I've been thinking about adding a section on expert reviews, so this I am going to cover three that have done reasonably well lately with links to free posts. Virtually all EW analysts are now calling for a 15 to 20% decline, but I am highly skeptical of consensus forecasts. I looked at one EW analyst's forecast for Oct 2007 and he was Med/LT bullish projecting SPX 2010 by 2010.
- Avi Gilbert (EW) has been the most bullish calling for SPX 3000+ by EOY and 3200+ early 2019. He did indicate that a break of 2880 could go below 2800 and eliminate the 3200 target, and below 2770 would eliminate the 3000 target.
- Pretzel Logic (EW) has been the most bearish, viewing the Feb 2018 decline as the first leg of an ABC with a possible new high for the B wave with a C crash wave to follow. A 2872-2532, B 2941, C 2400s.
- Raj (Timing&Cycles) called 09/21 top, 10/11 st low with retest later. He doesn't give LT projections but others show LT cycles still up.
I. Sentiment Indicators
The overall Indicator Scoreboard (INT term, outlook two to four months) has risen to levels comparable to both the Aug 2017 and Feb 2018 selloffs which were each followed by SPX 400 pt rallies.
The INT view of the Short Term Indicator (VXX $ volume and Smart Beta P/C, outlook two to four months) has reached the stage of the second Aug 2017 low but is well below the Feb 2018 lows. A choppy upward bias trend over the next few weeks could match the 2017 sentiment, while lower prices seem required to match the Feb 2018 levels.
Bond bearish sentiment (TNX) surprisingly rose even as rates fell last week, matching the Feb 9 level at the stock market lows that day. This may indicate that bond holders are more likely to move into stocks.
For the INT outlook with LT still negative, the gold miners (HUI) bearish sentiment fell sharply as the HUI rose over 150 with the stock panic last week. Prices are not likely to rise much higher.
RUT (small cap) bearish sentiment also rose sharply as prices crashed back to the Dec 2017 level. Small caps are likely more sensitive to raises in the Fed fund rates since they borrow money at the prime rate (FF rate + 3%) plus 1-2%.
II. Dumb Money/Smart Money Indicators
The Risk Aversion/Risk Preference Indicator (SPX 2x ETF sentiment/NDX ETF sentiment, outlook 2 to 4 days/wks) as a INT indicator has finally risen to the top of its TL, but is a long way from previous major SPX lows.
The option-based Dumb Money/Smart Money Indicator as short/INT term (outlook 2 to 4 days/weeks) has reached extremes seen both Aug 2017 and Feb 2018. At least a ST bottom should be close at hand.
The INT term SPX Long Term/Short Term ETFs (outlook two to four weeks) bearish sentiment actually fell as selling in the smart money (3x) was stronger than dumb money (2x). The levels are still near the Dec 2017 levels, so this may not be immediately bearish, but is a warning flag.
Long term view of the NDX Long Term/Short Term ETF Indicator (outlook two to four weeks) saw bearish sentiment rise to the highest level since late 2016. So far since 2015 there have been several sudden 10% selloffs in the NDX and all have come back. It's hard to see a bigger decline in the SPX unless this trend is broken.
III. Options Open Interest / Other
Given the huge price swings this week, the options open int outlook is probably useless so I am going to take a break this week.
With the VIX Call Indicator not working, it looks like I will have to go back to using the VXX $ Vol as a volatility indicator as it did give a SELL recently similar to the Aug 2017 and Jan 2018 tops, but there were several false positives the first half of 2017.
IV. Technical Indicators
I just wanted to cover two charts listed on the Twitter updates last week. The first is the Oct 2017 crash scenario after a high vol Sept opt exp ATH. This Oct got off to a slower start, but after the first decline there was about a one week consolidation before the final sharp leg down thru the 200 SMA. Next week may consolidate, then we see what happens.
The second is a look at the entire Trump rally from Nov 2016. I have been expecting a retracement to about 2100 which was delayed by the corp tax cuts. I don't use EW, but as long as the SPX holds the lower TL (about 2740), this could be corrective. For this purpose, last week would be like the Aug 2015 flash crash that rallied to lower highs in Nov and Dec 2015 (from May highs) w/ larger correction 5 months later. The timing would stretch a final lower high to Jan-Feb 2019 when the one time boost in EPS growth from tax cuts goes away. This is my preferred scenario.
Conclusions. Most of the sentiment indicators, except the SPX ETFs, show that a major bottom is near if a Aug 2017 bottom occurs. Sentiment can always get more extreme, but the consensus for a 15-20% correction based solely on price behavior seems extreme, especially when the result is supposed to be a huge following rally. More likely with bond int rates leveling off, this becomes another "flash crash" or buying opportunity. The SPX LT/ST ETF Indicator is, however, showing that dumb money has not seen enough selling, so longer term more lows are ahead. 2019-20 are likely to see lower GDP and EPS growth due to higher int rates and falloff of stimulus, both of which should lead to lower stock prices. Without a recession, which I doubt, there won't be more QE, negative rates or other stimulus to create a giant rally. If anything, if GOP loses House then Presidency in 2020, a corp VAT tax is likely since the GOP corp tax cut to match the EU and others failed to mention that everyone else has 10-20% VAT in addition to corp taxes, and the corp tax cut boost will get reversed.
Weekly Trade Alert. Best to wait and see for a couple of weeks. Updates @mrktsignals.
Investment Diary, Indicator Primer, update 2018.03.28 Dumb Money/Smart Money Indicators
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