An Apple a Day

Last week's SPX trading pattern did not reach my upside shorting target of 2715ish, turning down from a Mon high of 2683 to a Wed low of 2595 (target 2575-2600), then back up to the options OI Fri target of 2670.  The story of the week was AAPL and although I was expecting an EPS upside surprise, did not anticipate the $100 billion buyback or the Buffet announcement of a $75 billion investment that pushed AAPL to new highs.  Tech enthusiasm has again pushed the Risk Aversion Indicator to an extreme were a sharp downturn might occur.

I. Sentiment Indicators

This week in general, I want to step back and longer term look at what might be expected in May and beyond.  The overall Indicator Scoreboard (outlook two to four months) is little changed for the week with a modestly positive outlook.

However, looking at the long term view (3 yrs, 5x EMAs) of the overall Indicator Scoreboard has failed to reach the bearish sentiment extremes of the Aug 2015 or Jan 2016 declines with the implications that the markets are still at the beginning of a longer term decline.

Switching to the INT view of the Short Term Indicator (VXX $ volume and Smart Beta P/C, outlook two to four months) bearish sentiment has continued to decline, but I expect a drop closer to the SELL area of -0.4 to -0.6 before high risk of the next 10+% decline occurring.

Looking at the LT view of bond sentiment (3 yrs, 1x EMAs), we have seen higher bearish sentiment as in mid-2015 before the top in a move up in rates.  The Fed has been talking about normalizing rates by moving the Fed funds rate to 3.0-3.5% and the TNX to 4% by 2020 and this may very well happen. The two and ten year continue to move in close fashion since late 2017.

Looking at the LT view of HUI sentiment (3 yrs, 1x EMAs), the last bull market did not start until the TNX started it's rate decline in Dec 2015, so even though short term sentiment looks positive, long term sentiment is only neutral.  Conclusion, the gold miners are not likely to outperform until the interest rate cycle reverses.

II. Dumb Money/Smart Money Indicators

The Risk Aversion/Risk Preference Indicator (SPX 2x ETF sentiment/NDX ETF sentiment, INT outlook) has continued to perform well on the very short term ending on a modest SELL last week before this weeks decline and has now moved into a modestly positive reading, indicating more upside is likely very short term.  The longer term shows a definite trend (yellow) that is pointing to a longer down trend.

The ST term SPX Long Term/Short Term ETFs (outlook two to four weeks) has moved back to neutral with diminished risk of a large decline, but no large rally expected either.

The ST term NDX Long Term/Short Term ETFs (outlook two to four weeks) saw a swift decline from the positive outlook early last week and is now warning of another pullback likely to start the next few days, but not as severe as the decline two weeks ago based on current sentiment.  Again we see a longer term trend, likely the source of the SPX/NDX ETF trend.

The options-based Dumb Money/Smart Money Indicator (outlook 2 to 4 days/hours) has not been as effective lately as the modest SELL has only resulted in opening declines that were reversed, but it is still warning of weakness ahead.

III. Options Open Interest

Last week's outlook worked like a champ with Mon slightly weaker than expected with a close slightly below SPX 2660 support, while Wed possible drop to 2600 occurred after hours and the Thur open, and Fri rallied back to the 2670 target.  Next week open interest is light so is likely to effect prices less. On Mon there's strong resistance at SPX 2700 and support at 2625 with an expected range of 2660-80, close 2670.

On Wed, the setup is very similar to last Wed with strong resistance at SPX 2700 and not much support until 2580, so another mid-week pullback may be in the cards.

On Fri, there is strong put support at SPX 2625 and below (2x M/W size) there is some call resistance between 2650 and 2700 and strong resistance at 2700 and above, expected close is overlap at 2650.

Conclusions.  Next week may end up similar to last week with less fireworks.  An upside continuation is likely Mon/Tue to SPX 2680-2700, followed by another test of the lower triangle boundary with options OI for Wed showing 2580 possible.  Size of pullback likely will depend on updated sentiment now pointing to only 2610-20, see Twitter for updates.  Rally into Fri is likely to be weak to the 2650 range.  My outlook had been for a continued rally into the end of month to SPX 2740-60 before a larger decline, but current sentiment seems to point to more consolidation.

Weekly Trade Alert.  Looking for early week rally to SPX 2690 +/- 10 to short, first target 2610-20, lower target possible 2580.   Updates @mrktsignals.

Investment Diary,  Indicator Primer,  update 2018.03.28  Dumb Money/Smart Money Indicators
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