Signs of an Approaching Top

As expected the past week could only be called choppy with almost daily cycles between an SPX low of 2160 and a high of 2175 to close the week at 2174.  Besides the sentiment indicators that I will cover later, several headwinds will face the market over the next two months.  The first is an interesting take on the "seasonality effect" that many call "sell in May" shown at Mauldin Economics.  Here John shows that the traditional flat period from May to October shows up from 1950-2015, but when looking only from 1988, a top usually occurs in late July and bottoms in late September.  The second, from Marketwatch, shows the markets have been supported by active global central bankers, mostty ECB and BoJ, even as the Fed has pulled back on QE, but recent actions indicate less willingness for further QE-like activity.  Finally, sightings of the Zika virus have started to appear in S. Florida.

What I have noticed the last couple of weeks, is that commodities are starting to weaken, especially oil, and we are seeing a rotation into the tech stocks   Looking at the NDX at 4730, it is only 10 points from the May 2015 high and about 120 points from the ATH in 2000, but sentiment shows that at least a short term top is near with short interest on the QQQ near the Dec 2015 levels.  My own ETF ratios for the 2x QID/QLD and 3x SQQQ/TQQQ show the same low level of bearish sentiment.

Looking at the two composite indicators this week, the overall Indicator Scoreboard (16 weighted) and the Short Term Indicator (VXX $ Vol and Smart Beta PC).  The Indicator Scoreboard EMAs are at the lowest levels seen in the last 18 months and the Short Term Indicator is showing the same.  

Conclusion.  Last week I was looking for a top in the SPX 2185 area, but the market has struggled to reach that level.  Combining the seasonal factors with the extremely low bearish sentiment may point to a high early this week as the first two trading days of the month are usually positive due to mutual fund inflows.  An additional warning was issued by the VIX P/C with a reading of 1.58 Friday due to a large put volume, and the last time this occurred was June 23 just prior to the BREXIT decline.

Weekly Trade Alert.  I am still using SPX 2185 as a shorting target with a stop at 2198 and a short term target of 2135, probably to be followed by an opt exp week rally.  Updates at @mrktsignals.

Appendix.  My special rant this week is to point out the weakness of the overall put/call ratio CPC Revised compared to the Smart Beta PC.  The CPC Revised is an improvement of the reported CPC by backing out the VIX puts and calls, but still has problems identifying tops, typically leading by several weeks.

The Smart Beta PC (ETF puts/Equity calls) does a much better job of indicating market turns, particularly the BREEXIT bottom.