Sunday, August 28, 2016

Employment Numbers are the Key

Last weeks forecasted trading range worked out almost perfectly with a high in the SPX mid 2190s followed by a drop to 2160, but I missed the entry point for a short by three points. Overall bearish sentiment has become less extreme, allowing for a continuation of the rally (early 2015 scenario).   The key for the next week to ten days are the unemployment numbers on Friday.  A repeat of the strength last month will increase the likelihood of FED tightening.  I always look at the FRED's Initial (Unemployment) Claims/1 year chart as an indicator, high claims means lower jobs numbers and that is exactly what happened last month.  So this report may be just right to support a rally back to the SPX 2200 level.

For this week's sentiment indicator review,  I will only cover the overall Indicator Scoreboard, the Short Term Indicator (VXX $ vol & Smart Beta P/C), and the VIX P/C.  There were 5 to1 splits in both the NUGT and DUST ETFs last week, so I need to do another smoothing algorithm and will report the results next week.

The Indicator Scoreboard continues to show a similar pattern to the topping pattern of early 2015, only this time the over bullishness is even more extreme.

The Short Term Indicator shows a similar pattern only to a less extreme and does not indicate a final top.

The VIX P/C briefly dropped close to the .35 level early last week before the decline showing the effectiveness of this indicator, and then bounced back at the end of the week.

Conclusion.  The bankers seem intent on maintaining a sense of calmness going into the election, but will this be only a calm before the storm.

Weekly Trade Alert.  I will be going long SPX on a retest of 2160 early in the week with a target around 2200 over the next two weeks with a 15 pt stop.

Sunday, August 21, 2016

Treading Water

Over the last few weeks, I have pointed out that low bearish sentiment indicated that some type of top was forming, but comparing the markets to 2015, possibilities included the first half of 2015, June thru July, or Nov thru Dec.  More and more, sentiment is becoming similar to the first half of 2015.  Most recently, the VIX has been trading in a very narrow band historically, but in early 2015 this continued for four months.

Jumping to the overall Indicator Scoreboard, a lower volatility equivalent of Mar thru April 2015 seems to be occurring.

The Short Term Indicator (VXX $ volume and Smart Beta PC) has also been locked in a tight range similar to  Mar thru April 2015.

Looking at the other indicators, the VIX P/C has leveled off around 0.5 and is neutral, one of the most reliable, the Smart Beta P/C continues to decline, but not at the SELL level yet.  The SKEW is somewhat worrisome having reached the low 130s, but the end of 2015 saw this level for three months before the Jan selloff.  The most worrisome immediately is the money flow indicator or the SPXU/UPRO which remains at the low levels of last week.

Conclusion.  It is very possible at this point that a pullback in the SPX of 50 to 100 points occurs before a likely Oct-Nov rally.  A possible top around 2200 occurring around the Jackson Hole financial summit could be followed by a pullback to test the May 2015 high at 2135.

Weekly Trade Alert.  Short SPX around 2200 +/- 2 or 3 pts.  Stop 2215.  Target 2160 for now.  VIX P/C is still too high to expect a lot of volatility.

Appendix.  Last week, I mentioned that the reverse split in the VXX resulted in some unusually low volume readings prior to the split so a smoothing algorithm was applied to smooth out the volume.  The first chart is the VXX $ volume for 2015 and 2016 with sentiment bottoming at normal levels (compare to early 2015).

The second chart is of the VXX/XIV from 2013 that shows bottoming sentiment similar to mid-2015.

Sunday, August 14, 2016

Low Volatility Could be Nearing an End

The last few weeks, I have pointing out that most sharp declines over the last year and a half have happened with low VIX P/C averages, but last week was the first sign of a change in trend from high levels with two days of .32 and .27.  The EMAs are still fairly high but a continued downtrend could reach a sell level over the next week or two.  Usually a .30 to .35 level is required for a sharp pullback.

Last week saw a 4 for 1 reverse split in the VXX, and the extraordinarily low volume over the last two weeks may be in part due to anticipation of the split.  The same behavior occurred a few months ago with the reverse split of the gold miner's ETF DUST.  Theoretically, there should be no difference in $ trading volume, but for the VXX the $ volume was 2X after the split compared to before the split.  So I am applying an algorithm to the price pattern to smooth the data, and I need another week of data to fine tune the results.  As a result, this week I will rely on other indicators.

First taking a look at the overall Indicator Scoreboard (wtd composite), the levels of bearishness are consistent with a topping pattern, but also similar to the first half of 2015.

Another composite that I haven't looked at for a while, the Students Trifecta (VIX term structure, TRIN, and overbought/oversold indicator) is at a lower level than the first half of 2015, but the last time at this level in April only produced a 70 point drop in the SPX.

One of the money flow indicators, the SPXU/UPRO ETF ratio, that has produced reliable short term calls when the 5 day EMA reaches the SELL level is now indicating a SELL.  The SDS/SSO ratio has reached levels only seen over the last 18 months at the Feb and Nov 2015 tops.

The last indicator the SmartBeta P/C is somewhat less ominous and is still consistent with the early 2015 topping pattern.

Conclusion.  Larger price swings and higher volatility seem likely, but do not rule out a general upward trend into the election.  One of the things that I see looking at the bigger picture is that a number of asset classes, including gold, stocks and bonds, seem to be topping together with oil already having broken down.  Perhaps this means that the FED will become more serious about normalizing rates, at least after the election, providing headwinds for all assets.

Weekly trading alert.  The SKEW is a little high at 132 to support much of a rally during expiration week, but I am reluctant to short unless the VIX P/C drops further.  Last week's call eked out a small gain, short SPX at 2185, stopped at 2175.  Updates or changes at @mrktsignals.

Sunday, August 7, 2016

Short and Sweet

Today's post will be fairly short.  The last two weeks I have been looking for a short-term top around SPX 2185 and Friday's close was 2183.  Last week's post noted a rise in the VIX P/C to 1.5 as a very short term warning and resulted in a 30 point decline.  This past Friday's reading of .52 is benign but unusually odd since calls were twice the normal level (smart money) and puts were three times the normal level (dumb money), so a short term rise in volatility is likely.  Other warnings short term are the potential VIX bollinger band "SELL signal" with a reversal from a close below the band, SKEW rising to 130,  as well as the lingering bearish sentiment. The Olympics have started so Vika is another concern. (Corrected BB signal)

Getting straight to the indicators from early 2015.  The overall Indicator Scoreboard has continued to show very low levels of bearish sentiment and the period since April is starting to look more and more like the early 2015 period.  Money managers and banks supporting the Democratic policies may keep the market afloat into the Presidential election.

The Short Term Indicator (VXX $ volume and Smart Beta PC) continues to show very low bearish sentiment similar to the May and November 2015 topping patterns.

Conclusion.  Everything seems to be in place for a 2 to 3% pullback to the SPX 2130s.  The continued high reading of the VIX P/C makes a larger decline unlikely at this time.

Weekly Trade Alert.  Short the SPX at 2185 or better, stop 2200, target 2135.  A rise in the VIX may be the first sign of a turn.

As a bonus chart this week, I'm throwing in the VXX/XIV ETF ratio chart going back to 2013.  The second half of the chart is starting to look like a mirror image (upside down) of the first half.  Draw your own conclusions.