Saturday, December 8, 2018

No Bottom in Sight

As mentioned last week as the market rallied all week based on false hope and fake news tweets from our fearless (feckless) leader that a China trade detente (truce) was on the way, the end result was a stalemate or impasse that retraced all of the previous weeks gains and more.  Can some lawyer out there start a class action lawsuit with the SEC to reimburse all traders that have been whipsawed as a result of these fake news Trump tweets?  Musk after all was sued for $20 million.

Sentiment-wise bearish levels have risen slightly but remain well short of a BUY.  One possibility is a trading range between SPX 2600 and 2700 similar to the month long range of 2575 to 2675 from mid-Mar to mid-Apr, but lower levels testing the Feb lows at 2532 (2500-50) are ideal to set up positive divergences with the daily RSI and MACD.  As mentioned on Twitter the up/down cycles compared to midterm 2010 seem to be 8/9 days, so a trading low may be seen Dec 17/18 before the FOMC Dec 18/19.

I. Sentiment Indicators

The overall Indicator Scoreboard (INT term, outlook two to four months) sentiment has moved well above neutral, but only at the level near SPX 2700 in the Mar retracement.  I am beginning to wonder if sentiment will reach the Apr levels, however, since this is more consistent with a partial retrace (possible 2550 lows, 2875 retrace)


The INT view of the Short Term Indicator (VXX $ volume and Smart Beta P/C, outlook two to four months) shows somewhat higher ST bearish sentiment that may point to a pause for a couple days.


Bond sentiment (TNX) has now moved to a mildly negative outlook that may mean a consolidation at current levels similar to July.  A continued decline in sentiment will likely lead to higher rates.


For the INT outlook with LT still negative, the gold miners (HUI) saw a price breakout from the recent 140-50 range with the combined support of lower rates and a weak dollar even with weak bearish sentiment, but rates appear to be pausing so the price rise could be temporary.


II. Dumb Money/Smart Money Indicators

The Risk Aversion/Risk Preference Indicator (SPX 2x ETF sentiment/NDX ETF sentiment, outlook 2 to 4 days/wks) as an INT indicator has now risen back to neutral.  As pointed out early on the result of low sentiment would likely be under performance by the NDX compared to SPX and since Oct the NDX is down by almost 50% more.


The option-based Dumb Money/Smart Money Indicator as short/INT term (outlook 2 to 4 days/weeks) remains at very low levels indicating that downward price volatility is likely to remain high.


The INT term SPX Long Term/Short Term ETFs (outlook two to four weeks) bearish sentiment has now moved to neutral but remains well below the levels seen in the Mar-Apr retest.  Expect significantly lower prices now or later as the dumb money (2x ETFs) was largely unfazed by the current correction.


Long term neutral, the INT term NDX Long Term/Short Term ETF Indicator (outlook two to four weeks) remains in a range similar to Apr-Jun that may indicate a bottoming..


III. Options Open Interest

Using Thurs close, remember that further out time frames are more likely to change over time.  This week I will look out thru Dec 14.

With Fri close at SPX 2633, Mon has very light resistance up to 2650 if the market rallies, over 2650, 2670 seems posible.  Good support at 2600.  Light open int overall.


Wed open int is very light, but below SPX 2680, prices could drop to 2625.  A strong market could push to 2700.


Fri shows larger open int but puts dominate and could lead to higher volatility.  Below the large positions at SPX 2600, 2630 and 2680 may cause put writers to sell futures so these are likely to be inflection pts when crossed from above.  Lack of calls makes direction difficult to access, but above or below 2650 should go to next inflection pt..


IV. Technical / Other

Assuming the markets are a near a tradeable bottom, this is approximately what I expect based on the 2010-11 analog.  In this case, weaker sentiment than seen in Apr leads to a lower top mid-late 2019, making a H&S top with Jan and Oct of 2018.  What happens next is anybody's guess, but one political analyst discusses Trumps options if the China trade war drags on and concludes that a re-escalation is likely.  This could lead to an SPX 500 pt waterfall.


A prominent EW analyst also shows a similar projection for both time and price here.

Conclusions.  Last weeks option open int proved accurate as SPX 2750 was seen as a major inflection pt with above pointing to 2800 and below to 2700 or lower.  Sentiment is moving in the right direction for a bottom in a week to 10 days, and seems likely that the banksters will do everything they can to encourage the Fed to stop taking away the cookie jar, so a sharp decline from Fri/Mon/Tue below 2600 is the best way to achieve this.
 
Weekly Trade Alert.  The ST Indicator pts to a possible pause for a couple of days and one EW blogger sees this as a small triangle that breaks down at the EOW.  Ideally my targets for the bottom are Dec 17/18 at SPX 2500-50 setting up a positive divergence before the FOMC.  A strong EOY rally could follow.  Updates @mrktsignals.

Investment DiaryIndicator Primer,  update 2018.03.28  Dumb Money/Smart Money Indicators
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Saturday, December 1, 2018

Softball or Hardball

With the market's path over the next weeks and months likely dependent on the outcome of the US/China talks, most have taken the rose-colored glasses approach that a happy ending is near at hand.  Many are now calling for a move to new highs in the SPX as a result of the double bottom in the low 2600s.  Oddly the SPX is still following the script from the 2010 midterm correction where a corrective double top (SPX 2815) was followed by a double bottom (SPX 2600, 2630) then a breakout high (SPX 2840-80) before a lower low (SPX 2500).  One thing that no one seems to be expecting is that with Trumps waning confidence, China may decide to play hardball since a bear market/recession in the US would doom Trumps chances of re-election, while China's Xi has tenure for life.

Most sentiment measures remain near neutral INT term.  This could mean a near-term rally, but are also at the same point as in Mar 2018 before the Apr 200 pt SPX decline.

I. Sentiment Indicators

The overall Indicator Scoreboard (INT term, outlook two to four months) continud its drop to neutral, but at similar levels to the mid-Mar decline.


The INT view of the Short Term Indicator (VXX $ volume and Smart Beta P/C, outlook two to four months) continues to mimic the overall Indicators move to neutral and the mid-Mar levels.


Bond sentiment (TNX) remains mildly positive, hovering above neutral.


For the INT outlook with LT still negative, the gold miners (HUI) bearish sentiment fell fairly sharply last week, possibly due to the less hawkish Fed outlook.


II. Dumb Money/Smart Money Indicators

The Risk Aversion/Risk Preference Indicator (SPX 2x ETF sentiment/NDX ETF sentiment, outlook 2 to 4 days/weeks) as an INT indicator remains in negative territory as low risk aversion shows continued complacency.


The option-based Dumb Money/Smart Money Indicator as short/INT term (outlook 2 to 4 days/weeks) has dropped to a SELL, but the effectiveness depends upon overall sentiment (neutral).  In Dec 2017 (a strong market) on two occasions with similar sentiment, there were one day pullbacks of SPX 30 pts within the uptrend..


The INT term SPX Long Term/Short Term ETFs (outlook two to four weeks) bearish sentiment has risen to neutral similar to early Mar, before the Apr retest.  Both smart and dumb (3x/2x) ETF sentiment has moved to neutral.


Long term neutral, the INT term NDX Long Term/Short Term ETF Indicator (outlook two to four weeks) remains at a low level.

III. Options Open Interest

Using Thurs close, remember that further out time frames are more likely to change over time.  This week I will look out thru Dec 7.

With Fri close at SPX 2760, Mon SPX could see a positive effect from the 2750 calls up to the 2770 level, but a move below 2750 should push down to 2715 then possibly 2700 put support.  Light open int overall.


Wed is somewhat similar, where over SPX 2725 and 2750 could push up to 2800, but below those levels could fall to 2675.  The key factor obviously the China trade outcome


For the following Fri, a jobs report day with large open int, where SPX 2750 is key, with strong call resistance starting at 2775 and strong put support at 2675.


IV. Technical / Other

I've seen a couple of analyst point to the high equity p/c and low Skew as bullish, so I just wanted to show some historical perspective.  Note, the Equity P/C is part of the options DM/SM Indicator as smart money.

For 2018, note the steady uptrend of the Equity P/C, even before the selloff.


Comparing this to 2015, you see the same upward trend starting in May where the recent high of 0.80 was reached in July, a month before the Aug flash crash.


For the $SKEW, previously I have pointed out that results were dependent on other sentiment, but the recent drop has been historic and is looking more like extreme complacency.  We are also at late 2007 levels, nearing the levels seen in 2008 where a combination of falling prices and falling $SKEW led to tragic results.



Conclusions.  As pointed out last week, news is likely to be the key driving force as the dovish outlook from Powell pushed the SPX to the first target of 2750.  I have very little success at predicting Trump's decision, but the options open int is predicting some type of pullback later in the week if SPX falls below 2750.
 
Weekly Trade Alert.  The surprise for the week may be an impasse to the China trade talks that leads into a triangle pattern similar to Jul-Aug 2015, if Trump then imposes the 25% tariffs on China in Jan a repeat of Aug 2015 may follow.   Updates @mrktsignals.

Investment DiaryIndicator Primer,  update 2018.03.28  Dumb Money/Smart Money Indicators
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Saturday, November 24, 2018

Swivel Stick

Last week I expected weakness in the SPX thru Wed with a target of 2700 or lower with sentiment largely unchanged from the prior week after a SPX 100 pt drop, and last weeks 100 pt drop again left sentiment largely unchanged.  So the big question is whether prices continue to drop until a BUY is given or whether a clearing rally is seen to generate a stronger SELL before the drop to 2500.  Largely this will be driven by news events with the early Dec China trade talks and the late Dec FOMC.

