Saturday, March 24, 2012

MCO Update 3/23/12

The McClellan Oscillator is pulling back to retest the low made two weeks ago. We are in the zone for the 39 TD (trading day) and the 13TD cycle low spots. It might have been Friday but I have a hunch it will probably stretch out a little longer into either Monday or Tuesday.

What we don't want to see here is a breakdown in the MCO and its components. The MCO, New Highs and Summation Index have been diverging from the SPX price, moving lower while the SPX moved higher. Late in a move this might be of some concern. However, since the markets made very oversold lows last October, and fear is still prevalent among the investing public, I think what we are seeing is a quiet correction in stocks as investors remain skeptical and exit the market. On the positive side, the Climatic Volume Indicator (not shown here) has remained well behaved and not given any signals that could be seen as the buying climaxes one would expect if the market was forming a top. Some caution is warranted until the indicators quit lagging the price action but my view remains bullish.

This chart is a bit different than the others. It only covers the last three months with the $SPX plotted using hourly data and the indicators using daily data. There is a slight misalignment but it's small, about 1/2 a day.

The SPX with the McClellan Oscillator
Click to enlarge

Friday, March 23, 2012

$BKX Headed much higher

Some observations on the financial stocks. The $BKX chart is looking quite positive for the first time since the 2008 collapse. Ignoring the 2009 overshoot lows, it has been trading in a basing channel between $33 and $58, with most of the trading confined to an even tighter range between $42 and $58. The recent decline below $42 was the result of fears over the Greece banking issues in Europe.

It is not uncommon, in fact it is more frequent than not, for a basing channel to end with one final selloff below the general channel bottom.

This is precisely what happened as a reaction to the Greece/Euro news and the $BKX made a tidy double bottom reversal, did a modest retest of the breakout point at $42, and promptly punched through its 200 WEEK moving average. Currently at the upper Bollinger Band (20Wk 2 Stdev) we could see a slight pullback in the financials to retest the moving average, or not.

The expected move out of the recent double bottom, projects right back to the top of the longer term basing channel, roughly $58. I would expect some pause there ultimately resolving itself with a breakout move higher. The long term base projects to the upper line at $83 and previous resistance. Over the longer term we should see the $BKX over the $100 level.

If the financials go up, so will the indexes. The SPX could go as high as $2000 in the process.

The Financial Index $BKX
Click to Enlarge

TVIX - Pass the Dramamine Please

The $VIX tracking ETF's and ETN's, UVXY and TVIX had a wild week.

And, just to make things interesting Credit Suisse made the following announcement yesterday which let the air out of the tires. From the PDF (link below)

"Credit Suisse Plans to Reopen Issuance of VelocityShares Daily 2x Long VIX Short-Term ETN (Ticker Symbol: “TVIX”) on a Limited Basis

New York, March 22, 2012 Credit Suisse announced today that it plans to reopen issuance of the VelocityShares Daily 2x VIX Short-Term ETNs (Ticker Symbol: “TVIX”) on a limited basis. The ETNs were temporarily suspended from further issuance by Credit Suisse on February 21, 2012 due to internal limits on the size of the ETNs. At present, the ETNs are trading at a premium to their indicative value. "

I've stopped trading TVIX because I don't know how to value it. I made money on it the first go-around but have since stayed away from both TVIX and UVXY. The UVXY traded closer to what I expected 2X the daily change on the $VIX but this week neither seemed to be following the $VIX. Since, especially in the case of TVIX which now trades like a close end fund, they can trade at a premium and when the premium unwinds like it did this week, the hedge gets sheered. (Read the prospectus for these instruments)

I tracked the UVXY/TVIX ratio and in the past it ranged between 2.22 and 2.39, with its centerline about 2.29. It finished the day at 2.19 indicating the TVIX is abour 6% over the middle value.

The TVIX closed at $7.16 and the UVXY at $15.66 so either the TVIX is $0.35 overvalued or the UVXY is $0.80 undervalued.

The problem for me is that there are too many variables to track and utilize when making a quick decision as a portfolio hedge. It worked once but I was lucky.

