Below are the other times the S&P 500 futures (since 1982) managed to close the first day of a new month higher by +2.5% or more.  Also included is the return over the next 7 trading days…not quite as euphoric as the initial thrust.

He discusses the price action in SP500 over the last two weeks.  There has been a price change that has happened only six times since 1990 and four times something else has happened afterward.  Just from a quick and dirty statistical point of view, if something has happened four times out of six, the error is plus or minus two.  So I think of that “four times” as really “two to six times”.  That changes the strength of the conclusion for me.

Pretty rare occurrence this week, via Dr. Brett.

We had a 10-day closing high on Friday in the S&P 500 Index (SPY) followed by a 10-day closing low on Monday. It turns out that this is an unusual reversal. Since 1990 (N = 4895 trading days), there have only been six occasions in which this has occurred.

While six occasions is hardly a sample from which we can build a robust analysis, it’s worth noting that the market was down subsequently on a five and ten day basis on four of the six occasions by averages of -.22% and -.76% respectively.

It also speaks again to the utter lack of volatility in recent days. Really on two levels. You could see low daily volatility, but if it moves in one direction, the net effect is that if you just sat with a short gamma position, you would do poorly as the stock gradually moved away from the strike(s) you are short. So this goes beyond that. Not only did we see small ranges, but they offset each other for a full two weeks.

OK, apparently caused lots of dissenting opinion in regards to slapping on a spread that involved going long VXX and short SPY near term options.

So let me clarify a few points.

This is just a convoluted way around a relatively simple trade, an SPX or SPY calender. So what if we forget VXX and VIX futures exist. The basic thought here is

when volatility caves, I generally would prefer owning calenders. That involves buying longer dated options at likely a higher volatility than I am selling the shorter term options. It gets me short gamma and earns money in the form of time decay.

You have to look at this as two separate transactions though. The short side of the options will earn me money if the realized volatility between now and expiration is less than the volatility I sold them for. Yes, part of that trade likely involves chasing stock into strength and shorting it into weakness. The idea is to lose less doing that than you earn in options attrition.

The long side of the calender is more of a bet on implied volatility at least holding steady. You will not lose all that much time decay, but you are at risk of a move lower in volatility. But if you think options volatility is a buy longer term, you are OK with that.

So combine the two and you are effectively betting on longer term implied volatility to outperform shorter term realized volatility. If you think that’s a good bet, a calendar makes sense.

Using VXX or a VIX future in lieu of a longer dated SPX or SPY option is not identical, but you will win or lose with it in a similar pattern as above.

But it’s important to remember however you chose to go long a longer dated option, it’s not a big deal if you “buy” higher volatility than you sell. It’s two different time frames and two very different bets, there’s no reason they will or should carry the same volatility. A few weeks ago they all did carry about the same volatility. That’s more unusual than not.

So what’s the risk in buying a calendar, or buying VXX and shorting SPY options?

It’s not that some small volatility difference between the two cycles will revert to 0. There are 2 big risks however. One is that realized volatility, which you are effectively shorting, will explode and longer term volatility will not lift as much. You would have got hit massively with that last Fall. Which is why I don’t like this position in a rising volatility environment.

The other risk is that all volatility caves in. Your short volatility will only earn you so much, I mean your options can only go to zero and you will get lousy prices trying to roll them. Meanwhile your VXX or VIX future or longer dated SPY straddle has gotten mauled.

Post getting long here. To be Continued.

$SPX broke out to the upside on Monday, easily overcoming the various resistance levels (January highs, May highs, and 200-day moving average). It then proceeded to pull back and test the breakout successfully, before advancing again today. Since none of our indicators are on sell signals, the path of least resistance is to the upside.

SP500 5 June 2009

Equity Only Put Call Ratio

Put Call Ratio Weighted By Cost

VIX through 4 June 2009

In summary, the situation remains bullish, although overbought conditions indicate that sharp, but short-lived declines are possible at any time.

I got this CNBC (India?) video from Investments Postcards From Cape Town.

Gives perspective to see how others see us, or our market in this case.

Today, before the market open, the SP500 is up 16 points to 935.

The last time we saw this kind of four-week cluster was during the end of December 2006 through the first week of January 2007 (it’s not surprising that many of these occurrences happen around holidays when volatility is dampened).

Using the S&P 500 since the late 1920’s, we usually saw a quick move to the downside out of these consolidations – the next week was positive only 32% of the time. But after that, the returns turn considerably more positive.

That’s something we very often see with volatility contractions…the first move is usually a fakeout before a more sustained move in the other direction.

Volatility collapsed Friday afternoon as well.