Sunday, December 25, 2016

Alarm Bells are Starting to Go Off

Apparently Wall Street is in complete agreement with Avi Gilbert that investors only worry for 2017 is how high the market will go.  This confidence/complacency is reflected in the sentiment measures, showing that investors are now "all in". That ringing I hear in my ears is not from Santa.  This week I have a lot of charts to cover, including an introductory look at the banking index BKX using FAZ/FAS ETFs, so lets get to it.

The overall Sentiment Scoreboard for the SPX remains pinned to the SELL zone and has now done a 180 degree turn from the January market lows.  I am now starting to wonder if I am bearish enough.

The Short Term Indicator  (VXX $ volume and Smart Beta P/C) has now reached the minimum for a confirmed SELL with the 5 Dy EMA at -0.4 and the 20 Dy EMA at -0.25.

Looking more closely at the Short Term components, the VXX $ volume (adj for market volume) has the long term EMAs at the lowest level for the last two years, warning of a pickup in volatility.

The second component, the Smart Beta P/C (ETF Puts/Equity Calls), is lagging the VIX $ Vol, but the overall pattern since June resembles the first half of 2015 which also showed the same divergence in August 2015.

The money flow indicator SPXU/UPRO has now reached a new low extreme after a brief bounce continuing to trace out the same pattern as the first half of 2015 only now for about 50% longer in duration.

Looking at some of the other indices, the NDX shows similar results as the SPXU/UPRO.

The RUT has seen a sharp drop in bearishness even as the rally has run out of stream, not a good sign.

The gold miners HUI has finally seen some increase in bearishness as the index fell below the critical 180 area last week, but the long term EMA (blue) has only now reached the neutral area and is in the same position as June of 2015 when the index continued to fall to 100.

Bond sentiment (TNX)  is hovering around the same area as in April of 2015 when interest rates were only 1.9%, so the overall outlook for bonds remains bearish.

Lastly, I just completed replacing the biotech index IBB with the banking index BKX using the FAZ/FAS ETFs. This is a long term look and next week I will show the normal period.  As you can see a strong BUY was issued mid-year so the resulting rally is no surprise. The only question is how high can it go.

Conclusion.  We are now seeing the lowest levels of bearishness of the last two years.  In addition to the above, VIX call buying spiked higher on Wed and Thur roughly equal to Dec 14 & 15 of 2015, this was about a week and a half before the decline started.

Weekly Trade Alert.  My overall preference is for an extension top into the first of the year, but sentiment is so extreme that I will consider a half position short on the SPX on a retest of the highs next week 2270-75 with a stop at 2290.  Updates @mrktsignals if necessary.


  1. Arthur, back on November 13th, 2015 insiders were told of the coming high via this print:

    Naturally I don't know the time it will hit but I'm sure there is coded information in the numbers that tells them the exact day. But it's looking like it could hit 230 on the SPY early in January of next year.

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