Saturday, November 18, 2017

Going Nowhere Fast

Last week was even more choppy than expected with several gap down openings early in the week, but Thurs bounced back strongly to within a few pts of the SPX ATH. The early week weakness started in Asia during Trump's three day trip and seemed to be precipitated by Trump's me-first trade policies with weakness in Asia spilling into Europe then the US.  Overall expectations remain of higher highs before a mid-Dec pullback.

I. Sentiment Indicators

I am probably as frustrated as anyone by the lack of clear market direction, but much of the markets ambivalence is due to uncertainty about the tax proposal and its possible that a short term pop happens with the Senate passing their plan, but that a compromise plan with the House may not be agreed upon for several months.

The overall Indicator Scoreboard continued its push back to neutral so there is little to indicate a preferred market direction.

The Short Term Indicator (VXX $ volume and Smart Beta P/C) has also continued higher to levels that recently supported higher prices.

Looking at the short term view of the ST Indicator, a spike higher in the Smart Beta P/C early in the week was more supportive of a rally than Friday's close.

While the VXX $ volume spiked high enough to give a ST BUY.  This indicator and the NDX 3x ETFs (shown below) are the only remaining indicators supporting higher prices.

For the NDX, the SQQQ/TQQQ ratio has pushed high enough to to push prices higher for the next week or two.

For bonds (TNX) sentiment continues to hover near neutral.

For the gold miners (HUI), bearish sentiment continues to weaken, providing less support for a rally.

II. Options Open Interest

The next two weeks show some promise of upside which makes me feel that some progress on the tax plan may be on the table.  The combined puts for Wed and Fri should put strong upward pressure up to SPY 259.5 for Wed (SPX 2596) with only small call resistance at higher levels.

While for Fri, strong call resistance should cap any advance at SPY 259.

For the last week of Nov, the weekly pattern is somewhat reversed with Wed (not shown) showing strong call resistance at 259, while for Fri strong put support is seen up to SPY 259.5 with little call resistance over 260.  A late week push over SPY 260 seems likely.

Conclusions.  Last weeks was a little weaker than expected and seems to have put off the timeline for SPX 2600 by a week to Dec 1 approx. The SKEW is also lagging the topping pattern.  The higher bearish sentiment (VXX $ vol) and options open int are now providing a higher confidence trade for higher SPX prices

Weekly Trade Alert.  Look for a long in SPX Mon at 2580 or better with a target of 2600+ by Dec 1.  Tight stops at SPX 2575 or -5.  Updates @mrktsignals.

Investment Diary, update 2017.10.28, Indicator Primer
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Saturday, November 11, 2017

Was Last Week a Wobble?

Monday of the first full week of Nov saw a sharp drop in bearish sentiment similar to the week after Oct options exp, but the big difference was the immediate decline in the SPX.  A continuation of low bearish sentiment for a few days would have been an identical setup to what was seen in Nov 2015 before the SPX dropped 100 pts, but last weeks decline woke up the bears and will likely extend the timeline for a larger decline for a couple of weeks.

I. Sentiment Indicators

 The overall Indicator Scoreboard saw a sizable jump in bearishness, only slightly less than that of the SPX 34 pt drop two weeks ago which was followed by a 50 pt rally.

The Short Term Indicator (VXX $ volume and Smart Beta P/C) bounced off its lows early in the week, but has maintained a downward bias.  The next decline should put us near the Nov 2015 lows.

The Smart Beta P/C (ETF puts/Equity calls) narrowly misses the Nov 2015 sentiment lows which may be why the SPX reacted immediately early in the week.

The VXX $ volume indicator has still refused to fall below the 80% of avg level, but the reaction high this time was much less, so the ideal 65% level is in sight.

First looking at a couple of the equity ETFs, the SPX has been moving steadily upwards since the extreme lows of mid-Oct.  Comparing the trend to Aug and Nov-Dec of 2015, bearish sentiment had started to rise weeks before the sharper declines, so this may be a "smart money" play.

The NDX ETFs SQQQ/TQQQ bearish sentiment has increased to a moderately strong BUY, supporting my thesis that a move higher to about 6700 is possible.  Note that this indicator did give a SELL at the Nov 2015 top.

