Last week was a rough one for U.S. equities, as the major indexes each gave back at least 1%. However, an upwardly revised second-quarter gross domestic product (GDP) and positive consumer confidence reading (both of which came out on Friday) helped stem the tide, as stocks finished the week on a decisively positive note. Plus, as Schaeffer's Senior VP of Research Todd Salamone points out, there are still plenty of technical and sentiment indicators suggesting that a bear market is far from imminent.
Finally, we close with a preview of the major economic and earnings events for the week ahead, plus our featured sector.
Notes from the Trading Desk: High VIX, Small-Cap Support, and Other Reasons Not to Fear
By Todd Salamone, Senior VP of Research
"With SPX 2,000 still in the picture, the NYSE Composite's (NYA - 10,989.57) 11,000 millennium mark continues to be a barrier, as does the $100 century mark on the PowerShares QQQ Trust (QQQ - 99.98) ... The sentiment backdrop continues to suggest that if pullbacks occur, they will be modest ... there are a few risks to the short-term outlook, specifically: 1) Due to expiration of VIX futures options this past week, VIX call open interest has decreased from 7.6 million ahead of Wednesday's VIX expiration to 5.0 million at present, implying some market participants that typically hedge no longer have portfolio protection ... 2) volatility speculators have given up on making bets on rising volatility, which is normally associated with a weaker market ... 3) an unusually large skew in how out-of-the-money (OOTM) SPY put options are priced relative to OOTM call options ... when a large skew is present during an advance, weakness has followed in the past."
-Monday Morning Outlook, Sept. 20, 2014
"Our weekend comments on large $SPY skew (has grown even wider this morning when looking at Oct options)"
-@ToddSalamone on Twitter, Sept. 22, 2014
"$VIX closed at 15.64 yesterday, which is roughly 50% above 2014's low close in July. Many peaks have occurred 50% above lows"
"$IWM Huge put open interest at 110 strike, with this area essentially marking bottom of 2014 range. Key level in days ahead."
-@ToddSalamone on Twitter, Sept. 26, 2014
The bad news (for equity bulls):
The good news (for equity bulls):
VIX with a horizontal line at 15.48 -- 50% above its July closing low of 10.32
Finally, a topic we discussed last week, and need to follow up on this week is the huge put skew on SPDR S&P 500 ETF Trust (SPY - 197.90) October options. In other words, options on put strikes 5% below SPY's current price have been extremely expensive relative to call strikes 5% above the current SPY price. When measured in terms of implied volatility (IV), the skew (put IV divided by call IV) is at multi-year highs. We observed last week that when this ratio reaches a relatively high level during a rally, market weakness soon follows, and this time around, weakness began soon after the market opened on Friday, Sept. 19. The skew, which is shown below with a 10-day moving average of the daily ratios, remains at multi-year highs. However, during the past couple of sessions, single-day readings have not been as extreme as the 10-day average, perhaps hinting at a roll-over in this ratio from an extreme level. A roll-over on the heels of a pullback has bullish implications, and such a scenario may very well be imminent.
The Case for Big Moves in IWM and QQQ
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