foxex: Volatilty Ebb

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Chart Advisor | Focus on the Price

By Gordon Scott, CMT

Tuesday, June 02, 2020

1. VIX drops to new lows as markets march higher

2. Option volume decline signals buy-write opportunity

3. The consumer stock worth watching now

Market Moves

The CBOE Volatility Index (VIX) closed at its lowest reading since the pandemic broke. Naturally the inversely correlated S&P 500 (SPX) closed higher again (see chart below). The dynamic at play here has been repeated many times in the past two months. The decline in both historical and implied volatility leads to higher prices which spurs a virtuous cycle throughout a given week.

This cycle follows a simple pattern that goes somewhat like this: (1) good news appears, (2)investors buy stocks, (3) stocks don't crash to new lows, (4) investors stop buying put option protection, (5) option prices fall, (6) investors feel confident and interpret more (or all) news as good. The cycle then repeats as prices steadily rise. This cycle seems to be in operation now, even though one might conclude, based on headlines, that investing right now could be a frightful thing. Chart watchers have ample evidence that, currently, investors are looking past the fear and seeing the opportunity.

Option Volume Decline Signals Buy-Write Opportunity
Speaking of declining option volume, take a look at the chart below. This chart features a comparison of the CBOE S&P 500 Buy-Write index (BXY) with a chart measuring the 50-day moving average of the total volume of index options traded on the S&P 500 index (OVSPX).

The importance of this chart is the reality that option trading volume has fallen back to the level where the year began, implying that option buyers expect the S&P 500 index to continue its upward trend until it makes new highs for the year 2020. A comparison between the two price trends below shows that option volume patterns similar to the current pattern are typically good for investors who like covered call strategies.

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The Consumer Stock Worth Watching Now

Before the market opens tomorrow, one company that will report its quarterly earnings may be worth the time for chart watchers to follow. Campbell Soup Company (CPB) has held its price gains for the year despite the pandemic (chart below). Analysts expect the company to report that they earned 74 cents per share, compared to 67 cents per share in the previous quarter.

This company was the beneficiary of consumer stockpiling as shoppers emptied grocery store shelves of selected items. If the company manages to turn in a good quarter and shares positive guidance going forward, the market will take that as good news. Which takes us back to the cycle mentioned in the first section of today's Chart Advisor.

The Bottom Line

Stock market indexes notched higher again today as the Volatility Index closed at its lowest reading since the COVID-19 outbreak. The lower volatility implies the potential for a continued upward trend in stocks. One source of good news to continue this upward trend may come from the earnings report of the Campbell Soup company which reports tomorrow before the market opens.