Now, don’t you go chasing this rally! Of course if you’re a client we won’t let ya, but if you’re a hitchhiker on the blog (it’s here for anyone who’s stumbled onto it), we can’t stop ya, but you should think twice before hopping onto the year-end FOMO (fear of missing out) express.
The skew index is one of the sentiment components in the financial markets subindex of our PWA Macro Index, and it’s saying something it hasn’t said since the very peak of the market last year, right before stocks derailed to the tune of 20%:
click to enlarge…
So what the heck is the Skew Index? Here’s the technical definition:
“CBOE SKEW Index is a global, strike independent measure of the slope of the implied volatility curve that increases as this curve tends to steepen. The index is calculated from the price of a tradable portfolio of out-of-the money S&P 500 options…”
Translation: It (the price of implied volatility on out-of-the-money S&P options) spikes when options players are making bets that the market’s going to take a bigtime tumble. Its nickname is “The Black Swan Index”.
Certainly doesn’t mean that those options traders are correct in their bets (I’ve seen this indicator spike many many times without the market anywhere near collapsing thereafter), it just means that they see outsized risk in the present setup.
Time will tell…