Saturday, November 24, 2018

Swivel Stick

Last week I expected weakness in the SPX thru Wed with a target of 2700 or lower with sentiment largely unchanged from the prior week after a SPX 100 pt drop, and last weeks 100 pt drop again left sentiment largely unchanged.  So the big question is whether prices continue to drop until a BUY is given or whether a clearing rally is seen to generate a stronger SELL before the drop to 2500.  Largely this will be driven by news events with the early Dec China trade talks and the late Dec FOMC.

Compared to Teddy Roosevelt's motto of "walk softly and carry a big stick", Trump's motto seems to be "talk loudly and carry a swivel stick".  The recent selloff in oil was after a last minute repeal of the threatened sanctions against our allies buying oil from Iran, and the  situation with the nuclear disarmament of N.Korea has also seen considerable back pedaling by Trump.  With the announcement that Larry Kudlow, a hard liner, is not going to the conference with China, this may mean that Trump is again willing to back pedal on his trade tariff stance.  If so a relief rally to SPX 2750 or higher may be expected.

The 30%+ decline in the price of oil, a main driver of inflation since the 1970s, is also likely to lead the Fed to rethink their inflation outlook if oil prices stabilize at $50 or lower.  If so, a softening of the rate hike outlook could help propel the SPX over 2800 again, but sentiment would likely give a strong SELL, sending prices back toward 2500 as Jan/Feb sees earnings outlook without the 20% pop due to tax cuts in 2018.

I. Sentiment Indicators

The overall Indicator Scoreboard (INT term, outlook two to four months) has shown almost no change over the last two weeks even after an almost 200 pt drop in the SPX.  Compared to Mar/Apr 2018, this indicates lower prices sooner or later.


The INT view of the Short Term Indicator (VXX $ volume and Smart Beta P/C, outlook two to four months) trend and outlook are about the same as Indicator Scoreboard..


Bond sentiment (TNX) declined slightly but still mildly supportive of lower rates.


For the INT outlook with LT still negative, the gold miners (HUI) bearish sentiment continues in a modest uptrend as prices stabilize between HUI 140-50.


II. Dumb Money/Smart Money Indicators

The Risk Aversion/Risk Preference Indicator (SPX 2x ETF sentiment/NDX ETF sentiment, outlook 2 to 4 days/weeks) as a INT indicator remains very low as preference toward the NDX remains high relative to the SPX.


The option-based Dumb Money/Smart Money Indicator as short/INT term (outlook 2 to 4 days/weeks) has actually fallen even as prices moved lower and indicates too much complacency.  This indicator points to lower prices sooner rather than later.


The INT term SPX Long Term/Short Term ETFs (outlook two to four weeks) bearish sentiment is one of the few indicators that is slightly favorable over the short term as the Tue SPX drop saw strong selling in the dumb money (2x) ETFs.  Sentiment is now at neutral, the same as the previous low at 2600.


Long term neutral, the INT term NDX Long Term/Short Term ETF Indicator (outlook two to four weeks) bearish sentiment fell sharply as there was strong buying late in the week by dumb money (2x) ETFs.  This indicator has not performed as well as the SPX Indicator as in May/Jun, but may point to under performance.


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 Dec 7.

With Fri close at SPX 2633, Mon has very light resistance up to 2750 and is more likely to be pinned by puts with support at 2600 and 2625 and hedging resistance at 2655.  Light open int overall.


Wed shows almost no put support down thru SPX 2550, but strong call resistance at 2710 and 2725.  Virtually unlimited downside potential with upside limited above 2700.


Fri shows larger open int with huge put support at SPX 2575 and 2600 with large support extending to 2700 and almost no call resistance until 2750.  A move over SPX 2700 is most likely.


For the following Fri, a jobs report day, the outlook is somewhat like the previous Fri, with support at SPX 2700 and huge resistance starting at 2750.  There is a slight bias for SPX 2725 or higher.


IV. Technical Indicators / Other

Taking a look at the $NYUPV/$NYDNV back to 2010 indicates that the lack of up volume shows a buying interest level similar to the Jun-Jul 2015 period before the Aug flash crash.



Conclusions.  Overall, sentiment is inconclusive with the potential for a news related Xmas rally that may take the SPX up to 2800 or higher, but other indicators showing extreme complacency that could lead to a sharper decline than many expect.  Be careful out there.
 
Weekly Trade Alert.  Options open int seem to support the Xmas rally scenario, at least to the SPX 2750 level with most of the action back loaded for the week.  A hold of SPX 2610ish thru Wed mid day may spark a short covering rally, especially with any positive outlook over China trade talks.  Updates @mrktsignals.

Investment DiaryIndicator Primer,  update 2018.03.28  Dumb Money/Smart Money Indicators
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Saturday, November 17, 2018

A Permanently High Plateau?

