Looking at SKEW in our latest WaveThinking Newsletter

We posted our latest WaveThinking Newsletter where we outlined how last Wednesday (10/23) we saw the markets looking ironically close to that of 1929, the CBOE SKEW Index was back to the same level that has brought in every peak, within a few days, of the past three years.  This index represents how much “black swan” risk traders are pricing into the Spx options in the next 30 days.  Black swans are named for any crash-like market event; larger than normal decline in a shorter than normal time.  With SKEW around 130, like now, odds of a large decline are around 10%, according to the CBOE, and of an extremely large decline about 2%.  These are both about double the odds or these types of declines than when SKEW is around 115, like July of this year, and November of last year, among other times.

Dollar sentiment is now as low as it last was in March ’12, and April ’11.  Each of those times, and others when sentiment was matching these levels, the dollar rose for 1-3 months usually.  In addition, weekly stochs haven’t been this low (touching the lower 2 sdb) since April ’11, when a bottom was placed around 73 for a rise to 80 in seven months.  The time before that, in Oct./Nov. ’10, the dollar rallied from near 75 to near 82 in six months.  In ’09, the bounce from these stoch extremes was even larger; from 74 to 89 in seven months.

The Netflix NFLX news went from ebullient after Monday’s close to scary after Tuesday’s, as Carl Icahn announced he sold half of his Netflix shares.  The stock peaked after hours as high as 397 even though it only traded as high as 389 during regular hours on Tuesday, then closed at 322, now it continues to bounce around 336.

The first bounce, whenever it arrives, will be THE sell of the year, after the stock rose 300% in 2013 to Tuesday’s close.  Initial support, after a bounce into the fibos shown in this chart, is for a test of the 200 +/-30 zone, then (God forbid for those trapped at this week’s highs) the 150 +/-10 zone.   Don’t laugh, as this is the first crash-and-burner, but not the last, in what should be a faint echo of the post ’00 Nasdaq blow off and crash in the coming couple years. Read our full analysis from last week.