Sunday, October 30, 2016

More Focus on Short Term for Now

As you will see from today's sentiment update, I apparently had a lot of company during the middle of the week in my siesta as bearish sentiment dropped low enough on the very short term to generate a sell signal.  This is the Short Term Indicator (VXX $ Volume and Smart Beta P/C) using 3, 5 and 10 day EMAs (one-half normal).

Looking at the less volatile SPXU/UPRO money flow ETF indicator short term shows bearish levels comparable to the 2016 tops of April, June and August.

Based on this short term view, more downside appears likely with a possible challenge of the SPX 2100 level. It now appears that Hillary's emails may follow her for some time, much like Bill's Monica Lewinsky during the late 1990's, and will lead to uncertainty before the election.  It's likely this uncertainty holds the market in check until after the election.

The overall Scoreboard Indicator continues to look eerily similar to the May-July period of 2015
where a breakdown of the trading range of the previous two months was enough to generate one last buy signal before the final market top.

Another indicator which supports this view is the VIX P/C which pushed to new lows last week to match the level of mid-June 2015

Conclusion.  Given the above sentiment outlook, I will be looking for long setup before the election, but probably not until election week.  Shorting here is probably the lower risk trade now, but potential gains appear to be limited.

Weekly Trade Alert.  Changed to siesta with one eye open.  Any changes in outlook at @mrktsignals.

Sunday, October 23, 2016

Taking a Siesta

With a little more than two weeks until the U.S. Presidential election, bearish sentiment seemed poised to support a further market advance starting last week, but as I warned on Twitter at the Tuesday open, the sentiment from Mondays weak decline did not support much of a rally.  For the week the SPX was up 8 points, but overall sentiment as shown by the Indicator Scoreboard fell back to neutral and continues to follow the pattern of mid-June 2015.  The result, if followed, still supports higher prices into the election, and if bearish sentiment continues to weaken would probably be followed by a sharper decline.  Most other analysts seem to be looking for near term weakness then a strong year-end/presidential cycle rally to well over SPX 2200, but how often is the majority right.

The Short Term Indicator (VXX $ Volume and Smart Beta P/C) has fallen even more sharply and is now back to neutral, indicating that any advance is likely to be fairly tepid.

The VIX P/C has started to bounce upward as expected last week and is also in a similar pattern to mid-June 2015.

Also this week I wanted to look at a couple of market sectors, i.e., tech (NDX) and small caps (RUT) to see if they were in a position to provide leadership for a possible year-end rally. 

First for the NDX, using the QID/QLD ETF$  ratio for a longer term perspective and the SQQQ/TQQQ $ ratio for shorter term, there is little support for a sizeable rally with bearish sentiment for the past several months hanging around the lowest levels for the past two years.

The results for the RUT are even more revealing.  Using the TZA/TNA $ ratio, bearish sentiment has continued to fall in a choppy pattern even as prices moved downwards - the same pattern seen at the mid-2015 top.

Conclusion.  The most likely scenario continues to be as outlined last week, with strength into the election, a sharper decline to lower levels, then a rally that everyone assumes will make new highs, but will probably disappoint.

Weekly Trade Alert.  Taking a siesta until the election.  Possible updates @mrktsignals.

Sunday, October 16, 2016

Setup for Options Expiration Nearly Complete

The last two weeks I have been expecting a tradeable low for the SPX prior to the October options expiration.  Last week I outlined a possible trading setup that was nullified by the strong decline early in the week ( that seems to be following the early September decline (sharp initial, consolidate, then rally).  Sentiment indicators are also comparable to the September bottom.

Starting with the Indicator Scoreboard (overall wtd average), the EMAs are close to those a month ago and overall seem to be following a similar pattern to Feb-Jun of 2015, but it is difficult to tell if a stronger selloff is needed to see a buy spike prior to a July 2015 type top.  One possible scenario could be a rally to the SPX 2180s into the election, an even sharper selloff after the election that sets up a buy spike to a final top late November-early December.  It is clear that SPX 2200 is as important a resistance zone as the 2130s was in mid-2015.