As noted, I had done research on TVIX earlier and decided to stay away from it. The main reason was that Credit Suisse halted share creation because of their capital risk requirements. This essentially turns TVIX into a closed end fund since there won't be any more shares issued in the near term. This means that investors will do what they did and bid the price up on TVIX if they think the market is going to decline (make the $VIX go up)

However, here's the gotcha. The prospectus suggests that the TVIX will approximate the 2X daily percentage change in the VIX futures contract (plus all that other interest rate stuff)

So hypothetically, if TVIX starts at $10 and the VIX is up 5%, TVIX should go up 10% to $11.

Suppose investors are frightened and bid TVIX up to $11.50. This is usually not a problem because the excess should be priced out the next day. If there was no change in the VIX then TVIX should remain at $11.50 (also no change from the previous day's inflated price) but it is more likely it gets sold down during the day to its fair value or $11.

BUT, now suppose, fear makes the VIX rise each day for 3 days, what happens?
Assuming exact VIX correlation and the following VIX changes:
Day 1 = +5%, Day 2 = +20%, day 3 = +5%

Then the expected TVIX changes would be 2X the VIX changes:
Day 1 = +10%, Day 2 = +40%, day 3 = +10%

Fair Value = 10*1.1*1.4*1.1 = 16.94 (expected value)

5% Premium = 10*1.15*1.45*1.15 = 19.18 (value + the premium)

Total premium after 3 days = 19.18/16.94 = 1.13 or a 13% Premium

While my numbers are dramatic, smaller incremental premiums crept into the TVIX price over a longer period. I suspect some hedge fund figured out how to recreate the underlying TVIX using the futures and by shorting TVIX and being long the underlying instruments they capture the difference with minimal risk. And the TVIX collapsed.

In general I prefer the UVXY which has the same leverage and less of a tendency to accumulate premium. But when trading the TVIX, one must watch the UVXY/TVIX ratio closely and if it gets out of the range I indicated, bail out or switch instruments.

Here is what the ratio chart looks like:
The UVXY/TVIX ratio
Click to enlarge

Here is the price action for the week ending March 23.
Price action on he UVXY TVIX and $VIX
Click to enlarge

Adding charts here for the ^TVIX-IV which essentially is the fair value of the TVIX. If one is trading the TVIX, it would pay to keep ones eye on both the TVIX and its relationship to the ^TVIX-IV, as well as the ^VIX and what the genera; market is doing.; ;-)

Price action on he TVIX-IV TVIX and $VIX
Click to enlarge

And from Bloomberg, here is a month long chart of the TVIXIV vs the TVIX: The distance between the green line (TVIX) and the orange line TVIXIV) is the premium:. For most of the life of this instrument, the TVIX and TVIXIV have remained close to one another which is what one would expect. The recent divergence and expanding premium of the TVIX over the underlying TVIXIV was in part caused by Credit Suisse suspending the issuance of new TVIX shares as demand increased.

Price action on he TVIX-IV TVIX and $VIX
Click to enlarge

Price action on he TVIX-IV TVIX, $VIX and UVXY
Note that the UVXY closely tracks the TVIXIX
This chart should update so it is the most recent 5 days
Click to enlarge

Monday, March 5, 2012

MCO Update 3/5/12

We have been in a correction for the last two weeks. There should be a 13 day cycle low early this week with the completion of the correction in about 13 days after that. The most reliable cycle I see is the 39 day which acts out as either 4 - 10 day wiggles or 3 - 13 day wiggles. The MCO is oversold but not oversold enough to be "oversold"

We might see the MCO get down to the -200 zone, or not since everyone is either looking for a correction or a dip to buy. Many stocks have already dropped off their short term highs, and this is being masked by the index favorites (AAPL, IBM).

All in all this is a remarkably well behaved correction. The Climactic Volume Indicator, hasn't moved out of the 'normal' range for over a month, no spikes, indicating no froth or panic.

Still bullish, buy the dips.

The $SPX, MCO and SUM index
Click to enlarge

$SPX showing the 13TD cycle
Click to enlarge