In order to provide more transparency into the contrarian methodology and hopefully give insight into the smart moneys mindset I am going to start sending the newsletter out on Tuesday and Thursday. The Thursday edition will include commentary on the Investors Intelligence polls.
The CBOE Equity Put/Call Ratio
Last Fridays gap up in the markets and close higher provided ample reason for bearish option traders to switch gears and consequently buy calls. The quick shift in sentiment brought the CBOE Equity Volumes Put/Call ratio down to 0.505. This sharp decline caused the 10 and 20 day moving averages to stop their advance upward. Last Thursday, the 10 day moving average peaked at 0.893. As of last night, the 10 DMA closed at 0.861 while the 20 DMA closed at 0.793. As mentioned last week I am going to switch the signal on the initial reversal of the 10 day moving average. Therefore, the signal is now on a Positive bias and will become confirmed once the 10 day moving average crosses below the 20 day moving average. It should be noted that the 20 DMA closed a little higher than Fridays close (0.792). The Negative signal will return if the 10 day moving average ticks upward again. SIGNAL: POSITIVE BIAS
The CBOE Volatility Index ($VIX)
Last week I mentioned that new money shouldnt buy into the Negative delta (short) bias until the $VIX falls to touch the 10 day moving average, assuming that the signal will still be negative. The 10 day moving average is at 26.80 while the 20 day moving average is at 23.59. As the chart shows, on Friday the $VIX dipped to the 10 day moving average on the initial pop in the SPX. That would have been an excellent time to put new negative Delta money to work. Then you would have been properly exposed to Mondays decline. Since the 10 and 20 day moving averages continue to rise, the Signal remains on a Negative bias. In addition, the current trading high/low range of the $VIX is 26 36 with the 20 day moving average is the low end of the range. Once the $VIX closes below the 200 day Upper Bollinger band, the low range will become the 200 day moving average. Volatility is high which usually presents occasional buy signals. However, a patient trader might reduce negative deltas once the $VIX closes below the 20 DMA and add negative Deltas on a test and bounce off the 20 DMA. The 10 day moving average is at 30.48 which is almost as high as the July spike in the $VIX. SIGNAL: NEGATIVE BIAS
Robert J. Ogilvie