S&P 500 Update – Was Risk Flushed Out?

The last S&P 500 update introduced the risk/reward heat map (RRHM), which projected increased risk in January/February (see image below). How exactly the RRHM is produced is discussed here: Risk Reward Heat Map Methodology

The January 15 Profit Radar Report warned that: “Based on our risk/reward heat map, we are approaching a period of increased risk with an initial emphasis on late January.”

Just 4 days later, stocks suffered the biggest pullback since October 2019.

The pullback stopped on February 3, which makes the analysis from the February 2 Profit Radar Report (republished below) all the more interesting:

                                        * * * * *  February 3, Profit Radar Report * * * * *

“Based on preliminary data, 82.85% of NYSE-traded stocks ended Friday lower, the biggest down day since August 8, 2019. The chart below shows various breadth gauges. The bottom graph reflects down days. A cluster of down days (80% or 90%) tends to reflect selling exhaustion and is usually seen near bottoms, so we’ll be keeping an eye on that.

We’ve seen two 80%+/- down days already, so one could argue there’s already a measure of exhaustion.

Almost all of our short-term sentiment gauges perked up nicely and are already showing minor extremes. In times past, readings of similar degree have been enough to mark a bottom. Since we’ve seen some significant optimism extremes at the top, it is quite possible we need some more significant pessimism extremes. This, however, is not required.

The S&P 500 closed right on the green support trend line, which could be considered the minimum down side target for this pullback. Due to the sentiment extremes at the top and our RRHM, we would like to see lower prices, with 3,190 being the next and 3,130 +/- a more ideal down side target.”

                                      * * * * *  End February 3, Profit Radar Report * * * * *

The S&P 500 spiked 110 point this week. The chart below shows the resistance (red) and support (green) levels mentioned in the February 3 Profit Radar Report.

The S&P tagged the minimum down side target, which was based on a trend line going back to 2016. The S&P failed to reach the ideal target, which was based on a trend line going back to 2007, and would have reflected a more proportional correction.

Resistance is still at 3,336. A break above 3,336 would allow for a move to next resistance, but the CBOE equity put/call ratio is getting dangerously low once again, and the RRHM suggests we may not be out of the woods yet.

Continued updates, projections, buy/sell recommendations are available via the Profit Radar Report.

Simon Maierhofer is the founder of iSPYETF and the publisher of the Profit Radar Report. Barron’s rated iSPYETF as a “trader with a good track record” (click here for Barron’s evaluation of the Profit Radar Report). The Profit Radar Report presents complex market analysis (S&P 500, Dow Jones, gold, silver, euro and bonds) in an easy format. Technical analysis, sentiment indicators, seasonal patterns and common sense are all wrapped up into two or more easy-to-read weekly updates. All Profit Radar Report recommendations resulted in a 59.51% net gain in 2013, 17.59% in 2014, 24.52% in 2015, 52.26% in 2016, and 23.39% in 2017.

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Despite Extreme VIX Movements, Option Traders are ‘Lukewarm’

According to the VIX, option-traders are complacent and have been complacent for many months. The bearish VIX implications however, have not been confirmed by two historically accurate options-based sentiment indicators.

The VIX soared 43% on Monday, collapsed 19% on Tuesday and is up nearly 30% today. Just before that, the VIX fell to the lowest reading since February 2007.

Although the CBOE Volatility Index (VIX) is rushing from one extreme to the next, options traders as a whole have been remarkably ‘non-committal’ or lukewarm from a sentiment point of view.

This sentiment deviation is illustrated by the chart below. The CBOE Equity Put/Call Ratio has been narrowing in a triangle shape formation void of extremes. The 2010, 2011 and 2012 market highs were preceded by at least one daily reading below 0.5 and a drop of the 10-day SMA below or at least close to 0.55.

The 2013 Equity Put/Call Ratio low was at 0.54 on March 6 (the 10-SMA has yet to fall below 0.6). The recent all-time highs caused no put/call sentiment extremes.

Quite to the contrary, the VIX has rushed from one extreme to the next. For that reason, the Profit Radar Report noted back in November that the: “VIX has been of no use as a contrarian indicator and will be put on ‘probation’ until it proves its worth again.” Yes, the VIX is still on probation.

A SKEWed Market?

The CBOE publishes another options-based index like the VIX, it’s called the CBOE SKEW Index. The SKEW in essence estimates the probability of a large decline.

Readings of 135+ suggest a 12% chance of a large decline (two standard deviations). A reading of 115 or less suggests a 6% chance of a large decline. In short, the higher the SKEW, the greater the risk for stocks.

The chart below juxtaposes the SKEW against the S&P 500. Last week the SKEW fell as low as 117. This was odd as readings below 115 (dashed green line) are generally bullish for stocks.


The CBOE Equity Put/Call Ratio and SKEW index proved to be valuable contrarian indicators in 2010, 2011 and 2012. The current option-trader sentiment is not bullish, but it’s not as bearish as one would expect to see at a major market top.

To an extent, option-trader sentiment is in conflict with other bearish sentiment extremes discussed recently. When sentiment indicators conflict, technical analysis and support/resistance levels become even more valuable.

The April 10, Profit Radar Report highlighted key resistance at 1,593 and stated that: “A move above 1,593 followed by a move back below 1,590 will be a sell (as in go short) signal.”

As long as prices remain below key resistance, the trend is down until stocks find key support.