This week I want to take a look at the two sides of Trumps economic policies. First, the expansionary policy in a growing economy with tax cuts (mostly corporate and wealthy individuals) and other deficit spending (defense and "the wall") which many expected to result in run away inflation and higher bond interest rates (hence the positive sentiment for gold stocks). Offsetting the expansionary policy, however, are the contraction effects of trade wars which reduce global growth. The result has been tame inflation as the stimulus has been focused in areas that stimulate investment (stocks and factories), but not consumer spending (the middle class/consumer is likely losing ground). Bond interest rates have remained relatively subdued, so far, due to risk preferences of an aging population, and inflation effects are offset by a higher dollar. If the trade war continues thru mid-2019, global GDP growth should decline with the US down about 1% to 2.5-3.0%, China down 3% to 3-4%, and the EU down 0.5-1.5% (hardest to predict). Trump would likely win the trade war, or as happened with British and French tariffs against the post-hyperinflation Germany in the 1930s turn China into a military antagonist. The US stock market could suffer a sizable downturn, but this would cause the Fed to reverse tightening and begin the next bull phase.
Back to normal programming.
I. Sentiment Indicators
The overall Indicator Scoreboard (INT term, outlook two to four months) briefly bounced to neutral with the early weeks volatility then turned down Thur/Fri. Not yet at a level showing high risk.
The INT view of the Short Term Indicator (VXX $ volume and Smart Beta P/C, outlook two to four months) took a sharp downturn Fri. At least a retest of SPX 2800 is expected over the next few days.
Bond sentiment (TNX) continued to fall last week, as interest rates pulled back below the 3.0% level. There is some indication starting in Japan that deficits do matter and may start the next rise in global rates.
For the INT outlook with LT still negative, the gold miners (HUI) bearish sentiment continued to fall last week even as prices moved lower. Sentiment has now reached the level of Feb of 2017. It's hard to say what might cause the gold bugs to turn bearish.
II. Dumb Money/Smart Money Indicators
The Risk Aversion/Risk Preference Indicator (SPX 2x ETF sentiment/NDX ETF sentiment, outlook 2 to 4 days/hours) as a very ST indicator moved briefly off its recent lows..
The option-based Dumb Money/Smart Money Indicator as short/INT term (outlook 2 to 4 days/weeks) took a sharp turn higher last week as the put buyers moved aggressively short on each test of SPX 2800. A weak BUY was posted on Twitter early Fri AM.
The INT term SPX Long Term/Short Term ETFs (outlook two to four weeks) bearish sentiment briefly moved to neutral then began to fall at the end of the week.
The INT term NDX Long Term/Short Term ETF Indicator (outlook two to four weeks) looks very bullish when viewed for 2017-18, but looking back to 2015 shows that sentiment is actually only neutral, and the high degree of cyclicality explalns the slope in the SPX/NDX ETF sentiment indicator.
III. Options Open Interest
Using Thurs close, remember that further out time frames are more likely to change over time. This week I will look out thru Aug 24.
Mon shows some put support at SPX 2825 with the next call resistance at 2845. A move over 2845 could run as high as 2870, but a tight range is more likely.
Wed shows strong resistance at SPX 2850 and a move down toward 2820 is likely. A top Mon/Tue should reverse downward by Wed close.
Fri should see a move down below SPX 2820 and possibly 2800 depending on put activity during the week. Strong support is at 2790.
The following Fri, Aug 17 monthly optn exp, shows a wide potential range of SPX 2750 to 2825 with 2800 the expected close.
The next Fri, Aug 24, shows a lot of resistance above SPX 2800 and not much support until 2775, so a multi-week trading range between 2775-2825 looks likely.
Conclusions. Last week was a day traders paradise if you BTFD at SPX 2800, but most seemed to be looking for the c-wave down to 2770-80 that never happened. Sentiment is again looking toppy, but no signs of a major downturn. The VIX Call Indicator has been asleep since Jan, so no sign of a pickup in volatility. Wed deadline for additional tariffs on China was put off to next week and may provide a downside catalyst by Wed if no compromise is agreed on. There is talk of major decisions on trade being put off until Sept, so Aug may end up being a "wait and see" month with little net activity, the real "summer doldrums". This is implied by the current SPX options open int.
Weekly Trade Alert. A retest of the SPX 2850 area Mon/Tue seems likely and could privide a good oppty to short with a target of 2800 by Fri if no tariff compromise is agreed on. Updates @mrktsignals.
Investment Diary, Indicator Primer, update 2018.03.28 Dumb Money/Smart Money Indicators
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