Sunday, March 12, 2017

So Close

An interesting thing happened last week after the SPX briefly exceeded the upside target of 2390 two weeks ago, reaching 2401.  Last week bearish sentiment actually went down as the SPX gradually fell to 2354 as the prevailing sentiment was "buy the dip".  As you see in the following sentiment charts, the same type of behavior occurred in July of 2015, before the August crash.  If the same behavior repeats, the markets may shrug off a rate hike by the FOMC next week since a decline then may be too obvious.  However, new highs may be marginal or non-existent before talks of additional hikes start pressuring markets lower by mid-May.  One key to watch is if the TNX exceeds the 2.8% level, last week jumping back to the 2.6% level.

Moving on to the sentiment charts, the overall Indicator Scoreboard continues to hug the low bearish SELL region.

The Short Term Indicator (VXX $ volume and Smart Beta P/C) briefly dropped to the lowest levels of the last six months, but still refuses to show total capitulation by falling to the SELL level.

Bond sentiment (TNX) raced higher as rates jumped back to the 2.6% level, but are considerably lower than was seen before the recent consolidation.  The 2.8% level is likely before the next pause.

Bearish sentiment for gold stocks (HUI) increased rapidly last week as prices fell towards the recent lows.  It is hard to predict, but I would expect some period of consolidation before the lows on the HUI at 160 are taken out.  This may coincide with the larger move down in the SPX as last week showed positive correlation between the two sectors.

Conclusion.  Since developing my sentiment model, I have found that sentiment can be as hard to predict as stock prices; but if current trends continue, the top may already be in, however, a significant decline may be weeks away.

Weekly Trade Alert.  It has been a few weeks since an opportunity for a trade consistent with sentiment was available.  This week a move up to or above the SPX 2390 level, likely on FOMC Wednesday, is a SHORT with a stop just above the recent highs at SPX 2401 and a target the recent lows around SPX 2350. Updates @mrktsignals.

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