Is Another Melt Up Possible?

I am starting to get a deja vu feeling to Aug 2017 when the overwhelming consensus was that as result of Kim Jong and Trump's hurling Tweets of nuclear threats, the world was headed for nuclear war and markets would crash.  Again in mid-Jan after several months of calling for a melt up not melt down, the consensus came to my point of view and instead we had the Feb crash.  Now, the consensus is agreeing with my opinion of the last two months that the the SPX would head for the 2400s not the 3000+ target that many were looking for after the Feb correction.  So now I have to consider that the majority will again be wrong now that everyone is looking for SPX 2400 as a result of trade wars, so what happens next?

There are indications using the Dumb/Smart Money Indicators that a final flush to retest the Feb lows may occur as soon as next week.  Overwhelming bearishness in other sentiment indicators show that we are likely to start a multi-month advance soon.  Comparisons to the Aug 2017 period may be appropriate where the markets started out slow from Sep-Oct, but then accelerated to the upside in Dec-Jan.  There are indications that a positive surprise on the interest rate front may provide the catalyst for upside acceleration for Jun-July.

A new addition to the Investment Diary has been made for the Dumb Money/Smart Money Indicators.  I have added back tests for 2015 for the ETF Long Term/Short Term Indicators as well as a long term view from 2014-2018.  The LT view of the NDX Indicator gives an explanation of the cyclicality factor since the index went from a strong BUY at 3,500 in early 2014 to a strong SELL at 7,000 in late 2017.  For the NDX, the strong SELL is more indicative of the end of a bull cycle (up twice SPX %), rather than the start of a bear market since overall bearish sentiment of each ETF indicator is high.

I. Sentiment Indicators

The overall Indicator Scoreboard, considering that it started at much lower levels, has now risen as much as it did in both the flash crash and retest of 2015 and the Jan-Feb decline of 2016.  A multi-month rally should begin soon as a result.

The Short Term Indicator (VXX $ volume and Smart Beta P/C) has risen to the BUY levels, indicating that a prolonged rally could start at any time, but the lower levels indicate that the rally will not be as strong as off the Feb lows.

Bearish bond sentiment (TNX) remains very high, indicating that rates should continue to fall/consolidate for the next several weeks, a positive for stocks and gold miners.

The gold miners (HUI) bearish sentiment remains positive, but seems to be moving inversely with prices.  The HUI looks like it is setting up an inverse H&S pattern that would first target the 185-190 area.

II. Dumb Money/Smart Money Indicators

The normal Dumb Money/Smart Money Indicator continued its pattern of short term oscillations with a weak BUY at the close Tues and a weak SELL possible by Mon.  I may have to start posting updates on Twitter, time allowing.

The cyclicality component, however, is strongly positive so I am assuming that any decline will be quickly reversed.

Since the NDX seems to be the tail wagging the dog in today's market volatility, I want to look at the NDX Long Term/Short Term ETF Indicator which is pretty much in agreement with the DM/SM Indicator.  A continuation into Mon should set up a weak SELL.

The SPX Long Term/Short Term ETF Indicator seems to be stair stepping higher much as we saw in the Aug-Sep 2017 period which eventually resolved into a bullish outcome, but the end of week pullback in sentiment looks a lot like that preceding the SPX 2789 and 2801 tops.  A short term pullback seems likely next week.

III. Technical Indicators

First, just a note on the various 200 day SMAs to keep a watch on.  Ideally if there is a drop, I would like to see both the DJIA and NDX bottom close to their 200 SMAs.  Since the SPX move is usually between the DJIA and NDX, the SPX may drop 3-4%.

	Current	200 SMA	Difference
SPX	2,641	2,589	52 / 2%
DJIA	24,103	23,412	691 / 2.9%
NDX (fixed typos)	6,581	6,268	313 / 4.8%

Second, on Tue I posted on Twitter a fractal of the Feb crash based on the two DM/SM sells of Jan 31 and Mar 15 using the highs of SPX 2830 compared to 2750, the next high was projected at 2679 (act 2675) and the next low at 2544.  Close to the same result.

