Friday, 21st January, 2022
1/ Option traders remain calm as indexes fall sharply
2/ Bearish signals not here yet
3/ Are airlines more like banks?
4/ The bottom line
1/ Option Traders Remain Calm as Indexes Fall Sharply
Stock indexes continued a steep decline begun earlier this week, but option traders were comparatively sanguine. Though the S&P 500 index (SPX) hit new lows this week, the CBOE Volatility Index (VIX) failed to break a new high.
The chart below compares the price action of the VIX with the stock benchmark index by inverting SPX and showing it underneath VIX candles. Because the VIX is inversely correlated with SPX, it often moves in the opposite direction. For the purposes of comparison, the inverted SPX looks more similar to the VIX price action, except for the way the two indexes diverge when it comes to their breakout.
Note that the SPX candles (shown in grey and black), clearly broke out above recent highs this week on the chart. That corresponds to the surprising new lows the index hit. Meanwhile, the VIX has yet to do so. When investors are panicked the VIX tends to anticipate the move, so a comparison chart such as the one below should show the VIX making new highs.
The fact that the VIX has yet to notch new highs implies that traders aren’t highly worried about the unknown. Their concern for now has more to do with what they know for certain: the Fed will raise interest rates soon.
2/ Bearish Signals Have Not Arrived…Yet
Since the indexes pulled back this week, some chart watchers may be eager to look for any technical indication of a bear market, or an indication of a downward trend. Dow Theory, a simple set of rules that attempt to catalog the market’s trend, might be useful for that task.
The chart below compares the Dow Jones Industrial Average (DJI) with the Dow Jones Transportation Average (DJT). Dow Theory states that if both indexes break below a recent, important low price, then it confirms that the market is in a downtrend. DJI has indeed broken below its trend line, but DJI has not. This implies that the markets have not yet turned bearish, and there may be a chance for a rebound next week.
3/ Are Airlines More Like Banks?
When the airline industry applied for government loans last year as the pandemic broke, they made some information apparent that hadn’t been publicly available before: the financials for the part of their business that handles frequent flyer miles. Turns out it was a big reveal because it led many people to speculate that airlines were managing their business more like financial institutions.
The chart below certainly supports that argument. It compares the price action of Delta Air Lines (DAL) with State Street’s financial sector ETF (XLF). The technical indicator below the chart (shown in red) is a correlation coefficient between the two using a one-year period.
It is eye-opening to observe just how correlated these two instruments have been over the past decade or more. While there have been some periods of low correlation, most of the price action shows a strongly positive correlation. This helps explain how airlines have managed to get through the pandemic even as well as they have.
4/ The Bottom Line
Stocks slid to end the week significantly lower, but the volatility index didn’t register a sense of panic among traders. The Dow Theory signal for a bear market hasn’t shown up just yet, so there may still be a chance for indexes to rebound.
Originally posted on 21th January, 2022
Investopedia.com: The comments, opinions and analyses expressed herein are for informational purposes only and should not be considered individual investment advice or recommendations to invest in any security or to adopt any investment strategy. While we believe the information provided herein is reliable, we do not warrant its accuracy or completeness. The views and strategies described on our content may not be suitable for all investors. Because market and economic conditions are subject to rapid change, all comments, opinions and analyses contained within our content are rendered as of the date of the posting and may change without notice. The material is not intended as a complete analysis of every material fact regarding any country, region, market, industry, investment or strategy. This information is intended for US residents only.
Disclosure: Interactive Brokers
Information posted on IBKR Traders’ Insight that is provided by third-parties and not by Interactive Brokers does NOT constitute a recommendation by Interactive Brokers that you should contract for the services of that third party. Third-party participants who contribute to IBKR Traders’ Insight are independent of Interactive Brokers and Interactive Brokers does not make any representations or warranties concerning the services offered, their past or future performance, or the accuracy of the information provided by the third party. Past performance is no guarantee of future results.
This material is from Investopedia and is being posted with permission from Investopedia. The views expressed in this material are solely those of the author and/or Investopedia and IBKR is not endorsing or recommending any investment or trading discussed in the material. This material is not and should not be construed as an offer to sell or the solicitation of an offer to buy any security. To the extent that this material discusses general market activity, industry or sector trends or other broad based economic or political conditions, it should not be construed as research or investment advice. To the extent that it includes references to specific securities, commodities, currencies, or other instruments, those references do not constitute a recommendation to buy, sell or hold such security. This material does not and is not intended to take into account the particular financial conditions, investment objectives or requirements of individual customers. Before acting on this material, you should consider whether it is suitable for your particular circumstances and, as necessary, seek professional advice.
In accordance with EU regulation: The statements in this document shall not be considered as an objective or independent explanation of the matters. Please note that this document (a) has not been prepared in accordance with legal requirements designed to promote the independence of investment research, and (b) is not subject to any prohibition on dealing ahead of the dissemination or publication of investment research.
Any trading symbols displayed are for illustrative purposes only and are not intended to portray recommendations.
Disclosure: Options Trading
Options involve risk and are not suitable for all investors. For more information read the Characteristics and Risks of Standardized Options, also known as the options disclosure document (ODD). To receive a copy of the ODD call 312-542-6901 or copy and paste this link into your browser: