Saturday, September 15, 2018

The Calm before the Storm

Last week was more notable for its lack of volatility than anything else with an SPX rise of 1% for the week.  Mon early decline was enough to generate a ST options Dumb/Smart Money BUY as posted on Twitter, but the week ended with many of the sentiment indicators near a SELL so further gains are likely to be limited.  Options open int is also showing limited upside potential that may indicate a Nov-Dec 2015 topping behavior (lower highs).  The VIX Call Indicator has also started to pickup with a 19% rise from recent lows (a SELL is 50%) Wed-Fri and may give a SELL next week, the last SELL was Jan 10th.

I. Sentiment Indicators

The overall Indicator Scoreboard (INT term, outlook two to four months) dropped sharply last week and seems to be bottoming in the area of the July 2017 top rather than the Jan top, so a repeat of the Jan-Feb crash is not expected.


The INT view of the Short Term Indicator (VXX $ volume and Smart Beta P/C, outlook two to four months) remains in an area that is similar to Jan, so a sizable pickup in volatility is expected soon.


Bond sentiment (TNX) showed a sharp pickup in bearish sentiment as rates rose near to the 3.0% level.  Much of the rise may be due to recent weakness in the dollar, but I still think that a stronger dollar and somewhat weaker rates are expected into the 1st half of 2019.


For the INT outlook with LT still negative (note, BUY for INT term equals neutral LT), the gold miners (HUI) bearish sentiment dropped sharply as many analysts are again calling for a bottom and new bull market, but this doesn't line up with the DUST/NUGT ETF sentiment.


II. Dumb Money/Smart Money Indicators

The Risk Aversion/Risk Preference Indicator (SPX 2x ETF sentiment/NDX ETF sentiment, outlook 2 to 4 days/hours) as a very ST indicator remains near the bottom of its TL and is a topping indicator.


The option-based Dumb Money/Smart Money Indicator as short/INT term (outlook 2 to 4 days/weeks) came close to a complete reversal from the Mon BUY and likely to generate a ST SELL next week.


The INT term SPX Long Term/Short Term ETFs (outlook two to four weeks) bearish sentiment was little changed for the week, but also appears to be forming a similar pattern to July 2017 period that saw a big jump in volatility, but not a large decline.


Long term neutral, the INT term NDX Long Term/Short Term ETF Indicator (outlook two to four weeks) again the cyclicality makes this hard to interpret, so this week I am going to add the 2x and 3x ETFs that show overall high bearishness is not similar to a major top.


The NDX 2x QID/QLD ETFs (dumb money) indicate a high level of bearishness.


While the NDX 3x SQQQ/TQQQ (smart money) show only neutral sentiment.  The conclusion is that a pullback/correction ST is not likely to be the beginning of a bear market.


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 Sept 28.

With Fri close at SPX 2905, a hold over 2900 can cause delta hedging with light resistance up to 2950.  A break below 2900 could fall to 2875.  Light open int overall.


Wed shows call resistance increasing up to SPX 2930 with strong support at 2840.


Fri opt exp has most of the options as hedges in the AM, but is similar to the PM where there is strong resistance at SPX 2900 and above with the potential for a drop to the 2850-75 level.  For the week, a Mon/Tue rally over SPX 2920 should be reversed by EOW.


For the following Fri (EOM) has large option positions with strong call resistance at SPX 2865 and higher.  So there is likely to be some weakness toward the 2850 area by the EOM.


A couple of weeks ago, I resurrected the VIX Call Indicator, point out that the extremely low VIX call vol was similar the Jan 2017 that saw a brief decline followed by a strong rally then a correction.  We got a brief decline and the Aug rally and last week the VIX Call indicator rose by 19% of the avg with 50% (0.5) as a rise from a recent low a SELL.  Remember that there is usually a 1-3 week lead before a large decline.  I will be using a SELL as an entry signal for a VXX position that historically has returned 30-50% over the following 4-6 wks with a maximum drawdown of about 10%.



