Saturday, August 26, 2017

Volatility Compression Likely

It appears that the huge amount of VIX call buying by dumb money at the recent market lows is more bearish on volatility than bullish on stock prices as over the past two weeks the SPX has risen 1% but the VIX has fallen 40%.  Last week, however, continued to show buying in the VXX as the dollar volume for Wed-Thur pullback of 15 SPX pts was almost as high as the 54 pt drop May 17-18.  Has Nostradamus predicted the end of the world?

I. Sentiment Indicators

The overall Indicator Scoreboard shows that bearish sentiment has risen to levels comparable to most of the market bottoms of the last two years, except Jan-Feb of 2015.

The Short Term Indicator (VXX $ volume and Smart Beta P/C) has seen bearish sentiment slightly exceed that of Jan 2015, but would also be consistent with at slightly lower low (SPX 2400) on a retest.

Both of the components of the Short Term Indicator show pretty much the same thing, so it is not just volatility hedging.

These sentiment measures seem to reflect traders, not longer term investors, however, as other measures as the SDS/SSO ETF ratio for the SPX or the QID/QLD ratio for the NDX do not show such extremes.

Moving on to other markets, bearish sentiment has continued to fall for bonds, indicating a rise in rates (TNX) is likely within the next few weeks.

Bearish sentiment has continued to rise for gold stocks (HUI), supporting moderately higher prices.

II. Options Open Interest

Overall, SPY open interest shows strong support at 240 with a likely trading range thru Sept 15 between 243 and 248.  Starting with Wed the 30th, 245 offer some resistance, but a move to 246 seems likely.

For Fri Sept 1, the range 245-6 offers less resistance, but delta hedging could go either way to 243 or 248 with 241 an outside possibility.

For Fri Sept 8, we have a similar setup to the Aug expiration where 245-7 is hedged and delta hedging could push higher or lower.  It is possible that with Congress back from recess that some news related to the debt ceiling could be a catalyst for a move either way.

For Sept 15 expiration, a pullback to the 243-4 area seems likely if prices remain higher.

Looking to an extended range for Oct 20, the period following the Sept 15 expiration is the most bullish with 247 most likely and a move over 250 with delta hedging is possible.  This seems to reflect the possibility of positive action on the tax cut proposal.

Conclusions.  First, I want to point out that I was mistaken last week in the bearish outlook from the Oct VIX option open interest.  I interpreted it similar to the SPY, but in retrospect low VIX calls are neutral as shown by the VIX call indicator.  So looking at overall sentiment, we have very high bearishness for the shorter term indicators for stocks, moderately high bearishness for gold stocks, and low bearishness for bonds.  All indicators point to some resolution of the Trump tax plan and/or debt ceiling that will be positive for growth and inflation prospects.  The most likely time period indicated by the options OI is mid Sept to mid Oct with the SPX possibly rising over 2500 by Oct 20.

Weekly Trade Alert.  The SPX missed my target range (2405-15) by two pts.  With two open gaps at 2428 and 2468 it's hard to tell which will be filled first.  I view a drop to SPX 2420-30 as a BUY and a rise to 2475-85 as a SELL short term.  Updates @mrktsignals.

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Saturday, August 19, 2017

Upside Surprise Ahead?

The market may be ready to throw a curve ball.  My call to short at SPX 2490 two weeks worked out better than expected as last weeks rally failed to meet my lower target of 2480, then continued lower.  The surprise may be a low next week around SPY 241 (SPX 2405-15), making the entire decline an abc, and for EW would then point to new ATHs.  Supporting this possibility are sentiment extremes and options open interest.

I. Sentiment Indicators

As a followup to my long term sentiment outlook from two weeks ago where I showed similarities to May of 2015, the recent decline has now put sentiment in a position similar to mid-July 2015.  I will use 2x EMAs.

The overall Indicator Scoreboard, which rose from a low of -8 to +6 or 14 pts from May of 2015 to the early July lows, has currently risen from -12 to +2 also 14 pts in just two weeks.

The Short Term Indicator (VXX $ volume and Smart Beta P/C) has risen from almost identical lows to slightly higher highs comparing the 2015 and 2017 periods.  More importantly after the 2015 July lows the SPX rose 90 pts the next 7 trading days.

From a longer term perspective, however, the SPX is still in trouble as the ETF bearish sentiment for the SPXU/UPRO ETFs has barely budged.

Switching back to the normal period and EMAs for bonds and gold stocks,
not much has changed.  For bonds (TNX) a slight decline in rates saw a small rise in bearish sentiment.

While for gold stocks (HUI), bearish sentiment is inching upwards to a level that might support slightly higher prices.

