Sunday, November 27, 2016

Up,Up and Away

... at least that's you are led to believe by nearly all of the market pundits.  While I was one of the few calling for a post-election rally early November based on extreme bearish sentiment, intermediate indicators are now warning that an end is near.

Today, I will be looking at a variety of indicators, including a last look at the the IBB (biotech) which I plan to replace with the banking sector BKX (FAS and FAZ ETFs) due to the resurgence in interest rates.  The overall Indicator Scoreboard has almost completed a 180 degree turn from before the election, having surpassed the low bearish sentiment before the August 2015 and January 2016 declines, but still above an official SELL signal.

The Short Term Indicator (VXX $ volume and Smart Beta P/C) has been falling even more slowly, mostly due to the Smart Beta P/C (ETF Puts/Equity Calls), leaving me to expect more time is required before a significant decline is seen.

The SPX 2x ETF ratio, SPXU/UPRO, is probably the closest indicator to giving a SELL since the short term EMA has reached the lowest level in two years, while the longer term EMAs may have further to decline.

The 3x NDX ETF ratio SQQQ/TQQQ is also approaching the lowest level of bearish sentiment for the last two years, leaving the potential for a H&S as a strong possibility for this sector.

The outsize reaction of the small cap index RUT to the rest of the market is understandable when you consider that the proposed 20-25% corporate tax rate would allow small businesses to pay the same tax rate the large corporations have been paying for 20 years or more thru the use of foreign subsidiaries.  Surprisingly, bearish sentiment (TZA/TNA) is still moderate, supporting further gains for this sector short term.

The gold bugs HUI index is in a precarious position as sentiment (DUST/NUGT) is less bearish than May of 2015 when from the same level as today at 180, a waterfall decline began taking the index down to 100 over a three month period.  A repeat performance may be in order the first quarter 2017 if talks begin of additional FED rate hikes.

Bonds, unlike gold stocks, have seen a sharp rise in bearish sentiment.  However, the current bearish level is equal to the April 2015 period after rates rose to 2.1% before rising to 2.5%.  This leads me to believe rates may rise to 2.8% short term.  But longer term, my belief that long periods of over bought (below mean) are matched by long periods of over sold (above mean) means the next 12 months will be rough for bonds (see gold stocks sentiment cycle).

Finally, without explanation the IBB, although this may just be an example of the long term sentiment cycle.

Conclusion.  Not much change from my Nov 6 post on the expectation of a fast and furious post-election rally lasting two to four weeks followed by a sharp decline of 15-20% in the SPX over the next 9-12 months starting by EOY.

Weekly Trade Alert.  None. Updates @mrktsignals if necessary.

Sunday, November 20, 2016

The Lonely Bear

I'm starting to feel a lot like I did last Nov when everyone was predicting SPX 2300 by EOY and higher beyond and I was warning of an SPX 10% or more correction in Dec-Jan due to problems from China.  Even Pretzel Logic has seemingly thrown in the towel, although I don't completely disagree that higher highs may be seen longer term but only after the born again bulls are predicting SPX 1100-1200 like they were in Feb-Mar.  My position on gold, however, has radically changed from last Nov when I was predicting a 50% or more rally in gold stocks, but now see a continued decline as likely over the next 9-12 months.

I did not develop my two main composite indicators, the overall weighted Indicator Scoreboard and the Short Term Composite (VXX $ Volume and Smart Beta P/C) until May, but today I want to back test these indicators to compare the positions at the end of 2015 to today.

The Indicator Scoreboard from 2015 showed similar behavior in bearish sentiment before both the August 2015 plunge and the December 2015 selloff with an initial SELL (at -10) followed by a rise and short covering rally then a decline in bearish sentiment to a less bearish -8.0.

Now comparing this to the 2016 Indicator Scoreboard, we can see a similar pattern from July through November 2016.  In fact, the overall Indicator Scoreboard is in the same position as at the end of Dec 2015 immediately before the January plunge.

The Short Term Indicator shows a slightly different story, however.  Following short covering rallies in 2015 the STI dropped to the -.40 level before both the August plunge and the December top and even in Oct 2014 had dropped down to the -.20 level.

So far in Nov 2016, however, the STI has not even reached the .00 level and it is likely that a drop to -.30 to -.40 occur before a significant pullback.

One other indicator that I have been watching for confirmation of a top is the bipolar VIX P/C which can see upward spikes when smart money bets on volatility declines at market bottoms or when dumb money bets on volatility declines at market tops.  This time we saw both with a pre-election spike by smart money followed a week later by a dumb money spike betting on continued volatility declines.  The later confirms a top as in the May, August and December tops of 2015.

Conclusion. A significant top may be in (Indicator Scoreboard), but a significant decline is not imminent (Short Term Indicator).

Weekly Trade Alert.  None at present.  Updates possible at @mkrtsignals.

Sunday, November 13, 2016

Sentiment Trumps All (Pun Intended)

Last week produced the post-election rally as expected, but started a little sooner than expected with the FBI reneging on the Hillary email investigation followup Sunday afternoon.  So I missed the Friday target posted earlier on Twitter (@mrktsignals)  I admit that since April when the SPX first hit 2080, I have been a cautious bear using extra caution approaching long positions.  So now that the election is over and the Tin Man won, but none of the markets crashed outside of bonds and gold, what is next?  As expected those looking for a Trump led crash in stocks have now switched sides looking for SPX 2300-2500, but I am seeing similarities to the Nov 2015 top as well as early 2000 where GB's proposed tax cuts produced a strong rally in the DJIA even as the NDX faltered.

