S&P 500 Index (SPX)
On May 9, SPX closed at 1354.58, below the low set on April 10 at 1357.38, our previously identified trigger point, thereby confirming the Head & Shoulder Top with the April 2 high of 1422.38 and the minimum downside-measuring objective at 1300.

Since there appears to be little support at 1300 we are expecting the decline to continue to at least 1225 where there is some support, but more likely to 1200 where there is more support from both August - October 2011 and April 2010 as well as the long-term upward sloping trendline from the March 2009 low at 666.79. This means the entire 2012 advance will have been unwound, which we think it is quite likely.   

E-mini S&P 500 Futures (ESM2)
One way to measure trend momentum is to watch open interest since it needs to keep expanding to sustain the move. On May 9 as SPX closed below 1354.58, the e-mini closed at 1351.00 with high volume of 2.53 million contracts and 2.89 million open interest. As of Thursday, the volume was again high at 2.91 million, as the open interest expanded to 2.97 million, an increase of 78,832 since May 9, thereby confirming the downtrend by this criterion. For a gauge as to when the trend may be changing watch for a sustained decline in the open interest indicating existing long liquidation to existing shorts who begin covering. Although there will be some confusion about the open interest numbers around the June contract rollover surge, a sustained decline in open interest could be the first indicator that the downtrend momentum is waning.  

Since last week, the Implied Volatility Index Mean increased from 17.94 to 22.28, while the CBOE Volatility Index (VIX) increased from 19.89 to 25.10.
  

The table below shows the VIX cash compared to the next two futures contracts as well as our calculation of Larry McMillan's day-weighted average between the first and second months.

 

The day weighting applied 88% to June and 12% to July resulting in the average premium of 3.09 or 12.33% shown above. Our alternative volume weighting between June and July results in a 12.88% premium. Last week the day-weighted premium was 7.84% and the volume weighted was 5.05%. 

For this short-term indicator the premium to the cash is a SPX sell signal suggesting professional expectations for the cash to increase toward the futures price. In the past premiums in excess of 20%, have usually preceded corrections, although not a precise timing tool it does appear to be a good way to measure professional hedging sentiment. On this decline, the VIX premium indicator has been failing miserably, especially since SPX closed below our trigger point on May 9. Perhaps more hedging activity has shifted to the SPX futures, where we see expanding open interest, or to the VIX options.  

Since the CBOE updates the VIX futures term structure during the day an estimate of the current premium or discount is always available. In addition, the data is available on our Advanced Futures Options pages, using VX as the Instrument symbol and CF for the exchange. Compare the options Implied Volatility to the Historical Volatility by setting HV chart to 21 days.

With a current 30-day Historical Volatility of 101.67 and 79.87 using Parkinson's range method, the table below shows the Implied Volatility (IV) of the at-the-money VIX calls and puts using the futures prices based upon Friday's closing option mid prices along with their respective monthís futures prices, since the options are priced from the futures.

 

Using the IV Index Mean of 110.07 the IV/HV ratio is 1.08, using the range method for Historical Volatility the ratio is 1.38 while the VIX put-call ratio is .68.

This week there has been a noticeable change in the futures term structure with July, the deferred contract, selling at an unusual slight discount to the near term June contract. Perhaps simply an anomaly attributed to contacts rolling over from May to June that occurred Wednesday, but watch to see if it persists.    

CBOE S&P 500 Skew Index (SKEW)
Along with our VIX futures premium indicator we are also putting this one in the less than useful category at least for the recent decline from May 9 when it was 115.05 at the bottom of the recent range. Since it measures the purchase of out-of-the-money S&P 500 Index puts for downside protection, perhaps it suggests greater enthusiasm for ATM SPX and SPY puts and greater confidence the decline will continue. In March while the SPX was still advancing it spiked as high as 139.25. Alternatively, perhaps it may be a useful as a contrarian indicator.

CurrencyShares Euro Trust (FXE)
Our comment in April that FXE was not likely retest the January 126 low in the near future was wrong as it closed below previous support at 130 and then retested the January 126 low last Thursday at 126.20. A weaker euro and an equivalent stronger dollar are currently the most important variables representing "flight capital" out of the euro. Further, the US dollar has also been strong against both the Australian and Canadian dollars and is clearly detrimental for equities and commodities. One indicator to look at is the US Dollar trade weighted index, now at 81.29, having just retested the January 13 high of 81.78. This could be the most important variable to watch. 

As we cautioned in April, breadth needed to start improving before the previous market uptrend could resume. However, breadth continued declining after a short, but unsustainable advance we optimistically noted in Digest Issue 18. Last week's decline of 419.33 points was the largest since last August 5 when it declined 447.07 to reach -620.99, a level that seems likely to be tested again soon.

iShares Dow Jones Transportation Average Index (IYT)
Although crude oil has recently declined, it has not helped the transports as they accelerated their decline on Thursday closing down 2.83 at 88.37 and below the neckline of a well defined Head & Shoulders Top with a minimum measuring objective of 85.

SPDR Homebuilders (XHB)
With the close at 22.43 on May 2, the homebuilders established a new and somewhat flatter upward sloping trendline from the October 4 low at 12.21, however with Thursday's decline of 1.09 it is now below the new trendline and below support at 20, which is not encouraging. Since this group has recently been demonstrating relative strength, watch for a quick rebound when the major indexes bottom.

iShares S&P GSCI Commodity-Indexed Trust (GSG)
Since energy represents approximately 70% of the weighting, of which petroleum is the most significant component, any continuing decline in crude oil prices and GSG could retest the low made last December at 31.31, which is just .28 away. Interestingly Goldman Sachs reduced their commodity outlook to neutral on March 27 when it was 35.73, just as it closed below the upward sloping trendline from December's low.

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