Next of short term importance, there was a 9 pt drop in the SKEW Thur to 119.  Over the last year most drops to that level saw 2-4% declines.  Notably in Jan there were two occurrences, mid-month there was an SPX drop of 30 pts the next day and the second time on Jan 26 and 29 it dropped to 118+ and the SPX fell 300 pts the next few days.

Finally on the interest rate front, both the two year rate (red) and the TNX (black) have been falling recently and the implied probability of a fed funds rates hike to 2.0% in June has fallen from 36% to 8% the last two weeks.  Hence a possible positive surprise.

II. Options Open Interest

Most seem to be expecting a big selloff Mon, but strong put support at SPX 2610 and 2625 should keep the market above those levels.  a move over 2640 could go as high as 2660, and the most likely (expected) close is 2630-35.

For Wed, a Mon close below SPX 2640 is likely cause some negative delta hedging with little price support until 2570.  If prices do fall that low or lower, the expected close is 2585-90, but if 2640 holds, the expected close is 2650.

For Fri, if prices can push above 2630, there is little call resistance until 2675 with an expected close of 2660-70.

For Fri 13th, there is little call resistance until SPX 2700 with an expected close of 2700-20.

Conclusions.  It's possible we see a final plunge next week to complete the retest of the Feb lows.  Several indicators including the DM/SM, SKEW, and options OI indicate a sharp drop to SPX 2550-70 or lower may occur Tue/Wed, if so a sharp rebound to 2650 or higher is likely by Fri.  Longer term we may see a weak recovery/consolidation for a couple of months similar to the post Aug 2017 lows that may be followed by an acceleration to the upside if the Fed delays additional rate hikes in June.

Weekly Trade Alert.  A short Mon for a decline to SPX 2550-70 (or lower based on 200 SMAs of DJIA and NDX) is possible but is considered as high-risk and counter trend.  Will look for long on possible drop to SPX 2550-70 with an upside target 2650-70 by Fri.  Updates @mrktsignals.

Investment Diary,  Indicator Primer,  update 2018.03.28  Dumb Money/Smart Money Indicators
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Taking a Look at Dumb Money/Smart Money Indicators

Last week I clearly put myself in the dumb money category by putting myself in a "take a break" posture after calling for a top at SPX 2800-20 area the week prior.  I admit to being somewhat distracted after having an epiphany two weeks ago regarding a "Dumb Money/Smart Money Indicator" that I had been working on off & on for about two years.  This indicator did give significant SELLs on Jan 31 and Mar 15 of this year and I wish I had completed the work two weeks earlier.  The results will be discussed in a special section replacing the options open interest this week.

I. Sentiment Indicators

Using regular EMAs.  The overall Indicator Scoreboard uses a folded view to compare the 2018 selloffs to the flash crash of 2015.  Here, we see that bearish sentiment never reached the extremes of Aug 2015 and at the SPX 2800 top had declined almost to neutral before the most recent decline to SPX 2585.  Sentiment has now reached the levels of the previous 2647 lows and is now consistent with a rally to 2750, but for reasons discussed later I doubt if 2800+ is seen again any time soon.

The Short Term Indicator (VXX $ volume and Smart Beta P/C) has seen a much sharper increase than the Indicator Scoreboard, but less than that of the Feb lows which was followed by an SPX 240+ pt rally, so a rally of about 200 pts from the lows may be possible.

Bearish bond sentiment (TNX) has continued to rise even as rates have slowly declined which should provide a mildly positive back drop for stocks and gold miners.

The gold miners (HUI) bearish sentiment saw a sharp spike last week as prices made a new low then reversed sharply.  This mirrors almost exactly the pattern of May 2017 when the HUI rallied from 182 to 205, a similar move from 168 would target 191.

II. Dumb Money/Smart Money Indicators

Over the last two years I have looked at a number of combinations of indicators looking for dumb/smart money indicators with little success, but a couple of weeks ago I tried something that seemed to work and have been trying to fine tune the results ever since.  As you can see from the main stock indicators extreme sentiment at tops and bottoms makes identifying buys and sells more difficult and one of the first things i noticed was that using a ratio of similar indicators removed much of the "cyclicality".  This particular combination is also more volatile yielding several signals a month.  So I will be using this indicator with s/t EMAs for 6 month periods.