II. Options & Open Interest

The VIX Call Indicator continued to climb last with the rise from the lows due to "dumb money" buying after the decline started to an increase equal to that seen at the Apr lows.  (Note each unit is 2% for SPX).

For the options open interest, I am going to look at the SPY, VIX and GDX thru Oct.  For next week Wed for the SPY shows a most likely pin at 246 if we make it over 245, but delta hedging is likely to push prices to the 241 level early in the week from the current 242.7 level.

For the SPY Fri, the much larger put size is likely to put a floor at 240 and pressure prices upward with the potential for an explosive move to 247-8.

The following Fri shows the potential for a drop back to the 241-4 level with the overlap from 244-7 similar to what we saw from 245-7 last week, but the relatively larger put size indicates a hold at 247-8.

For Sept 15, the most likely outcome would be a pullback to the 243-5 area, but delta hedging could easily push prices higher to 249.  Remember the option expiration high of Sept 2014 that saw a 10% selloff the next three weeks.

For Oct 20, there is a lot of put support from 240-45, but not much below 240.  The most likely close seems to be 248, so no crash seen here.

Moving on to the VIX for Sept, the large number of calls are likely to keep the VIX pinned between 13 and 14.

For Oct, the most likely pin is also between 13 and 14, but there is little resistance above 15 until 25, so this would seem to at least allow the possibility of a crash.

For GDX in Sept, there seems to be a firm fix at 23, but delta hedging could push either way.

For the GDX in Oct, the outlook shows a firm floor at 23, but much more potential for an upside breakout.  If considered a safe haven, this and the VIX makes Oct look like a potentially dangerous month for the SPX.

Conclusions.  It appears that the Aug selloff has opened the way for clear sailing into mid-Sept, but Oct remains a question mark.  Most EW analysts seem to be expecting a repeat of last week, but the principle of alternation warns us that it may be different.  So I am looking for a weak start to the week, but a strong move into Labor Day that may test the ATH.  Looking out further, we seemed to skip a couple of months of consolidation compared to 2015, so with alternation we may consolidate after the sharp run up in sentiment at higher levels if we make it thru Oct.

Weekly Trade Alert.  Looking for Mon-Tues move down to SPY 241 or SPX 2405-15.  May test SPX 125 SMA (current 2407) then rally into Labor Day weekend.  Long SPX 2410, target is 2480+, stop 2400.  Updates @mrktsignals.

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Saturday, August 12, 2017

Now is Not the Time to Short

Last week's call for an SPX top at 2490 and a decline to 2450 or lower (options open int) worked out perfectly.  However, many EW analysts are now calling for a wave 4 decline to SPX 2300 or lower, and as a result bearish sentiment has again skyrocketed to levels that are warning of a 50 pt SPX rally back to 2480 or higher.

I. Sentiment Indicators

Using normal time periods and EMAs, the overall Indicator Scoreboard moved straight up over the last week similar to what happened in June 2016 after the SPX fell 60 pts  What happened next was a 50 pt rally before an even sharper decline.  Also in March 2017 a similar pattern evolved.

The Short Term Indicator (VXX $ volume and Smart Beta P/C) also shows extreme bearish levels similar to the June and Sept 2016 lows which produced 50 and 60 pt rallies before the decline resumed.  Referring back to last week's long term view of the ST indicator duplicating May 2015, we could be setting up for 3 to 4 month trading range between 2500 and 2400 before a more serious breakdown similar to the mid-2015 range of 2130-2040.

For the NDX, bearish sentiment first declined to the same level as previous rallies since June early in the week, and has now risen back to another weak Buy with the recent selloff.

I haven't looked at small cap stocks (RUT) for a while, but the extremely low bearish sentiment is likely dampen any rallies in this sector.

For bonds (TNX), sentiment remains below neutral as bonds are catching a safe haven bid.

For gold stocks (HUI), the safe haven demand is also holding up prices, but sentiment remains at neutral.

II. Options & Open Interest

I don't really have a section for the VIX Call Indicator, but after showing a SELL with a 1 to 3 week lead 3 weeks ago, the indicator came thru last week.  Now after the selloff, the signal has now reversed to a BUY after rising more than 50% of the avg from the lows.  The same rise was seen at the Mar, Apr and May lows that each rallied SPX 50 pts or more.

Moving on to the put/call open interest, Wed is very small relative to expiration Fri, but the pressure should be upward early in the week with a target of SPY 246-7 once the hurdle at 245 is overcome.  There is an outside chance that weakness can cause delta hedging for puts pushing prices as low as 241.

