It’s great to see the market moving up today, but I’m not quite sure we’re out of the woods yet.
December’s monthly options expiry is looming on Dec. 17, and there are lots of potentially face-ripping trading sessions between now and then. So which charts should we watch?
A couple of important macroeconomic data points are coming this week that are sure to influence sentiment over markets…
But really, what is clearly at the forefront of every trader’s mind this morning is volatility.
In previous pieces, I have been vocal about how the trend in volatility has clearly been to the downside.
This time around, I’m not so sure…
3 Charts to Watch Ahead of December Options Expiration
So the first of three market indicator charts I’m watching closely ahead of December monthly options expiration is the CBOE Volatility Index, or VIX — the fear gauge. When it goes up, markets generally go down.
And it certainly made me take notice when it jumped above 30 last week for the first time since the “Volmageddon” Gamestop short squeeze drama back in January and February.
Source: Bloomberg
With the VIX, a score of 20 means average volatility — a 1% move up or down each day — is expected over the next 30 days. The further below 20 the VIX falls, the less volatility is expected.
If markets “settle in” to a VIX level above 30, then get ready for some serious choppiness. While day traders thrive on that kind of action, I speak from experience when I say it can be incredibly time-consuming for those employed full time.
The second indicator I’m looking at is the volatility of the VIX itself. How I tend to use this metric is to confirm the signal from the VIX. In this case, the volatility of the VIX is also making a higher high, creeping up into that same January/February 2021 range.
If that’s where it stays, we’re OK…carry on buying dips.
But if the VIX remains elevated and the volatility of the VIX continues to increase well past the 200 level – which it could with OpEx looming – then the “small position sizing” for which I have been advocating would begin to turn into a “zero-position sizing”.
For what it’s worth, we’re not there… yet… but we’ll see.That’s why it’s on our short list of charts to watch ahead of the December monthly options expiration.
The last indicator I’m following this week is the Federal Reserve’s preferred inflation metric, the Consumer Price Index.
Source: Bloomberg
Data is released on Thursday and analysts expect a 6.8% increase year on year, or 4.9% ex-food and energy.
My projections show slightly lower numbers overall (oil corrected 20% in November), but slightly higher numbers in the low-5% range for ex-food and energy.
While the CPI is a lagging indicator, it nonetheless will influence Fed policy over the coming quarter. So if CPI comes in even hotter than my projections, I would expect more hawkish policy announcements from Chair Jerome Powell (reduced tapering and less chatter about raising interest rates “soon”).
Ironically, any policy change that would arise from such discussion would be implemented right around the time the economy begins to slow or decline in Spring 2022.
The last time that happened was in December 2018, when the S&P 500 drew down 16%.
Source: Bloomberg
Strangely, this year’s chart doesn’t look terribly dissimilar thus far.
Source: Bloomberg
Bottom line…be careful out there, and don’t be afraid to book gains on a green day like today.
We want to be watch these three charts intently ahead of the December monthly options expiration, because we never know when the rug might be pulled out from under us.
All the best,
Matt Warder