Conclusions.  Possible tropical storm, but no hurricane on the horizon.  I am expecting a 5-7% pullback in Oct before a possible final year end rally that may top SPX 3000.  In addition to the August tops discussed last week, there is also a mid-term election factor.  Sentiment is the over riding factor, however, and the first VIX Call Indicator SELL since Jan would strongly support the historical trends.

Weekly Trade Alert.  A top next week may not be followed by a sharp decline immediately, but I am looking for the DJIA to fill the Jan 29 gap at 26,440 before a sizable decline begins.   Options open int point to possible weakness by end of next week or EOM at the latest.  We could see something like Dec of 2015 where volatility picks up gradually, then explodes due to some external event.  Updates @mrktsignals.

Investment DiaryIndicator Primer,  update 2018.03.28  Dumb Money/Smart Money Indicators
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Saturday, September 8, 2018

Questionable Sentiment

Last week was somewhat weaker than expected and the SPX seems to be testing the diagonal support from early July around 2860.  As posted on Twitter Wed AM, one of the research firms took a closer look at the avg of 14 times the SPX made a new high in Aug since 1980, and the result was a weaker 1st half of Sept with a stronger 2nd half followed by a sharp decline in Oct, then a year-end rally.  Since this includes 1987, there are likely some distortions for Oct, but my expectations are for a rally to SPX 2920-40, followed by a decline to 2750-2800 in Oct.

I. Sentiment Indicators

The overall Indicator Scoreboard (INT term, outlook two to four months) was accurate with a SELL at the Aug top, and shows some improvement with last weeks action, but not enough to expect an immediate rally.


The INT view of the Short Term Indicator (VXX $ volume and Smart Beta P/C, outlook two to four months)  was little changed, again not supportive of much of a rally.


Bond sentiment (TNX) surprisingly showed a sharp drop in bearishness even as rates rose with the strong wage growth in the jobs numbers.  Bond investors seem to be discounting inflationary implications due to trade war concerns.


Looking at the LT, I have been negative on the gold miners (HUI) for most of the last two years while many have been talking about a new bull market and even with a decline of almost 50% from 2016, bearish sentiment is more indicative of the early stages of a decline.  Comparing this time to the 2015 decline, sentiment in 2015 had already reached a BUY before the last collapse from 180 to 100. so this decline may have more to go than people imagine.


II. Dumb Money/Smart Money Indicators

The Risk Aversion/Risk Preference Indicator (SPX 2x ETF sentiment/NDX ETF sentiment, outlook 2 to 4 days/hours) as a very ST indicator remains near the bottom of its TL with little change for investors appetite preferring NDX to SPX, not a good sign given the recent weakness in NDX.


The option-based Dumb Money/Smart Money Indicator as short/INT term (outlook 2 to 4 days/weeks) has started to rise and may reach a buy by the end of week.


The INT term SPX Long Term/Short Term ETFs (outlook two to four weeks) bearish sentiment continues to be one the most accurate indicators reaching a SELL at the Aug top, and last weeks lack of improvement is indicative of stronger downside ahead, the only question is whether there will a be a brief options related rally first.


Long term neutral, the INT term NDX Long Term/Short Term ETF Indicator (outlook two to four weeks) has reached the level where a short term rally occurred in the past couple of months, but the overall high levels have marked longer term tops.


III. Options Open Interest / Other

Using Thurs close, remember that further out time frames are more likely to change over time.  Given last Fri downward volatility, put support is likely stronger for the week than shown on Thur.

With Fri close at SPX 2772, Mon has some put support up to 2875 with offsetting puts and calls from 2880 to 2895.  Light open int overall with a slight upward bias.


Wed is somewhat similar but with put support moving down to SPX 2860, while there is some call resistance at 2880 but little at higher prices.


Fri shows larger open int with significant call resistance starting at SPX 2900, and the 2850 up to 2880 show a lot of overlap.  Some volatility between 2850-80 seems likely.


Conclusions.  Next week is likely to show some downward pressure, but may find support between SPX 2850-60.  Currently sentiment is not showing much support for a rally.