For Fri, this is one of the more complicated patters I have seen, but it looks like puts and calls cancel out between 245-7, with a weak most likely close at 246.  Possible delta hedging can go either way to 241 or 248.

Open interest is very low the following week of the 25th, but there is strong put support at 240 with moderate support up to 247 and little call resistance up to 250. so prices are likely to be 247 or over.

Conclusions.  Last week's decline was reminiscent of the mid-May decline, but this time happened a week before expiration.  Congrats to the new VIX Call Indicator as smart money shows why its smart, buying VIX calls around 10 when Fri the VIX hit 17.  Even the timing fell in the 1 to 3 week expected period on week 3.  All indicators are now pointing to the dumb money being loaded for bear, but they are likely to find skunks instead.

Weekly Trade Alert.  We may still see a selloff Mon-Tues AM, but a mid week rally to SPY 246-7 seems likely with an end of week pullback to 246.   The following week looks more promising and may turn into a three week rally into Labor Day weekend.  Lower target is 2480, upper target is 2500.  Updates @mrktsignals.

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Saturday, August 5, 2017

The Long and Short of It

Today I want to step back and take a longer term view of the normal sentiment measures while reserving the short term view for the options open interest and technical indicators.

I. Sentiment Indicators

For the long term view, I want to go back to 2015 and use the 2x EMAs.  Starting with the overall Indicator Scoreboard we have seen very low bearish sentiment that appears to be a mirror image of the high bearish sentiment between mid-2015 and early 2016.  The reason I am pointing this out is that the bear/bull cycle may be nearing completion.  Just as two year consolidation between SPX 1800 and 2150 has lead to a breakout of the same size range pointing to SPX 2500, sentiment now appears to be balanced.

The Short Term Indicator (VXX $ volume and Smart Beta P/C) has shown less extreme low bearishness and has been a more accurate timing tool, only recently falling to the levels last seen in late April - early May of 2015, so we are likely very near a significant longer term top.

Looking at the Short Term Indicator components on a normal time frame, the VXX $ volume has again fallen to levels that has shown some short term pullback in a bull market, even if only a 20 pt drop for two hours in the SPX.

The Smart Beta P/C is continuing to fall, but not yet at a level where I would call a top.

Taking a look at the longer term NDX, we can see the same symmetry in sentiment where a breakout from the two year range of 4000 to 5000 was followed by a rally of 1000 pts, meeting the breakout projection.  The DJIA is, however, an anomaly where a two year range of 15400 to 18400, or 3000 pts, did not stop the DJIA at 21,400.

Looking at bonds longer term (TNX) where a BUY in bonds means lower rates are expected, and the opposite for a SELL, there usually seems to be a lag of several months between sentiment and rates changes, but currently points to higher rates.

Finally, the longer term view of sentiment for gold stocks (HUI) is not favorable.

II. Options Open Interest

Last week showed that the SPY was caught between high call open interest at 246 and 248 with delta hedging pushing upward and resulted in a tight range of 15 pts on the SPX.  Wed shows high resistance at 248, but the low interest at 246 and the low put support could see a drop in SPY below 246.

Friday is much the same for put support, but resistance moves up to 250.  Although I don't expect it, this would allow for a pullback early in the week followed by a move up later in the week that may top early expiration week.  The reason I am considering this is that it would be a repeat of the May 2017 expiry setup where the market topped on Tues then fell sharply Wed-Thur.

The Aug 18 monthly would normally indicate a close between SPY 244-6, but given the pin last week at 247, a pin between the puts at 241/2 or even a move over 248 seems possible.

III. Technical Indicators

This week I am going to try to use technical analysis to better pin point a top in the SPX.  Starting with the bear flag in the SPX from Mar-Apr (purple), it looks like we are completing 5 waves up.  Waves 1 and 3 up moved up sharply, then consolidated for 2-3 weeks with a final pop higher of 5-10 pts before a larger move down.  The previous top (pink) provided support, so any pullback should be limited to 2455.  Wave 1 (2329-2406) was 77 pts and wave 5 so far was 76 pts (2408-2484), so I am looking for 2485-95 as a top.

Conclusions.  Normal pre-option expiration week would be a pullback as a setup for a move up through expiration, but markets have been anything but normal lately.  Option open interest shows the possibility for new highs next week that could extend into expiry week, so I am focusing more on the target range of SPX 2485-95.  A down move similar to the NDX in June of 5-6% over a three week period to about SPX 2350 seems likely.

Weekly Trade Alert.  Short at SPX ~2490, stop 2500. Target 1 ~ 2400, target 2 ~2350.   Updates @mrktsignals.

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