As you can see below the indicator gave several buys and sells in the volatile Aug 2017 period and became extremely bullish in Nov 2017.  The two sells in Jan were followed by a one day SPX 30 pt decline then the Jan 31 sell was followed by a 300 pt decline.  The Mar 15 sell at SPX 2750 has seen a 165 pt decline so far.  Current sentiment has risen only to just above neutral, but much of the signal is directional and we have now reached the level of the recent SPX 2647 low before the rally to 2800, so a 150 pt rally may be expected soon.  The two declines above started two days after the signal and many signals seem to occur during consolidation periods or "nests" as some analysts call them as investors position for the next move, when dumb money positions for a rally and smart money positions for a decline, watch out below.

The second component of this indicator is a cyclicality version when combined with the BPSPX/CPCE ratio.  Here we see that the cyclicality version is similar to the ST Composite and would support a stronger than SPX 150 pt rally.  The cyclicality seems to magnify signal strength in the same direction and dampen for the opposite direction.

Next, i was wondering if there may be any correlation with this effect and the recent weakness in the tech sector.  To look at this I noticed that the 2x ETFs were less bearish than the 3x ETFs so I looked at the long term 2x  QID/QLD as dumb money sentiment and the 3x SQQQ/TQQQ as smart money and came up with this short term view.  With the very weak bearish sentiment it is no wonder that the NDX has been so weak.  Note cyclicality makes it difficult to use longer periods.

Doing the same for the SPX ETFs using the 2x SDS/SSO as long term dumb money sentiment and the 3x short term SPXU/UPRO as smart money, the results are even more impressive without the cyclicality problem.  More smart money flowed into the market at the beginning and end of 2017, while more dumb money flowed in before the July and Aug 2017 pullbacks as well as the Dec 2017 and Jan 2018 tops.  The outlook is much more positive for the SPX than the NDX, now reaching the equivalent of the May and Aug 2017 lows.

III. Technical Indicators

Just two short notes here for the DJIA and SPX.  The DJIA looks very much like a H&S that is targeting the 200 SMA at 23,360.

The SPX still may form a slightly larger bear flag than originally expected with a low in the low 2570s.  With the DJIA about 170 pts from its 200 SMA, both indices seem to be lining up for coincident touches.  I am expecting Mon to be about the same as the early Mar 2647 low.

Conclusions.  The downside move was not unexpected, but the strength was.  Given the SELL shown by new the Dumb/Smart Money Indicator, it could have been predicted.  A bottom is likely very near, and I am hoping Mon sees an up, down, up sequence bottoming in the SPX 2570s with the DJIA at 23,360ish.  Most are expecting a very strong rally to at least new recovery highs, but I think a weaker rally for the next two months or so to SPX 2780s to set up a H&S pattern is more likely.  The NDX fell below its 100 SMA and is likely to under perform the SPX with a test of its 200 SMA likely this summer.

Weekly Trade Alert.  The year started with the SPX at 2675 (Dec 29) and its likely we retest that level next week to end the quarter flat.  Look for a long with the SPX in the 2570s Mon/Tue with a S/T target of 2670.  Updates @mrktsignals.

Investment Diary,  Indicator Primer,  update 2018.02.23 ETF Sentiment Revision
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Time for a Spring Vacation

Last week met our upside target of SPX 2800+ and started a pullback that could extend into the end of March.  Normal sentiment measures continue to unwind, but at a slow pace.  SPX options open interest is showing promise compared to using SPY and this week I will take an extended look out to the May expiration.

I. Sentiment Indicators

Again shorter time frames and EMAs.  The overall Indicator Scoreboard has bounced back from the lower levels seen last week and earlier this week, making a full retest of the lows any time soon less likely.

The Short Term Indicator (VXX $ volume and Smart Beta P/C) is hovering around the mean at a lower level than the previous pullback to SPX 2650, so some additional decline is possible.

