Stock market risk
The CBOE Skew Index, which measures the risk of a black swan event for the S&P 500, jumped to the highest level in months. This is often seen as a contrarian indicator for the stock market and over the past 2 years has had a better-than-average track record for predicting market declines.
Overall, SKEW’s accuracy as a bearish signal was spotty. Historical cases in which SKEW was more than 12% above its 200 dma led to mixed results. Cases in the 2000s were mostly bearish over the next few weeks and months whereas cases over the past 5 years mostly led to more gains over the next few weeks and months.
U.S. Dollar extreme positioning
I noted yesterday that speculator positioning towards copper is at a historical extreme. Such extreme COT readings are not just notable in copper – they are also notable in currencies. Large Speculators are extremely bullish towards the Japanese Yen after a major U.S. Dollar decline:
Such extreme sentiment in the past did not halt the Yen’s rally. Instead, USD/JPY fell even more over the next 2 months:
Similarly, Large Speculators positioning towards the U.S. Dollar is at a multi-year low:
Once again, such bearishness towards the U.S. Dollar usually led to more losses for the Dollar over the next 6 months. When currency trends get going, they are hard to stop. There are always counter-trend moves along the way, but it’s hard to successfully predict these counter-trend moves.
Energy is golden again
The S&P 500 energy sector is on the verge of forming a “golden cross” (50 dma > 200 dma). This is the first golden cross after one of the worst crashes in amrket history:
In the past, energy stocks could pullback in the short term after forming a golden cross. This wasn’t a guaranteed bullish sign.