I. Sentiment Indicators
The overall Indicator Scoreboard (outlook two to four months) remains at very high bearish levels, but has dropped sharply the last week due mostly to lower put/call ratios. The market should maintain a positive bias, however.
The Short Term Indicator (VXX $ volume and Smart Beta P/C, outlook two to four weeks) has dropped to neutral territory more indicative of consolidation.
Bearish bond sentiment (TNX) remains elevated and has me wondering if the Fed may be more intent on raising rates to slow the economy than I expected. Recent strength in the precious metals may indicate stronger inflation expectations. Bond sentiment may be indicating a flattening of the yield curve, where higher S/T rates may not cause the TNX to rise over 3.0%, thereby not causing a stock market panic.
The gold miners (HUI) bearish sentiment remains near neutral allowing higher prices as the HUI continues to follow the inverted H&S pattern targeting 190.
II. Dumb Money/Smart Money Indicators
I am going to quit posting updates on Twitter for a few weeks as there seems to be a lot of confusion about the interpretation. I have only been following these indicators for a couple of weeks, so I am no expert, but these are typically very short term, normally 2 to 4 days and sometimes 2 to 4 hours. For instance on Mon two hours before the close, I posted an NDX ETF indicator showing that the EMAs had fallen below the horiz red/pink SELL line, but people got confused because I said investors were "all-in". Use the color coding, the result was an SPX 40 pt drop by the close.
The INT term SPX Long Term/Short Term ETFs (outlook two to four months) has dropped to the neutral zone comparable to the July and Oct 2017 periods which were followed by consolidations.
The Dumb Money/Smart Money Indicator (outlook 2 to 4 days/hours) gave a weak SELL after the close Tue that was followed by a gap down opening Wed and a Wed BUY that was followed by by a gap up opening Thur. Neither trade could be used by regular hour traders. The current reading is neutral.
The DM/SM cyclical component (outlook 2 to 4 days/hours) has declined from the extreme BUY zone, but remains in positive territory. Buy the dip is still preferred, but not as strong.
The Mon NDX ETF call may have been a fluke, but I have been trying to use the ETFs to generate "before close" signals. One option is a risk aversion/preference indicator (outlook 2 to 4 days/hours) using SPX sentiment / NDX sentiment with 2x ETFs. Ie, preference to SPX ETFs indicates risk aversion or bottoms, while preference for NDX ETFs indicates risk preference or tops. The results are shown below. This indicator peaked at the exact Feb bottom, and warned before the close Thur Apr 5th with a strong SELL before Trump announced the $100B China tariff and the SPX dropped 90 pts the next day. No indicator is perfect but this looks like a good companion to the the DM/SM Indicator.
The NDX Long Term/Short Term ETF Indicator has fallen back into the INT cyclical pattern and will not longer be used as a ST indicator, now replaced with the Risk Aversion Indicator. The decline in sentiment is comparable to late July 2017 which was followed by a consolidation period.
III. Technical Indicators
The SKEW is now forming a rounded bottom similar to early June 2017 which was followed by a one month consolidation.
On the interest rate front, the two year note rose sharply last week and is now showing an implied probability of 48% that the Fed will raise the funds rate to 2.0% in June. The TNX is well off its highs, however, raising the possibility of a flattening of the yield curve which could mean a recession late 2018 or early 2019. Tom McClelland recently showed an interesting piece showing how the two year note predicts Fed rate changes back to the mid-1990s, but I disagree with his cause and effect argument.
IV. Options Open Interest
There was a slight change to the Fri 13th outlook during the week, with additional puts pushing the expected close to the overlap at SPX 2650 (act 2656).
For Mon 16th, there is not much support/resistance between SPX 2630 and 2775, so 2630 may be a target if there is a strong reaction to Syria's missile attack, otherwise 2655-80 is likely to contain prices.
For Wed 18th, the numbers are not as big as they look due to auto-scaling, but there is good put support at SPX 2650 and 60 with call resistance at 2680 and little resistance over 2680. Expected close SPX 2665-70.
The Fri 20th opt exp is very mild comparing the number of contracts, so this may mean a less volatile week. There is strong support at SPX 2600 with the expected close at the overlap at 2700 and additional resistance at 2710.
Conclusions. Overall indicators point to a slightly positive bias where a "buy the dip" outlook should be maintained. The S/T indicators are mostly neutral with options open int pointing to a Fri close near SPX 2700. Big picture, it looks like the next three to four weeks will have a slight upward bias to the low, mid-2700s to be followed by a mild correction of 3-5% in mid, late May before a possible summer rally. The interest rate outlook has changed since a flat yield curve seems more likely, not sure what that means for stocks. OntheMoneyUK has an interesting chart showing one possibility of a consolidation, followed by pullback, then rally.
Weekly Trade Alert. None this week. Not sure what effects will be seen from Syria. If Wed closes at SPX 2665-70, it may be good for a Fri pop to 2700. Updates @mrktsignals.
Investment Diary, Indicator Primer, update 2018.03.28 Dumb Money/Smart Money Indicators
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