S&P 500 Index (SPX) 2476.55 added another 33.50 points or +1.37% for the week closing back above the 50-day moving average now at 2452.65, the blue line in the charts below. The risk that the rebound could be limited to the top of the downward sloping channel trendline and then retest 2400 detailed in Digest Issue 34 "Pull Back Ending [Charts]" faded last Wednesday at it closed above top of the downward sloping channel trendline and then confirmed Thursday as the advance continued on accelerating volume. Next, a retest of the August 8 intraday high at 2490.87at the top of the upper channel.

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.

30.58% up from 18.65% last week and up from the pivot at -1.39 week ending 8-11-17. Now at the top of the range.

With 12 trading days until the September expiration, the day-weighted premium between September and October allocated 48% to September and 52% to October for a positive 30.58% premium as the futures remain elevated as VIX declines.

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.

VIX Carry Trade

ProShares Short VIX Short-Term Futures (SVXY) 80.31closed up 2.35 points or +3.01% for the week. Of the two inverse ETFs that short VIX futures and advance as the VIX declines, SVXY has listed options with enough volume and open interest to consider. Since the futures currently trade above the cash VIX, (contango) until front-month future converges with the VIX at expiration as the front-month futures decline approaching expiration the short futures ETF advances capturing the futures premium loss.

The current Historical Volatility is 85.55 and 54.60 using the Parkinson's range method, with an Implied Volatility Index Mean of 58.06 down from 63.29 and likely to continue back down toward 50. The implied volatility/historical volatility ratio using the range method is 1.06 so option prices are inexpensive relative to the recent movement of the ETF. Friday’s option volume was 34,668 contracts with the 5-day average of 32,050 contracts with wide bid/ask spreads reflecting lower options volume.

Consider this out-of-the money long call with defined and limited risk.

Adding a short put makes it a synthetic long or risk reversal with an attractive implied volatility edge since the implied volatility of the sold put is considerably higher than both the long call and the historical volatility. However, it greatly increases the risk of loss in the event VIX spikes higher should the market suddenly decline. Keeping the risk in mind, here is a synthetic long carry trade idea.

Using the ask price for the buy and bid for the sell the debit would be 1.30. In the event the S&P 500 Index stalls near the previous high and the VIX starts advancing close it out or buy back the short put to limit the risk.

The suggestions above are based on the ask price for the buy and ask price for the sell. Tuesdays' option prices will be somewhat different due to the time decay over the weekend and any price change.

Crude Oil Update

WTI Light Sweet Crude Oil (CL) 47.29 basis October futures declined .58 points or -1.21% for the week ending on the 50-day moving average (red line below) and just above the downward sloping trendline, DSTL from the April 12, high at 54.87.

Now futures trading activity for the week ending Tuesday, August 29, just as Harvey was dumping heavy rain on Houston and the Gulf Coast.

From the Disaggregated Commitments of Traders - Options and Futures Combined report as of August 29 "Managed Money," the group that best correlates with crude oil price changes and arguably the most important, reduced their long position -27,558 contracts while adding to their shorts -78,113 for a substantial net position decrease of -105,671 contracts representing 5.00 % open interest down from 8.71% the week of August 22 and approaching the June 27 low of 4.73 %.

147,303 contracts net long representing 5.00% of the open interest vs. 8.71% week ending August 22 and approaching the June 27 low at 4.73%

Notably "Managed Money" selling recorded the largest net position decline since at least May 2014 and maybe even before. "PMP," and "Others" along with "Swaps" and Nonreportables were all buying as Hurricane a.k.a Tropical Storm Harvey flooded Houston and the Gulf Coast. While October futures closed the week .58 lower without sizeable selling by " Managed Money" prices would have been higher.

Here are they are shown by change in numbers of contracts.
Producer/Merchant/Processor/User, (Commercials ) or "PMP" +35,562
Swap Dealers, or "Swaps" +27,200
Money Manager, or "Managed Money" -105,671
Other Reportables, or "Others" +34,866
Nonreportable Positions (Small Speculators ) +8,046

Typically Producer/Merchant/Processor/User, (Commercials ) or "PMP" are net short contracts as producers hedge production by selling futures contracts and then delivering crude against their shorts at expiration or if the price declines, buying back short contracts for a gain and then buying cash crude for delivery. However, since processors and users are also included in this category their buying partially offsets producer selling.

Shown as a percentage of open interest the chart below shows a declining net short position since peaking at 12.03% on April 19, 2016 when cash crude was 40.91.

Either producers are unwilling to sell production forward at current prices or they have already hedged all available production while demand from processors and users continues to rise as processors and users hedge against future price increases. Declining crude oil inventory at 457.8 million barrels as at August 25, 2017 as reported by EIA vs. 495.2 million last year seems consistent with this view.

In the meanwhile "Managed Money" may have been following the seasonal downward sloping trendline and used the uncertainty and confusion caused by the Hurricane as an opportunity to sell into buying strength by those expecting sharp price increases. As conditions begin returning to normal long liquidation and perhaps short covering could be the story this week.

Once again "Buy the Dip" proved to be the right strategy as the S&P 500 Index traded above the down channel shown above. The next challenge will come as the S&P 500 Index approaches the previous high. Since September, like August is historically another seasonally weak month, perhaps hedging a possible double top as SPX advances toward the August 8 intraday high of 2490.87, might be worthwhile.

Summary

"Buy the Dip" was the right strategy last week and now look for a retest of the previous August 8 intraday high at 2490.87 where it will most likely generate some double top speculation but eventually continue higher as it has many times before. In the meanwhile, until it clears the previous high hedging another pull back could prove beneficial.