Weekly Trade Alert.  None.  Outlook may change by end of week.  Updates @mrktsignals.

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

Remember September

August was quite a memorable month as the SPX regained the highs lost in January on the lowest volume of the year.  You could say that this was climbing the "wall of worry" as the last few months press has been dominated by talks of Presidential impeachment resulting from involvement in Russian meddling in US elections, trade wars and sanctions on foreign governments that do not toe the line to US policies, and a President that quite frankly acts like a schoolyard bully.  September should see volume returning to the markets and seems on a collision course to repeat the late 2014 volatility pickup.  One sequence of events that could lead to a similar outcome is a mid-Sept high volume top on the SPX, followed by an unfavorable Mueller investigation report in Oct implicating Trump and a sharp selloff, but a GOP victory in the Nov elections would make impeachment unlikely with possible new market highs by EOY.

I. Sentiment Indicators

The overall Indicator Scoreboard (INT term, outlook two to four months) saw a sharp plunge in bearish sentiment early last week, but still above the levels seen before the Jan and June tops.  More upside is likely.


The INT view of the Short Term Indicator (VXX $ volume and Smart Beta P/C, outlook two to four months) appears to be in a bottoming process that may not go much lower.  Inconclusive.


Bond bearish sentiment (TNX) has been on the rise recently and I still think that the big surprise may be the TNX and Fed funds rates meeting at 2.5% if the economy slows.  Recent strength in the GDP may be a result of "front running" higher tariff prices by foreign buyers.


For the INT outlook with LT still negative, the gold miners (HUI) bearish sentiment has continued to rise and is likely to support prices for now.


Taking an infrequent look at the small cap RUT INT sentiment using TZA/TNA, bearish sentiment remains low, but not extremely so.  Limited gains likely.


II. Dumb Money/Smart Money Indicators

The Risk Aversion/Risk Preference Indicator (SPX 2x ETF sentiment/NDX ETF sentiment, outlook 2 to 4 days/hours) as a very ST indicator remains near the bottom of its TL, ahow optimism for techs vs the broad market is high.


The option-based Dumb Money/Smart Money Indicator as short/INT term (outlook 2 to 4 days/weeks) gave a weak SELL mid-week, but the 1% pullback Thur/Fri may be it.  The pattern the last two weeks still resembles that leading to the Jan top with choppy downward action.


The INT term SPX Long Term/Short Term ETFs (outlook two to four weeks) bearish sentiment has been driven lower by strong buying by the dumb money (2x) ETFs, but both indicator and ETFs are still a few weeks from the Jan extremes.


Long term neutral, the INT term NDX Long Term/Short Term ETF Indicator (outlook two to four weeks) remains the difficult to interpret as three upward trends in sentiment occurred since early 2017 with the first two marking tops at the current levels..


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 Sept 7.

Last Fri showed a pickup in put support at SPX 2880 making a larger drop unlikely, while the close at 2900+ showed relative strength.


With Fri close at SPX 2902, Tue has very light resistance up to 2925 if the market rallies, while under 2900 the next support level is at 2895.  A weak open is likely to rally.  Light open int overall.


Wed shows strong call resistance at SPX 2925 with some put support up to 2915.


Fri, a jobs report day,  shows larger open int with very strong call resistance from SPX 2925-35 and a positive week is likely going to be capped in that area.  There is little put support to 2850, so there is a small probability of a large decline.


Conclusions.  If the SPX continues to follow the 2014 analog Sept should be up week 1 to about 2925, down week 2 to about 2885, then up week 3 (opt exp) to 2935.  Checking the historical data, mid-Sep 2014 saw a large pickup in VIX call volume near the top, so a similar pickup in volume this year would be a warning.  Otherwise, there is still a possibility that the rally may continue until Nov when a possible blowup of the China trade talks and/or election loss by the GOP could derail the Trump agenda.
 
Weekly Trade Alert.  Next week looks to be up with a target of SPX 2920-30 by Fri.   Updates @mrktsignals.

