Once again the time has come to consider hedging long positions. Based upon option and futures indicators this week's action was slightly less bearish than the week ending 8-11 as if some pressure had been released from the steam boiler perhaps related to options expiration. There is more below including a SPDR S&P 500 ETF (SPY), hedge idea and another Commitment of Traders update for crude oil.

S&P 500 Index (SPX) 2425.55 dropped 15.77 points or -.65% for the week including 38.10 points Thursday closing under both the upward sloping trendline, USTL and the 50-day moving average at 2449.89. Interestingly Thursday's 1.54% decline was the second Thursday to decline more than 1%. Now a test of support at 2400 seems very likely.

CBOE Volatility Index® (VIX) 14.26 declined 1.25 points or -8.06% for the week while the comparable IVolatility Implied Volatility Index mean, IVXM at 10.96 only declined .18 or -1.62%.

VIX Futures Premium

The chart below shows as our calculation of Larry McMillan’s day-weighted average between the first and second-month futures contracts.

5.18% up from -1.39 week ending 8-11-17

With 22 trading days until the September expiration, the day-weighted premium between September and October allocated 88% to September and 12% to October for a slightly positive 5.18% as the VIX remains at a higher level. Although the VIX futures were higher Friday the curve is almost flat out to January. As the VIX declines look for the premium to return to the more bullish 10% - 20% range.

The premium measures the amount that futures currently trade above or below the cash VIX, (contango or backwardation) until front month future converges with the VIX at expiration.

Market Breadth as measured by our preferred gauge, the NYSE ratio adjusted Summation Index that factors out the number of issues traded, and reported by McClellan Financial Publications, declined another 218.45 points in addition to the 251.61 point decline week ending 8-11 and now approaching the March low near 222.

Crossed below the 50-day Moving average August 9. As a "Buy the Dip" timing signal watch to see if breadth improves as SPX tests support around 2400.

Crude Oil Update

WTI Light Sweet Crude Oil (CL) 48.51 basis September futures declined .31 points or -.63% for the week, after testing what appears to be solid support at the 50-day moving average (red line below) then rebounded sharply perhaps on the Baker Hughes report that the oil rig count declined 5 to 763.

From the Disaggregated Commitments of Traders - Options and Futures Combined report as of August 15 "Managed Money," the group that best correlates with crude oil price changes and arguably the most important, reduced their long position -7,896 contracts and reduced their shorts +2,229 for a net position decrease of -5,668 contracts representing 8.97% of open interest down from 9.40% the week of August 8, but up from 4.73 % on June 27, the last pivot shown in the chart below.

Small changes in the other major categories suggest slow August trading activity with little conviction.

With the exception of Nonreportables, net changes were insignificant.

Producer/Merchant/Processor/User, (Commercials ) or "PMP" -3,859

Swap Dealers, or "Swaps" +2,336

Money Manager, or "Managed Money" - 5,668

Other Reportables, or "Others" - 11,992

Nonreportable Positions (Small Speculators) +19,182

Typically Nonreportable Positions also called small speculators (no defined category) often have a tendency to be on the wrong side of the market perhaps because they don’t have the same information as the Producers/Merchants/Processors/ Users or the same price moving clout as "Managed Money" and Other Reportables together referred to as "Large Speculators."

Hedge Time

With most indicators negative the time has come to consider some hedging.

Many times in the past hedges were suggested just as the markets were about to recover and this could be another one of those times, but that's what hedges are for: continuing declines. Like buying a flood insurance policy after heavy rain begins. Unlike traditional insurance policies that charge premiums even with the sun shines, using options strategies you can create downside insurance only when it seems necessary. However, since implied volatility typically rises as the underlying declines single options are exposed to a sudden decline in implied volatility so consider using spreads to offset this risk. Here is one idea.

SPDR S&P 500 ETF (SPY) 242.71

The current Historical Volatility is 7.78 and 5.42 using the Parkinson's range method, with an Implied Volatility Index Mean of 11.91. The implied volatility/historical volatility ratio using the range method is 2.20 so option prices are expensive relative to the recent movement of the ETF that's now increasing.

Friday’s option volume was 4,263,569 contracts, with a 5-day average of 3,277,960 contracts, was unusually high due to August options expiration.

With defined and limited risk, consider this October put spread.

With a reasonable implied volatility edge (higher short option implied volatility) the debit would be 1.32 using the ask price for the buy and mid for the sell, about 26% of the distance between the strike prices with 70% of the long call hedged by the short call. Use a close back above the 50-day Moving Average at 244.60 as the SU (sell/unwind).

The spread suggestion above is based on the ask price for the buy and middle price for the sell presuming some price improvement is possible. Monday’s option prices will be somewhat different due to the time decay over the weekend and any price change.

Summary

Seasonal August weakness was anticipated and now the time has come to prepare hedges just in case the decline continues and becomes something more than another "Buy the Dip" event. For the S&P 500 Index watch support at 2400 along with improving market breadth for signs to begin unwinding hedges and get ready to buy the rebound once again.