The internals of the US equity markets continue to deteriorate as a large wall or worry tracks every movement of the European debt crisis. Despite the positive results of this past weekend’s Spanish elections, investors remain pessimistic that the EU will create a solution that is all encompassing. For this reason, yields on Italian, French and Spanish bonds continue to reflect a nervous investor base.
For stocks, this negative sentiment is reflecting in falling prices and a rising VIX volatility index. The VIX is near 34%, and is poised to test the recent highs near 37%. During August and then again in early October, the VIX put in multi-year highs near 48%. Historically this level has been met with strong resistance and stocks have rallied significantly over the long term after reaching levels near 48%.
The sentiment in the market, has recently failed to lift the VIX over the 38% level, but a close above this region is likely to see a quick move back toward 48%. The VIX represents the implied volatility of the at-the-money options listed on the S&P 500. A VIX level of 34%, which is considered relatively high, means that market participants believe that the S&P 500 index will move 34% from the current level on an annualized basis.
The trade – purchase a daily binary call option on the VIX on a daily close above 38%.
Signal Summary
Asset : VIX
The trade : Binary Call Option
Expiry time : End of day
When : On a daily close above 38%.
Result : N/A