Compared to Teddy Roosevelt's motto of "walk softly and carry a big stick", Trump's motto seems to be "talk loudly and carry a swivel stick".  The recent selloff in oil was after a last minute repeal of the threatened sanctions against our allies buying oil from Iran, and the  situation with the nuclear disarmament of N.Korea has also seen considerable back pedaling by Trump.  With the announcement that Larry Kudlow, a hard liner, is not going to the conference with China, this may mean that Trump is again willing to back pedal on his trade tariff stance.  If so a relief rally to SPX 2750 or higher may be expected.

The 30%+ decline in the price of oil, a main driver of inflation since the 1970s, is also likely to lead the Fed to rethink their inflation outlook if oil prices stabilize at $50 or lower.  If so, a softening of the rate hike outlook could help propel the SPX over 2800 again, but sentiment would likely give a strong SELL, sending prices back toward 2500 as Jan/Feb sees earnings outlook without the 20% pop due to tax cuts in 2018.

I. Sentiment Indicators

The overall Indicator Scoreboard (INT term, outlook two to four months) has shown almost no change over the last two weeks even after an almost 200 pt drop in the SPX.  Compared to Mar/Apr 2018, this indicates lower prices sooner or later.


The INT view of the Short Term Indicator (VXX $ volume and Smart Beta P/C, outlook two to four months) trend and outlook are about the same as Indicator Scoreboard..


Bond sentiment (TNX) declined slightly but still mildly supportive of lower rates.


For the INT outlook with LT still negative, the gold miners (HUI) bearish sentiment continues in a modest uptrend as prices stabilize between HUI 140-50.


II. Dumb Money/Smart Money Indicators

The Risk Aversion/Risk Preference Indicator (SPX 2x ETF sentiment/NDX ETF sentiment, outlook 2 to 4 days/weeks) as a INT indicator remains very low as preference toward the NDX remains high relative to the SPX.


The option-based Dumb Money/Smart Money Indicator as short/INT term (outlook 2 to 4 days/weeks) has actually fallen even as prices moved lower and indicates too much complacency.  This indicator points to lower prices sooner rather than later.


The INT term SPX Long Term/Short Term ETFs (outlook two to four weeks) bearish sentiment is one of the few indicators that is slightly favorable over the short term as the Tue SPX drop saw strong selling in the dumb money (2x) ETFs.  Sentiment is now at neutral, the same as the previous low at 2600.


Long term neutral, the INT term NDX Long Term/Short Term ETF Indicator (outlook two to four weeks) bearish sentiment fell sharply as there was strong buying late in the week by dumb money (2x) ETFs.  This indicator has not performed as well as the SPX Indicator as in May/Jun, but may point to under performance.


III. Options Open Interest

Using Thurs close, remember that further out time frames are more likely to change over time.  This week I will look out thru Dec 7.

With Fri close at SPX 2633, Mon has very light resistance up to 2750 and is more likely to be pinned by puts with support at 2600 and 2625 and hedging resistance at 2655.  Light open int overall.


Wed shows almost no put support down thru SPX 2550, but strong call resistance at 2710 and 2725.  Virtually unlimited downside potential with upside limited above 2700.


Fri shows larger open int with huge put support at SPX 2575 and 2600 with large support extending to 2700 and almost no call resistance until 2750.  A move over SPX 2700 is most likely.


For the following Fri, a jobs report day, the outlook is somewhat like the previous Fri, with support at SPX 2700 and huge resistance starting at 2750.  There is a slight bias for SPX 2725 or higher.


IV. Technical Indicators / Other

Taking a look at the $NYUPV/$NYDNV back to 2010 indicates that the lack of up volume shows a buying interest level similar to the Jun-Jul 2015 period before the Aug flash crash.



Conclusions.  Overall, sentiment is inconclusive with the potential for a news related Xmas rally that may take the SPX up to 2800 or higher, but other indicators showing extreme complacency that could lead to a sharper decline than many expect.  Be careful out there.
 
Weekly Trade Alert.  Options open int seem to support the Xmas rally scenario, at least to the SPX 2750 level with most of the action back loaded for the week.  A hold of SPX 2610ish thru Wed mid day may spark a short covering rally, especially with any positive outlook over China trade talks.  Updates @mrktsignals.

Investment DiaryIndicator Primer,  update 2018.03.28  Dumb Money/Smart Money Indicators
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Saturday, November 17, 2018

A Permanently High Plateau?