Bearish bond sentiment (TNX) saw a significant uptick last even as rates declined slightly, meaning that more consolidation or some pullback is likely for the next few weeks.  This should provide some relief from interest rate pressure for stocks and gold miners.

The gold miners (HUI) bearish sentiment has now risen to the levels seen  in early Feb when the GDX rallied from 23 to 25 so a rally to HUI 185 might be expected.  A closer look at GDX is shown in the options section.

II. Options Open Interest

First, I want to take a look at Friday's SPX open interest.  Last weeks chart showed little put support until 2730, but early in the week additional support rose from new puts at 2750 and I posted on Twitter that a close below 2750 was unlikely and could reach 2770.  Later by Fri AM more calls were added around the 2760 area making the most likely close 2750-55 (actual 2752).  The SPX options seem to change more than the SPY, so I will probably start posting AM updates of the MWF expirations, at least when there are posted trading opportunities.  Link to CBOE SPX Weekly (PM) options info here.

Mon SPX option setup looks much like Fri with a slight upside bias to a close at 2760, but put support is weak below 2745 with 2710 possible on a strong breakdown.

For FOMC Wed we have an odd setup I'm calling the twin towers.  Given the usual volatility aroud FOMC day we could see some wild swings Tue/Wed from a low of 2730 to a high of 2785, but the most likely close is 2765.  Due to the weakness possible after Wed, SPX 2780-85 is a shorting oppty.

For Fri, there is much larger call resistance than put support above 2740 and the most likely close is 2730-40.

For Mar 29 EOQ, the huge open int compared to other weeklies may be pressuring the market downward, but the most likely close is 2725.  Lower levels are possible intra week with strongest support at 2650, 2680, then 2700-10.

Looking farther out for Apr and May a trading range of 2700-2800 seems probable with Apr's most likely close a 2760 and May's at 2765 with more downside a possibility for May.

Finally, a look at GDX where unfortunately the last close at 21.50 is also the most likely close for Apr 20 with strong support at 21 and fairly strong resistance up to 24.

Conclusions.  More downside seems likely from last weeks high of SPX 2802, but the overall Indicator Scoreboard says it may be limited.  SPX options indicate a possible top around 2780 by Wed that may be the b-wave of an abc correction of lengths -60,+40,-60 with the correction extending into the last week of the month around 2720.  More downside is possible, but not probable at this point.  April and May look to be consolidation months between SPX 2700-800 to allow bearish sentiment to subside before possible summer fireworks.

Weekly Trade Alert.  A pullback did start from the targeted area of SPX 2800-20 last week, but the hoped for VIX Call SELL did not appear and the downside seems limited at this point.  Next week could see the next leg down starting FOMC Wed with an upside target of SPX 2780+ to short and a downside target of 2720-30.  Updates @mrktsignals.

Investment Diary,  Indicator Primer,  update 2018.02.23 ETF Sentiment Revision
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What Crash?

Overall last week went pretty much as expected with a retest of the prior weeks lows and a strong rally afterwards, but the retest came much earlier in the week than anticipated and at somewhat higher levels.  Friday was clearly a short covering rally as a repeat of the crash after the Feb jobs report did not happen.  There are signs that the rally may be nearing completion with upside targets next week of SPX 2800-2820.  The following week (FOMC) may see a return of volatility with a sharp increase in VIX call buying Thu/Fri pushing the VIX Call Indicator to a 25% increase of the mean from recent lows (50% is SELL) with a sell signal likely next week.

I. Sentiment Indicators

For the next few months I plan on looking at the normal indicators for short term changes (2017-18 and st EMAs) as I expect a topping pattern similar to mid-2015 that saw several 4-5% declines.  The overall Indicator Scoreboard has now dropped to the level of the Feb high of SPX 2789 before a three day drop of about 140 pts.

The Short Term Indicator (VXX $ volume and Smart Beta P/C) still remains somewhat higher than the Feb top, so I expect the SPX to increase at a slower rate than last week into options exp.

Bearish bond sentiment (TNX) short term continues to fall but the risk of higher rates will remain small until sentiment reaches the mean or lower.