Looking at the Short Term Indicator (VXX $ Volume and Smart Beta P/C), we are seeing a double buy spike that has occurred several times over the last year where a lower sentiment reading was followed by a stronger rally due to a cumulative build up in bearish sentiment.

Finally, the VIX P/C has little to add this week, but we seem to be at or near a low that may last several months.  As I have mentioned, the VIX P/C is difficult to interpret because smart money buys VIX calls at market tops, while dumb money piles in at market bottoms.  The latest dip seems to mark a bottom with dumb money buying calls.  A spike upwards (more put buying by dumb money) is likely to mark a market top.

Conclusion.  I would like to see one more dip to SPX 2120+/- Monday afternoon or Tuesday AM to complete the setup for a rally into expiration and beyond.

Weekly Trade Alert.  Last week, I forgot to mention that updates are posted on my Twitter account when appropriate  (  It's hard to identify an exact entry point other than SPX 2120+/- with a target by the election of 2180+.

Sunday, October 9, 2016

Markets Direction Starting to Clarify

A myriad of forces are starting the clarify the market(s) direction.  On the political front in the land of Oz, the wicked witch from the East is pulling ahead of the tin man with no heart.  On the currency front, the inclusion of the RMB in the IMFs currency basket did not cause the crash in the US dollar that many had anticipated and instead caused a crash in the precious metals. Rising interest rates and a rising dollar are hurting the S&P but making the DJIA more attractive to foreign buyers.

Today, I am going to follow the bottom up approach, looking at several indicators and concluding with the composites.  First up the precious metals.  Goldman Sachs is recommending buying gold at 1250, but the gold miner's sentiment, using the DUST/NUGT ETF ratio is much closer to a Sell than a Buy.  In fact, last weeks sharp selloff was met with weaker bearish sentiment, indicating that the decline may have much further to go.

Looking at interest rates using the TBT/TLT ratio for 10 year bonds, there is not really any breakout until TNX rises above 2.0%.  But remember the long forecasting model I mentioned several weeks ago where since 1980 a 50% drop in rates equated to a 100% rise in equity fair value.  The result if interest rates rise is that a 100% rise in rates (1.4% to 2.8%) equates to a 50% drop in equity fair value.

I have also been following the VIX P/C ratio closely since it tends to decline at major tops develop with spikes higher at short term tops.  So no spike yet.

The Short Term Indicator remains in neutral territory as the equity market consolidates.

The overall Indicator Scoreboard is dropping at a faster rate, but still in neutral territory.

Conclusion.  Last week I incorrectly pointed to an options week setup which as it turns out should happen this week.  There is an interesting pattern developing especially in the DJIA using the 50 and 125 SMAs.  The 125 day SMA is popularized by the Fear&Greed index of CNN Money and provided support for the SPX for almost two years for 2013 and 2014. A good setup for a long into options expiration on Oct 21 would be if both SPX and DJIA decline to the 125 SMA with a stop just below.

Weekly Trade Alert.  Long the SPX at 2130 with DJIA at 18100 with a stop at DJIA 18000 and a target of SPX 2180-85.

Sunday, October 2, 2016

Sitting on the Sidelines

Last week the SPX gained 3 points roughly trading between 2142 and 2172 with strong resistance provided by the 50 DMA.  The indicators I follow also showed little net movement, but the VIX P/C may have bottomed with a move from the .30s to the .60s on Friday.  I have been looking for one last move up in the EMAs to match the May 2015 top.

The Short Term Indicator has moved down closer to neutral, but I expect a move down to near the SELL line similar to July-August of 2015 to indicate a selling opportunity.

The Overall Indicator Scoreboard is following a similar pattern timing wise to the ST Indicator and should decline more before a shorting opportunity.

Conclusion.   As the last two weeks have pointed out, sometimes sitting on the sidelines is the safest investment strategy.  November looks to be a pivotal month.

Weekly Trade Alert.  October option expiration week has provided upside surprises more often than not.  So I will be watching this week for a long setup.  No guidelines for now.