The sentiment indicators last week were pointing to an SPX 80-100 pt drop from Fri close at 2781 and the low for the week was 2671.  Admittedly my timid self was expecting more holiday spirit with optn exp, but not to be.  The drop in prices followed a similar pattern to the late Feb 2018 retrace of the strong rebound from prior lows, but sentiment was mostly unchanged by the end of the week with the SPX 45 pts lower.  Investors seem to believe Keynes famous line that "stocks are at a permanently high plateau" months before the 1929 crash.  Most analysts agree with EOY targets of SPX 2850-2900 concluding that an early agreement on China trade talks is around the corner.  Despite Trump's tweets from the sideline, neither China nor the US is showing much sign of retreating on differences as evidenced by Pence and Xi this weekend.  My feeling is a "hope rally" may pull the SPX up to fill the gap at 2805, but disappointing trade talks will result in a quick trip to 2500-50.

I. Sentiment Indicators

The overall Indicator Scoreboard (INT term, outlook two to four months) last week's SPX 100 pt drop only resulted in unchanged sentiment and a few days of up/sideways prices will likely drop sentiment to the level of early Mar before the retest of the lows at 2550.


The INT view of the Short Term Indicator (VXX $ volume and Smart Beta P/C, outlook two to four months) sentiment actually dropped last week and is already at the level of the Mar highs, so any gains from here should be short lived.


Bond sentiment (TNX) remains mildly positive and my prediction of the TNX and Fed funds rates meeting at 2.5% by mid-2019 is looking more likely .


For the INT outlook with LT still negative, the gold miners (HUI) bearish sentiment may be finally indicating capitulation by the gold bugs.  Remember my optimal scenario is that an economic slowdown will lower inflation expectations and gold into mid-2019.  At that point sentiment should be bearish enough to start an inflation rally into the 2020 election if the Fed stops raising rates.


II. Dumb Money/Smart Money Indicators

The Risk Aversion/Risk Preference Indicator (SPX 2x ETF sentiment/NDX ETF sentiment, outlook 2 to 4 days/weeks) as a INT/ST indicator is starting to show some improvement.


The option-based Dumb Money/Smart Money Indicator as short/INT term (outlook 2 to 4 days/weeks) similar to the ST Indicator saw only a small blip last week before turning lower.  Another SELL is only a few days away.


The INT term SPX Long Term/Short Term ETFs (outlook two to four weeks) bearish sentiment remains at bearish levels with the next chart showing the LT (2x) ETFs.


Here you can see that the dumb money (2x) SPX ETFs are also stuck at sentiment levels prior to the late-Mar/Apr retest lows at SPX 2550, indicating that an SPX 200+ pt SPX decline could start any time.


Long term neutral, the INT term NDX Long Term/Short Term ETF Indicator (outlook two to four weeks) has dropped to levels seen at the Aug and Oct tops even though prices remain near lows, so BTFD is in danger here.


III. Options Open Interest / Other

Using Thurs close, remember that further out time frames are more likely to change over time.  This week I will look out thru Nov 30.  Last weeks options were dominated by Fri opex that showed a lot of overlap down to 2700 which may have allowed prices to fall then reverse.

With Fri close at SPX 2736, Mon has light put support at 2725 then 2710 with call resistance at 2740 and 2750.  More likely some weakness.  Light open int overall.


Wed has surprisingly strong resistance at SPX 2740 and 2750 with only modest support until 2700.  Bulls betting on seasonal strength may be disappointed as a Mon-Wed move to SPX 2700 looks likely.


Fri shows large open int with significant put/call overlap from SPX 2715 to 2725.  This is the opposite of what we saw last week and may indicate the potential for a rally to SPX 2775 or higher if call resistance at 2750 is overcome.


For the following Fri, EOM with huge open int, there is strong put support up to SPX 2740 with overlap of put/calls up to 2775.  Continuation of late week strength is expected.



Conclusions.  As the showdown between US and China approaches, I am reminded of the invasion of England by the French in 1100 AD (aka the Opium wars with China circa 1850s).  The result was conflict between the European superpowers for almost 800 years.  If China gives in they risk becoming a vassal of the US like Japan, which I doubt.  Market sentiment is surprisingly bullish with most analysts expecting SPX to reach 2850-900 by EOY, but sentiment indicators are showing a high degree of risk in the 2750-800 area compared to the Feb-Mar period.  Very ST, options open int points to a weak beginning for next week that may test 2700 before a move higher into the next week.  Last week   NorthmanTrader had an interesting writeup about the recent markets adherence to TA that made me wonder if selling dominated by Smart Money (SPX 3x ETFs) might be the cause.

Weekly Trade Alert.  An early week pullback to SPX 2700 or lower should be a BUY for a move to 2740-50.   Updates @mrktsignals.

Investment DiaryIndicator Primer,  update 2018.03.28  Dumb Money/Smart Money Indicators
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