The gold miners (HUI) bearish sentiment has risen to the point that a small bounce is expected, but the main trend is still down.

Next I want to look at the ETF sentiment using long term EMAs for the SPX and NDX to show why the intermediate trend (months) is still higher, but not likely to carry over to the long term (years).  First, looking at the SPX 2x SDS/SSO ETF ratio, the level of bearishness is much lower than what was seen during the 2015 flash crash or the early 2016 selloff.

The SPX 3x shorter term SPXU/UPRO ETFs are also lower than the earlier 10% selloffs.

A couple of weeks ago when the NDX was at 6850, I mentioned that high bearish ETF sentiment could push the NDX up 300 to 500 pts and now at 7100, it is nearing the first target.  The NDX 2x ETFs QID/QLD, similar to the SPX 2x ETFs, is nowhere near the levels of the 2015 and 2016 selloffs.

While the NDX 3x ETFs SQQQ/TQQQ actually exceeded the levels of the earlier selloffs and remains at extremely high levels, indicating that more rally is expected short term, probably an additional 250 pts or more over the next few months.

II. Options Open Interest & Other

The last few months I have been disappointed with the SPY options, particularly last week, while the SPX options open Int that I presented last week were much more informative.  Last Wed, while many were expecting a sharp selloff after the Gary Cohn resignation, I posted on Twitter that a close between SPX 2720-30 was likely using SPX options.  For Fri close, SPY indicated a 273 close, while the SPX showed the possibility of SPX 2750 or higher if 2730 was exceeded, and indeed pushed over the 2780 puts.

For next week, Mon the 12th, the range between SPX 2750 and 2800 looks wide open if the calls maintain positive delta hedging, the most likely close is 2770-80.

For Wed the 14th, the outlook is more ominous as there is little put support until SPX 2730, but as long as the SPX remains over 2760 positive delta hedging may maintain an upward bias with strong resistance at 2800.

For Fri opt exp the 16th, the outlook is much the same as Wed where strong call resistance at 2800 is likely to cause a close below that level, and a break of the 2750 level does not find support until 2720-30 with strong support at 2690.

Last week's increase in VIX call volume was concentrated in the Mar 21 monthly opt exp that shows a push up to the 18-19 level and possibly to 23-24.  Given that this is also the time for the FOMC outlook on short term rates we could possibly see another 3 day selloff week after next on Mon-Wed of SPX 100-150 pts.

The VIX Call Indicator has yet to show a SELL at a 50% increase of the mean from a recent low, but is half the way there as of Fri.  Note the extreme high (BUY) at the Feb crash market low.

III. Technical Indicators

This week I just want to add two possible charts that may convey where the market is going.  Note that the May and Nov 2018 tops were rounded tops so this may evolve differently.  First a possible bear flag may be forming that could top in May near the ATH with a slope of SPX +30 pts/mn.  This would put in a top next week at SPX 2800-10 with a potential decline into the EOM to 2660-80.

The second is an ending ED that could top next week around SPX 2820 with a potential correction to only 2700.

Conclusions.  The crash never happened, or at least that is what the stock market is indicating, but sentiment is telling us that short sellers are forced to cover once again as the tales of doom and gloom don't pan out.  As I've said before the eagerness of the bears is their own undoing.  Everything still seems to point to higher levels ahead over the next few months, but the June-July period still looms as a strong possibility for a trip to the SPX 2450ish level.  The VIX Call Indicator is warning that the current upswing may be coming to an end soon.

Weekly Trade Alert.  Week after next is looking interesting as a shorting opportunity.  The Indicator Scoreboard and ST Indicator is showing that bearish sentiment is likely to keep the market afloat one more week, but the VIX Call Indicator is showing that volatility may pick up FOMC week.  Look for a high to short at SPX 2800-20.  A lower high will probably lead to sub 2700, while a higher high may only pull back to 2700.  If the VIX Call Indicator triggers a SELL, an update will be posted the next AM.  Updates @mrktsignals.

Investment Diary,  Indicator Primer,  update 2018.02.23 ETF Sentiment Revision
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