Tuesday, September 5, 2017

Investment Diary

2017.10.27 Indicator Primer - this entry is dedicated to new readers and others to provide a quick overview of the various indicators I use and what they mean
  1. The VIX call indicator is the last indicator I added and is based on the last two years of noticing that the VIX P/C went to extremes at market tops and bottoms.  Finally, I identified the source as the VIX calls.
    • Why does it work?  Let's say that a member of the PPT (buyer of last resort) which happens to be a big bank (GS) has an arrangement with the govt (FED) so that for the use of personal capital to prop up the markets, the bank is given advance notice of a potential market disruptive event (Don and Kim nuking it out).  Said bank then approaches a large option writer (pension fund as CalPERS or TRS/TX who writes options to collect premium income) to write $200M VIX calls (1M contracts $2/call). After selling VIX calls, writer sells ES futures to hedge position, driving down market temporarily.  Market goes up for a few days after making writer fell good, then "unexpected event" happens causing sharp drop in stock prices.  Bank sells calls after doubling purchase price to panic buyers, then steps in to buy up market, driving stock prices higher.  Bank wins, option writers win, panic buyers lose.
    • How is it calculated? Two things that I wanted to show were how the number of VIX calls varied compared to the average  and how they varied compared to stock prices.  There are probably an unlimited number of ways to show this, but I decided on using the number of calls divided by the 10 day simple moving avg and to graph the values I subtracted 1.0 to make the y-axis 0.0.  For the SPX stock price, I used the SPX divided by the 20 day simple moving avg, subtracting 1.0, and converting to a percent.  For comparability graphing, the SPX % is divided by two.  The logic is discussed here.  The result was fairly easy to see in a back test prior to the Aug 2015 flash crash, where the volume rose by about .5 or 50% from the lows at market peaks.

    • Current examples are more complicated with the popularity of VIX hedging by smart money and speculation by dumb money causing spikes at bottoms as well. Below is EOM Sept.

    1. The Short Term Indicator (VXX $ volume and Smart Beta P/C) is an equal weighted composite of the two most highly correlated indicators with the SPX ex ante (future) returns discussed in the methodology section of the Indicator Scoreboard below.  The VXX $ volume is the daily price times volume divided by a long term moving average.  The Smart Beta P/C was derived from a couple of articles I read about smart beta portfolio management where one buys out performing stocks (Apple, Google, Amazon) and hedges with a similar index (NDX).  I decided to use a similar put/call ratio using the CBOE listed ETF puts/Equity calls.  The results were better than expected and the indicator soon became one of my favorites.

    2. The overall Indicator Scoreboard was developed in March thru May of 2016 starting with 16 indicators listed here in Mar 27.  The Smart Beta P/C was added on Apr 3 here.  On Apr 23, I developed a table showing the correlations between about 20 indicators from Apr 2014 to Apr 2016 and the ex ante SPX returns from 1 to 12 weeks following the indicator data.  The 16 indicators with highest correlations were selected and combined into a composite weighted by the correlations.  The standardized variable approach was used to allow variable comparability.  The total was then scaled to show a range of +16 (all bearish, strongest BUY) to -16 (all bullish, strongest SELL).

    3. ETF short/long ratios were developed to show the same relationship as Put/Call ratios using daily $ volume for ETFs representing the SPX, NDX, HUI, and TNX plus a couple of sector indices.  These are considered as money flow indicators showing the ratio of short/long $ amounts invested in each index.  As with the other indicators, a move to a high bearish sentiment (+1 std.dev. over mean) is a BUY, while low sentiment (-1 std.dev) is a SELL.

    4. Options Open Interest was added on May 20 here as a means of improving my short term timing.  The methodology is used at Sassy Options for week to week timing, but I found it informative to look out as far as three months.  Open interest in puts represents support for stock prices, and like-wise calls represent overhead resistance.  Once support/resistance is broken something called delta hedging, driving prices further in the same direction, can occur when the option writers are forced to hedge their losses by buying futures (price above calls) or selling futures (below puts).  I have used this appproach for SPY, GDX and VIX, but it can be used for any option.  The most common approach is to identify support/resistance zones much like EW pivots.  Below are a couple of charts from July 22 for the month of Oct where the SPY showed strong put support and little call resistance up to 249, while the VIX showed very strong call resistance above 14.  The conclusion was that any pullback in Aug would be reversed strongly into Oct.

    2017.09.05 - of interest to day traders
    • Today, I noticed a repeat of a pattern that started the week before the August options exp and since next week is options expiration, perhaps we are seeing a repeat.  There were two items in particular, the first is the options open interest.  I generally do my weekend posts on Sat, but sometimes the open interest changes significantly since option contracts settle on Sat evening. The last time in Aug, I saw the update at Sassy Options and posted the update on Twitter, but two days later the market crashed thru the "new put" support, so I thought it may be a data error.  However, the same thing happened this weekend.  My conclusion using the OI chart here was that we would see a drop to SPY 246 (act 245) early in the week, while Sassy concluded the SPY would stay over 247 with the "new put" support.  What this tells me is that this is a "smart money" indicator, similar to VIX calls, where someone has advanced knowledge of a selling event.
    • The second similarity to August was the CBOE put/call intra-day update.  On Aug 10, the market opened flat/down but the P/C ratio total was 1.4 with the SPX p/c ratio the first half hour almost 8.0 - the SPX close was down 36.  Today;s first half hour total was 1.24 with the SPX only at 5.0.  Again "smart money" seems to know what is going to happen before it happens.
    • Probably a coincidence, but Aug 7 the SPX closed at 2481, Wed exp week closed at 2468 and Fri exp closed at 2426.
    © 2017 SentimentSignals.blogspot.com


    1. Arthur, you can get a live update of the charts you get from Sassy at: opricot.com/ticker/spy/optiongraphs

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