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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