISEE Call/Put opening long ETF/Indices as low as 26%, meaning 3.78 times as many opening long Index puts as calls, the smart money seems to be ready for a market downdraft:

http://www.ise.com/market-data/isee-index/

The NEM at the money calls implied volatility is 25.84%, while the NEM at the money puts implied volatility is 56.62%, suggesting a long NEM position may pay off...

[Al_Dente]

CORRELATION STUDIES:

Speaking of correlations, whether or not opening long options transactions are direct or inverse sentiment indicators may depend on implied volatility option premiums.
(When premiums are overvalued, they tend to be sold. When they are undervalued, they tend to be bought.)
This could account for high volatility Equity Options being a contrary indicator and low volatility Index options being a direct indicator.
With VIX 15.14 on the SPY and ISE ISEE Call/Put opening long ETF/Indices as low as 26%, meaning 3.78 times as many opening long Index puts as calls, the smart money seems to be ready for a market downdraft:
http://www.ise.com/market-data/isee-index/

heck thanks very much that is great info

[Al_Dente]

“Washington, D.C., June 5, 2013 — The Securities and Exchange Commission today voted unanimously to propose rules that would reform the way that money market funds operate…”
http://www.sec.gov/news/press/2013/2013-101.htm

[joegamma]

Heck: great info and broader view....needs more digging into skew smiles...

ES Futures reject 1640 area from Friday, here is 1 hr, with bearish divergence, heading south thus far, fwiw

609ES1hr.png (9.8 KiB) Viewed 2234 times

[Heck]

FB Target 16:

http://stockcharts.com/freecharts/gallery.html?s=FB

[Heck]

Except the Smart Money still near record high short, I don't see other usual weekend updates worth blah blah.

[Heck]

CORRELATION STUDIES:

Speaking of correlations, whether or not opening long options transactions are direct or inverse sentiment indicators may depend on implied volatility option premiums.
(When premiums are overvalued, they tend to be sold. When they are undervalued, they tend to be bought.)
This could account for high volatility Equity Options being a contrary indicator and low volatility Index options being a direct indicator.
With VIX 15.14 on the SPY and ISE ISEE Call/Put opening long ETF/Indices as low as 26%, meaning 3.78 times as many opening long Index puts as calls, the smart money seems to be ready for a market downdraft:
http://www.ise.com/market-data/isee-index/

heck thanks very much that is great info

[Heck]

Heck: great info and broader view....needs more digging into skew smiles...

ES Futures reject 1640 area from Friday, here is 1 hr, with bearish divergence, heading south thus far, fwiw

609ES1hr.png

[TWT]

$EURUSD: I maintain the scneario of a ZZ off the February 1 high

[TWT]

$DAX: So far the internal structure of the rebound is favouring the bulls

[joegamma]

CORRELATION STUDIES:
Otherwise, the options traders (VIX) have not been in 100% perfect sync with SPY all year [aka: they have not believed in this rally….. they have been more inclined to buy put-protection rather than long calls for much of the year…]
I AM REQUESTING comments on this, especially from folks who study correlations, as I don’t really understand the current implication here.

The attachment 69correlation_png.png is no longer available

Hi Room: my name is Joe,and I am

not statistically rigorous....
(took me a few tries to pass 'mathematical econometrics' to get a degree in econ many decades ago)

I was reading Kroll and Chande's book and playing with Trin, trying to take out the movements from large changes in upvol or down vol, did not find any holygrails this weekend , because trin is unlimited upside in falling markets, TA often don't mean much.....



Look at the correlation with spy, statisticians might call it fitting the data but thats what the data says , 4 day corr is better fit than 20 or 50.....traders just have short term memories

the 20 day average is not consistent across varying time frames either

[TWT]

$EURUSD: I expect a ZZ from the May 29 lod (Now in the wave B)

[joegamma]

more things for DR AL to ponder...
at least the 20 day average is a bit consistent at a small positive for 4,8,20 day views

[joegamma]

Russell says about the same, a bit more positive,

[TWT]

$USDJPY: Key pair to be monitored

[TWT]

$SPX: if bulls are patient and allow a pullback they could set a textbook bullish pattern shaping the right shoulder of an Inverted H&S (Theoretical target = 1691)