For bonds (TNX) sentiment is somewhat an enigma since the basing period in mid-2016 saw bearish sentiment rise the same time as rates (possible "smart money").  The current pattern is much the same as mid-2016, so we may see rates rising along with sentiment.

As to the gold miners (HUI), the consolidation of sentiment below the neutral area may be a warning of what we saw in very early 2015, just before prices collapsed.

II. Options Open Interest

This week, I am going to take a look at just the SPY monthlies for Nov and Dec.  First for the Nov exp, the "most likely" is 257 (11/10 close 258), but with the uptick in bearish sentiment from 258 the upside resistance is not difficult to overcome and there is strong put support above 255.

Looking to Dec exp, the large call resistance should overpower puts pushing prices below SPY 255 and the low level of put support indicates a possible drop to the SPY 250 level with "most likely" at 254.5.

III. Technical Indicators

I haven't talked about this indicator for most of 2017, but for much of 2015-16 I was using the $SKEW as a price change indicator where large values (142+) usually indicated large price moves ahead.  The current period looks a lot like June to me.  First, it indicates low chances of a large price move, but also during that period we saw a two week period with a sideways wobble ending with a pop and drop of about SPX 2%.  This aligns with both sentiment and opt open int with a choppy upward bias into Black Friday then a 2-3% pullback into mid-Dec.

Conclusions.  Last weeks drop in ST sentiment lead to a sharp intra week drop of SPX 30 pts which is now pointing to a very short term rally, but the overall downward trend in bearish sentiment is indicating something larger soon.  Both SKEW and options open int indicate that when the next rally ends, the direction will be down for the SPX into mid Dec, probably due to a Fed rate hike.  Depending on sentiment, the current NDX ETF points to higher prices, so there will probably be a year-end rally into Jan earnings, stronger for the NDX than SPX.

Weekly Trade Alert.  There will probably a 20+ pt rally in the SPX over the next two weeks, but likely choppy and hard to trade.  Wait for SPX 2600+ to short around Black Friday.  Updates @mrktsignals.

Investment Diary, update 2017.10.28, Indicator Primer
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Saturday, November 4, 2017

Approaching Singularity

The story this week is much the same as last week.  The buy spikes in the VXX $ Volume Indicator and the ETF SQQQ/TQQQ remain in force with last weeks action resulting in only minor pullbacks in those indicators.  Over the last 7 trading sessions the SPX is up just over 1% while the NDX is up over 4%.  One well-respected analyst has a target of about 6700 for the NDX, or about 5% higher, so this may result in a 1-2% increase in the SPX.

I. Sentiment Indicators

This week I'm sticking to the 2015-17 period view with int EMAs to show comparisons to late 2015.  The overall Indicator Scoreboard has retreated to the levels of most recent lows, but is well off the lows of -12 at the Nov 2015 SPX highs.

The Short Term Indicator (VXX $ volume and Smart Beta P/C) has started to retreat, but again is well short of the late 2015 levels.

The Smart Beta P/C (ETF puts/Equity calls) has now dropped down to the 0.45 level which may be why the SPX has run into a brick wall, but slightly lower levels were seen before the May and Nov 2015 tops.  The largest components of the ETF puts are the SPY, QQQ and IWM.

The VXX $ volume indicator has only fallen to neutral and should fall to the 0.6-0.7 level before a top is seen.

Next, I want to look at some of the 3x equity ETFs (SPX, NDX, RUT, and BKX) to see what sectors are likely to outperform for the remainder of the  rally.  The SPXU/UPRO SPX ETF bearish sentiment has bounced off the lows at 0.6 in mid-Oct, but remains at the lowest levels seen prior to 2017.

The SQQQ/TQQQ NDX bearish sentiment remains well above the mean even after the 4% rally of the last two weeks.  It's hard to predict how high the NDX may need to rally to lower sentiment levels, but 5-6% seems reasonable at 6700.  With record high consumer sentiment levels, Xmas shopping may provide an extra boost thru the holiday season.