Investment DiaryIndicator Primer,  update 2018.03.28  Dumb Money/Smart Money Indicators
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Saturday, August 25, 2018

The Longest Bull Market

A couple of weeks ago I pointed out that an important date for Wall St would be Aug 22 in order to claim that US stocks were in the "longest bull market in history", eclipsing the 1991-2000 run (although some argue 1987-2000 is more appropriate).  Fait accompli, as Fri the SPX closed at new highs, but NDX and DJIA did not.  Now FOMO can go into high gear.  Sentiment overall shows low, but not excessively low, bearish sentiment and still reminds me of Jan 2018.  I would not be surprised to see a run up to the SPX mid-2900s into the Sept opt exp as most of the current rally has been on very light volume and the FOMO crowd could enter on higher volume in Sept, much like 2014.  The Humble Student first gave SPX 2925-60 as a "cup and handle" target on July 29, but has recently turned more bearish.

I. Sentiment Indicators

The overall Indicator Scoreboard (INT term, outlook two to four months) has moved back to its recent lows, indicating that the current move may be close to taking a breather.  OntheMoneyUK last week discussed a DeMark setup that implies a run up to SPX 2880-90 before a 40-50 pt pullback.


The INT view of the Short Term Indicator (VXX $ volume and Smart Beta P/C, outlook two to four months) is in a similar pattern but slightly more bullish for prices short term.


Bond sentiment (TNX) surprisingly shows increased bearishness, probably due to expected Fed rate hikes, but a slow down in the economy could push the TNX to 2.5% even if the Fed fund rate rises to 2.5%.


For the INT outlook with LT still negative, the gold miners (HUI) bearish sentiment finally pulled back to the neutral level following the near 40 pt waterfall decline in the HUI over the last month.  We may see a consolidation for several weeks, but I still expect to see downward pressure to the 100 level by year's end.


II. Dumb Money/Smart Money Indicators

The Risk Aversion/Risk Preference Indicator (SPX 2x ETF sentiment/NDX ETF sentiment, outlook 2 to 4 days/hours) as a very ST indicator remains near the bottom of its TL.


The option-based Dumb Money/Smart Money Indicator as short/INT term (outlook 2 to 4 days/weeks) had dropped to a weak SELL early in the week, but closed the week at neutral.


The INT term SPX Long Term/Short Term ETFs (outlook two to four weeks) bearish sentiment dropped significantly last week nearing a SELL that should see at least a weak pullback.


Long term neutral, the INT term NDX Long Term/Short Term ETF Indicator (outlook two to four weeks) pulled back from its recent highs, so the NDX may falter near the 7,500 level.


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 Sept 7.

With Fri close at SPX 2775, Mon has very light resistance up to 2900 if the market rallies, while under 2775 the next support level is at 2850.  Light open int overall.


Wed is somewhat similar except that strong resistance appears at SPX 2900. a push up to the 2890+ area seems likely by Wed.


Fri shows larger open int with significant call resistance starting at SPX 2870, and the 2850 and below show a lot of overlap.  A move down to at least 2850 seems likely


For the following Fri, a jobs report day, the outlook is somewhat like the previous Fri, with support at SPX 2850 and high resistance starting at 2900.  Some consolidation between 2850-2900 is expected.


I haven't looked at the VIX Call Indicator much since Jan, mainly due to very low reading, but recently volume has been picking up.  Early Aug saw a drop to a new low at -48% 10 DMA/Avg and has recently moved over 0%.  The last time we saw a reading this low and a move to 0% was Jan 2017.  We then saw a small pullback, followed by a strong rally in Feb that moved the VIX Call Indicator to +50% before a two month correction.


Conclusions.  Having made a new high in the SPX, some follow thru is to be expected over the next 2-3 days, but a 1-2% pullback is likely thereafter.  A weak volume rally in Aug looks a lot like the setup in 2014 which saw a higher volume continuation in Sept thru opt exp, but a nasty Oct surprise.
 
Weekly Trade Alert.  A move up to SPX 2890+ seems likely by Wed, but a pullback to 2850 into early Sept is indicated by the options open int.   Updates @mrktsignals.

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