VIX/VXO Set to Post an Eighth Consecutive Week of Lower Highs

A surge in equity call volume in the final hour of Wednesday’s session sent the CBOE equity put/call ratio down to a low .45 at the close, its lowest reading in over three weeks. Recent action in the options market is consistent with the ‘no fear’ theme discussed in this March 26th column, which pointed out that we’d already witnessed an unusually long string of below-average put/call ratios. Wednesday marked the 23rd consecutive session without any meaningful equity put volume.

Wednesday also marked the third consecutive session that the CBOE equity put/call ratio closed lower since topping out last Friday at the .60 level. That triggered a short-term buy signal that remains in effect until next Tuesday’s close. The last thirty separate occurrences in which the equity ratio declined three days in a row are listed below. Note that in 26 cases, or 87% of the time the S&P was higher three sessions later, significantly above the 54% random chance for a higher S&P three sessions later in the same time frame…

CBOE Equity Put/Call Ratio Declines Three Days
03/31/10… S&P500 ??? three sessions later
03/02/10… S&P500 +1.8% three sessions later
02/17/10… S&P500 +0.8% three sessions later
02/10/10… S&P500 +2.5% three sessions later
01/08/10… S&P500 +0.1% three sessions later
11/04/09… S&P500 +4.5% three sessions later
08/20/09… S&P500 +2.1% three sessions later
08/05/09… S&P500 +0.4% three sessions later
07/13/09… S&P500 +4.4% three sessions later
04/13/09… S&P500 +0.8% three sessions later
03/10/09… S&P500 +5.1% three sessions later
01/23/09… S&P500 +5.1% three sessions later
12/23/08… S&P500 +0.7% three sessions later
12/17/08… S&P500 -3.6% three sessions later
10/29/08… S&P500 +3.9% three sessions later
08/22/08… S&P500 -0.8% three sessions later
07/18/08… S&P500 +1.7% three sessions later
04/02/08… S&P500 +0.4% three sessions later
03/13/08… S&P500 +1.2% three sessions later
12/28/07… S&P500 -2.1% three sessions later
09/21/07… S&P500 -0.0% three sessions later
08/31/07… S&P500 +0.3% three sessions later
08/17/07… S&P500 +1.3% three sessions later
07/09/07… S&P500 +1.0% three sessions later
06/28/07… S&P500 +1.3% three sessions later
06/14/07… S&P500 +0.7% three sessions later
04/02/07… S&P500 +1.4% three sessions later
02/15/07… S&P500 +0.1% three sessions later
01/11/07… S&P500 +0.5% three sessions later
11/15/06… S&P500 +0.3% three sessions later
10/23/06… S&P500 +0.9% three sessions later

A primary reason for the consistently low put/call ratios is the steady drop in volatility. Note that the VXO is in the process of posting its eighth consecutive week of lower highs. That’s only occurred one other time in the 25-year history of the index – a little less than a year ago in May ’09. Prior to 2009 we’d never seen more than seven consecutive weeks of lower highs, but since 2009 it’s happened on two separate occasions. Pull up the long-term VXO chart and it looks like we’re still coming off the huge volatility spike at the end of 2008 in a move that looks very similar to the 1988-89 time frame.

There have only been five instances in which the VXO posted six consecutive weeks of lower highs – November ’86, September ’88, February ’98, April ’03 and May ’09. In each case the S&P was higher three months later, and the S&P never posted a weekly close more than 1.5% below the entry week. That’s interesting considering that the SPX closed just under 1160 when the VXO posted its sixth consecutive week of lower highs on March 19th. If the market follows a similar script this time around, we shouldn’t see the S&P trade much below 1150 heading into mid-June.

This is the second time the SPX 1160 area has been highlighted as potentially significant support. Recall that the S&P is still holding above long-term trendline resistance since breaking above that line on March 17th, suggesting resistance has turned into support (see close-up).

Categories : Archived EOD Commentary, End-of-Day Commentary

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