The TZA/TNA RUT ETF bearish sentiment looks like a more volatile version of the SPX ETFs with a bounce only to neutral before turning down, so only limited gains are likely here.

The FAS/FAZ BKX ETF bearish sentiment remains at the lowest levels seen over the last three years, so very limited gains are likely here.

Finally, back to the other sectors.  Bonds (TNX) saw a moderate decline in rates from the recent runup, but sentiment remains in an unfavorable position.

For gold miners (HUI), as prices dropped near the 180 level bearish sentiment increased slightly, but remains below neutral.

II. Options Open Interest

The SPY showed more daily volatility than expected, but the overall expectations of a pullback early in the week to 257 followed by a late week rally worked out.  Looking at the SPY open int for next week, Wed the "most likely" is at 257.5, but the low int levels give little guidance.

For Fri, "most likely" remains at 257.5 with strong resistance at 259, but a move over 259 is possible which would cause delta hedging.

For exp week,  the buildup in put has raised the "most likely" to 257 with delta hedging over 258.

I wanted to look at the QQQs to see if that would provide any targets, but current price levels are already in the delta hedging area, so no guidance for Nov exp.

Dec shows some resistance at 156, but it's too early to see the significance.

Conclusions.  Much the same as last week, the high VXX $ volume continues to be a problem as does the continued bearishness for the NDX short term.  It's starting to look more like a marathon is required to wear out the remaining bears.  It's easy to see why someone would be skeptical of high beta tech stocks when you have AMZN trading at a PE of 280 and NFLX at 200, but this is probably what it looked like the last half of 1999.  Current sentiment indicates a possible 5-6% higher for NDX and 1-2% for SPX.

Weekly Trade Alert.  None.  Updates @mrktsignals.

Investment Diary, update 2017.10.28, Indicator Primer
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Saturday, October 28, 2017

More Conflicting Indicators Short Term

Last week started with the weakness foreseen by the SPY options open int, but in the end the overly eager bears got humped by the bulls.  The ECB vailidated the european growth recovery with last week's decision to cutback EU QE in 2018.  Are we now in the global blowoff stage discussed in my Mar 2015 annual forecast?  This would certainly explain the out performance of the DJIA as these are the largest of the US multinationals.  IBM for instance has 50% of its revenues from Europe and its last profit report resulted in a 10% jump in the stock.  The bears are contributing all they can to fuel the rally by looking only at valuations and problems in the US.  The Indicator Primer (Investment Diary) is complete, but I am considering another section on technical indicators later.

I.A. Sentiment Indicators - Normal

This week I want to take a closer look at some of the indicators short term so they will be in Part B.  The overall Indicator Scoreboard bounced back to neutral on the Wed decline.

The Short Term Indicator (VXX $ volume and Smart Beta P/C) had a stronger move up on the back of the sharp jump in the VXX $ volume.

For bonds (TNX), the week started with a breakout over 2.4%, but the late news of Howell's preference as the new Fed Head caused a pause at weeks end.  Its seems like Trump floats a different idea every day then waits to see the markets reaction.  Longer term, higer growth will push rates higher.

For gold miners (HUI), prices have paused near recent lows, but bearish sentiment continues to fall as bulls continue to expect growth and inflation to be a good thing.  Don't they remember that in 2000 growth and inflation were twice today's levels, but gold was only $300/oz?  In addition, here is a five year Stockcharts example of the close relationship between gold (black) and interest rates (red, 1/TNX), especially in 2017.

I.B. Sentiment Indicators - Short Term EMAs 2015-17

I noticed several contrasting indications looking thru the data, so I want to highlight them here.  First, looking at the ST indicator components, the Smart Beta P/C has finally started to decline, reaching the initial SELL level at -0.40 reached Oct 23, 2015.  But the final top saw a lower level at -0.45.

The VXX $ volume had a huge jump on Wed, generating a ST BUY, and comparing this to late 2015, it never reached the SELL level and even showed a BUY spike early Dec.

There is also a conflict with the shorter term 3x ETFs, where the SPXU/UPRO has reached much lower levels than in late 2015.

While the 3x NDX SQQQ/TQQQ ETFs had declined to a below neutral sentiment level, but last Wed saw a BUY spike.