Over the next few weeks I hope to update my long term view ( last updated in March 2015.  The Republican victory has given much clarity to my overall bearish view as I have for several years viewed the global economy like a 6-cylinder auto engine where the US and Europe are two cylinders each, China one and the ROW the other.  Now only 4-cylinders are working with Europe sputtering and Trump is proposing switching from mid-grade to high octane fuel for two cylinders but ignoring the rest.  My bullish LT forecast previously was dependent on a resurgent Europe resulting from a much higher US dollar (and lower Euro), but Yellen prevented that from happening by also adopting a US-centric position and keeping short term rates too low.

Since this is supposed to be a stock market sentiment site I want to take a look at several long term sentiment indicators using 25, 50 and 100 day EMAs to see if LT sentiment is bullish or bearish.  First looking at the VIX term structure (VXV/VIX) since mid 2012, you can see that the SPX rallied strongly while the VTS stayed above the mean, but began to lose momentum as the VTS spent more time below the mean thru mid 2015.  Since March of 2016, the VTS has spent most of the time below the mean, pretty much the opposite to 2013 and not much support for the bulls.

The second long term measure is the volatility ETF ratio VXX/XIV.  Here we see less cyclicality chart wise, but the same overall results.  Interestingly, the pre-election dip barely moved sentiment.

Finally, in case you feel that this is just an anomaly related to volatility, take a look at the SPX 2x ETF ratio SDS/SSO.  This looks almost like an average of the previous two charts.  As a result of long term sentiment, I am going to go out on a limb and predict the same "born again bulls" that are calling for SPX 2300 and beyond similar to Nov 2015 will get an even ruder awakening over the next 9 to 12 months with the SPX falling 15 to 20 percent (and more is possible longer term depending on what happens in Europe and China).  Part of the problem is likely to be sentiment as most will look at declines of 10 to 12% as similar buying opportunities to the 2015 and 2016 declines providing less bearish sentiment.

Return to Regular Programming (from Outer Limits)

After giving a Buy signal last week, it will probably take two to four weeks of distribution for a Sell signal to form using the overall Indicator Scoreboard which has just started to turn down.  Compared to the July and December 2015 tops, this would probably mean a reading of about -8.0.

The Short Term Indicator is in much the same position and is likely to drop close to the Sell line before a significant market decline starts.

Looking at some of the other indices, the gold bugs seem completely oblivious to what is happening in the HUI and despite Avi Gilbert's call for a doubling of the GDX in 12 months a couple of weeks ago, new lows look more likely.

Finally, I've been waiting for the bond market to wake up for at least six months.  While I expected a more gradual rise in the TNX to 2.5 to 3.0% with the Dems in control, the Reps policy to cut taxes and spend baby spend like GB2 is likely to drive rates to the 3.5 to 4.0% level.  If you read the FEDs dot-plot projections for rates, you know they were planning to gradually raise ST rates to 2% with a 4% TNX, but they may end up playing catch up with the TNX.  The long period of low bearish sentiment means MEGA distribution.

Conclusion, a top of significance is near.  Some of you may have seen Tom DeMark's comments last week calling for a top next week in the DJIA at 19,400 and the SPX at 2200+ before an 11% pullback.  I don't disagree, since this matches the 2015 top in Nov where a six week consolidation was followed by the January collapse.  This time I expect a more gradual decline with timing similar to 2008, with a first quarter pullback, a spring-summer rally then a fall decline.  Here, the outcome becomes more uncertain due to several key elections in Europe that may result in increased turmoil in the EU.

Weekly Trade Alert.  None at present.  Updates possible only at @mkrtsignals.

Sunday, November 6, 2016

Setup for a Bounce or More?

First, I want to thank the loyal readers since I first started this journey a year ago October.  Many thought my contrarian approach was too left field, but the last few weeks have seen over 3,000 page views a week, so I must be doing something right.  I was also able to provide some timely updates last week at

The past week saw a fairly strong rise in some of the bearish sentiment indicators, especially those related to options as the VIX has risen to the highest level since the BREXIT in June (22 now vs 26 then) and so have put/call ratios.  Oddly other measures, especially the money flow measures (SPXU/UPRO) have barely budged.  This leads me to believe that we are likely to see what John Hussman called several years ago, "a fast and furious short-covering rally that is prone to fail", rather than the 5th wave blowoff to SPX 2300 or 2500 that many EWers are looking for.

So let's start by looking at an update of two of the short term measures I mentioned last week. The Short Term Indicator (VXX $ volume and Smart Beta P/C) is not at levels seen during BREXIT but has reached the levels of early Feb and Oct.

The 3x SPX etf ratio SPXU/UPRO has struggled to reach the mean, showing that outside the options market, investors remain unconcerned about the current pullback.  This leads me to believe that a sharp post-election rally is likely but it is not likely to have much follow through and may not make it above the SPX 2160-2180 level.

The tech sector which I mentioned two weeks ago as having extremely low intermediate term bearish sentiment has almost gone into crash mode with even less concern by investors as measured by the short term SQQQ/TQQQ ratio.

Finally, switching to the intermediate term view, the overall Indicator Scoreboard has almost reached levels seen at the June 2015 lows before the final rally of mid-2015.

One other thing I should cover for those looking for a safe have in gold stocks is an update of the HUI etf ratio DUST/NUGT.  Other than for very short term plays, the sentiment picture here is not much better than for the NDX.

Conclusion.  Short term rally but not much more.  I want to enter a long position Mon-Tues around SPX 2080 with a target of 2160.  If the H&S pattern in the NDX holds, the SPX should top out in two to four weeks and be in full decline by late December.

Weekly Trade Alert.  Long SPX around 2080, stop 2065, target 2160.