II. Options Open Interest

Last week short pullback may be an indication of options OI influence returning as Wed close at SPY 255.3 was just over the forecast 255.  For Wed, strong resistance at 258 may cause a slight pullback to 257 or lower from 257.7.

For Fri, the upside for SPY looks more promising with a "most likely" at 257, but little resistance until 260, perhaps good job numbers will encourage the bulls.

Nov expiration is starting to look less favorable for the bulls with a "most likely" at SPY 255, and the large call positions at 255 and 260 are like to cause some fairly wild swings due to delta hedging.

As posted on Twitter last week, more bad news for the gold miners as decline below GDX $23 leaves almost no put support.  Prices may bounce back, but any rise in interest rates will have dangerous implications.

Conclusions.  The standing dominoes are down to one as the Smart Beta PC has joined the other indicators showing very low bearishness.  The high VXX $ volume continues to be a problem as does the spike in bearishness for the NDX short term.  SPY open int shows that a small pullback may be followed by a sharp rally toward 260 by end of the week, but by options exp week (Nov 17) a more sizable pullback may begin.

Weekly Trade Alert.  For those that like to gamble a small pullback on the SPX may be a BTFD with a target of roughly 2600, but I will be watching more closely at indications of a shorting opportunity.  Updates @mrktsignals.

Investment Diary, update 2017.10.28, Indicator Primer
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Saturday, October 21, 2017

Bubble Dynamics Continue

When I showed a chart of the typical Sornette Bubble in June, I commented how the declines become shallower as the bubble progresses.  Last weeks decline of SPX 12 pts in one day was the largest in a month, but the resulting doubling in volume in the VXX caused a sharp reversal thru Friday.  Outside that surge in excitement, market sentiment remains relatively unchanged so expect more of the same.

I. Sentiment Indicators

Today, I am going to take a shorter term view 2016-17 to allow more detail in the charts,  but year-end 2015 is still my analog.  The overall Indicator Scoreboard shows a slight uptick in bearishness, mostly from Thurs decline.

The Short Term Indicator (VXX $ volume and Smart Beta P/C) continues its sideways dance with a slight decline in the Smart Beta P/C offset by a slight increase in the VXX $ volume.

Taking a longer term look at the money flow ETFs SDS/SSO and QID/QLD, the short/long ratios are at extreme lows and are approaching the reverse of the 2013 levels.  So when the top appears, it will probably be more significant than most expect.

Taking a look at bonds (TNX), since the Sept SELL, rates have moved backup to the mid-year highs at 2.4%, but with lower bearish sentiment.  Will this lead to a breakout that tests the 1 yr highs at 2.6% or even go higher?  My contention is that the Republican goal to borrow as much as possible while rates are low (the Trump path to prosperity) will eventually backfire with higher rates pulling asset prices down.

The gold miners (HUI), may be an early indicator of the outcome of the pro-growth tax cuts, as prices fell modestly even as bearish sentiment declined.  Will gold miners be the first victim of higher rates?

II. Options Open Interest

The effectiveness of options OI as certainly been reduced as the relentless upward pressure has overwhelmed all resistance from SPY calls, so interpret the following with a grain of salt.  Currently with the SPY at 257, we are in delta hedging, so the Wed "most likely" at 255 probably means little, while continued upward pressure could go to 259.

The story for Fri is pretty much the same although stronger resistance shows up at SPY 260.

Taking a quick look at next month's exp for Nov, the "most likely" is a decline down to SPY 254 with strong resistance at 259, but the outcome probably depends more on the overall sentiment picture.

Conclusions.  The SPX broke out of the expected 2560-70 range and I am beginning to wonder what it will take for the bears to give up.  Oct always seems to be a favorite of the bears with talk of "crashes" and "cycles", so hopefully Nov will see the bears go into hibernation so a pullback can begin.  Until we see a sharp decline in the ST Indicator no shorting is advised, and I have no further upside targets.

Weekly Trade Alert.  Nothing this week.  Updates @mrktsignals.

Investment Diary, update 2017.10.xx, (in progress) Indicator Primer
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