The sentiment indicators last week were pointing to an SPX 80-100 pt drop from Fri close at 2781 and the low for the week was 2671.  Admittedly my timid self was expecting more holiday spirit with optn exp, but not to be.  The drop in prices followed a similar pattern to the late Feb 2018 retrace of the strong rebound from prior lows, but sentiment was mostly unchanged by the end of the week with the SPX 45 pts lower.  Investors seem to believe Keynes famous line that "stocks are at a permanently high plateau" months before the 1929 crash.  Most analysts agree with EOY targets of SPX 2850-2900 concluding that an early agreement on China trade talks is around the corner.  Despite Trump's tweets from the sideline, neither China nor the US is showing much sign of retreating on differences as evidenced by Pence and Xi this weekend.  My feeling is a "hope rally" may pull the SPX up to fill the gap at 2805, but disappointing trade talks will result in a quick trip to 2500-50.

I. Sentiment Indicators

The overall Indicator Scoreboard (INT term, outlook two to four months) last week's SPX 100 pt drop only resulted in unchanged sentiment and a few days of up/sideways prices will likely drop sentiment to the level of early Mar before the retest of the lows at 2550.


The INT view of the Short Term Indicator (VXX $ volume and Smart Beta P/C, outlook two to four months) sentiment actually dropped last week and is already at the level of the Mar highs, so any gains from here should be short lived.


Bond sentiment (TNX) remains mildly positive and my prediction of the TNX and Fed funds rates meeting at 2.5% by mid-2019 is looking more likely .


For the INT outlook with LT still negative, the gold miners (HUI) bearish sentiment may be finally indicating capitulation by the gold bugs.  Remember my optimal scenario is that an economic slowdown will lower inflation expectations and gold into mid-2019.  At that point sentiment should be bearish enough to start an inflation rally into the 2020 election if the Fed stops raising rates.


II. Dumb Money/Smart Money Indicators

The Risk Aversion/Risk Preference Indicator (SPX 2x ETF sentiment/NDX ETF sentiment, outlook 2 to 4 days/weeks) as a INT/ST indicator is starting to show some improvement.


The option-based Dumb Money/Smart Money Indicator as short/INT term (outlook 2 to 4 days/weeks) similar to the ST Indicator saw only a small blip last week before turning lower.  Another SELL is only a few days away.


The INT term SPX Long Term/Short Term ETFs (outlook two to four weeks) bearish sentiment remains at bearish levels with the next chart showing the LT (2x) ETFs.


Here you can see that the dumb money (2x) SPX ETFs are also stuck at sentiment levels prior to the late-Mar/Apr retest lows at SPX 2550, indicating that an SPX 200+ pt SPX decline could start any time.


Long term neutral, the INT term NDX Long Term/Short Term ETF Indicator (outlook two to four weeks) has dropped to levels seen at the Aug and Oct tops even though prices remain near lows, so BTFD is in danger here.


III. Options Open Interest / Other

Using Thurs close, remember that further out time frames are more likely to change over time.  This week I will look out thru Nov 30.  Last weeks options were dominated by Fri opex that showed a lot of overlap down to 2700 which may have allowed prices to fall then reverse.

With Fri close at SPX 2736, Mon has light put support at 2725 then 2710 with call resistance at 2740 and 2750.  More likely some weakness.  Light open int overall.


Wed has surprisingly strong resistance at SPX 2740 and 2750 with only modest support until 2700.  Bulls betting on seasonal strength may be disappointed as a Mon-Wed move to SPX 2700 looks likely.


Fri shows large open int with significant put/call overlap from SPX 2715 to 2725.  This is the opposite of what we saw last week and may indicate the potential for a rally to SPX 2775 or higher if call resistance at 2750 is overcome.


For the following Fri, EOM with huge open int, there is strong put support up to SPX 2740 with overlap of put/calls up to 2775.  Continuation of late week strength is expected.



Conclusions.  As the showdown between US and China approaches, I am reminded of the invasion of England by the French in 1100 AD (aka the Opium wars with China circa 1850s).  The result was conflict between the European superpowers for almost 800 years.  If China gives in they risk becoming a vassal of the US like Japan, which I doubt.  Market sentiment is surprisingly bullish with most analysts expecting SPX to reach 2850-900 by EOY, but sentiment indicators are showing a high degree of risk in the 2750-800 area compared to the Feb-Mar period.  Very ST, options open int points to a weak beginning for next week that may test 2700 before a move higher into the next week.  Last week   NorthmanTrader had an interesting writeup about the recent markets adherence to TA that made me wonder if selling dominated by Smart Money (SPX 3x ETFs) might be the cause.

Weekly Trade Alert.  An early week pullback to SPX 2700 or lower should be a BUY for a move to 2740-50.   Updates @mrktsignals.

Investment DiaryIndicator Primer,  update 2018.03.28  Dumb Money/Smart Money Indicators
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Saturday, November 10, 2018

Not to Hot, Not to Cold

Not to hot (red), not to cold (blue) seemed to be the markets initial reaction to the election with the GOP strengthening their hold on the Senate, and the Dems taking over the House.  But whether the thought of less stimulus or the continued likelihood of a strong Senate-backed position on China, the sugar high was very short lasting.  The 2010 mid-term boundaries of the 100 SMA (SPX 2820) for a top and 400 SMA (low 2600s) for the bottom continue to hold.  Continued divergences between the high P/C ratios and low ETF sentiment continue to puzzle, but may indicate strength (SPX 2800+) thru next weeks optn exp.

This weeks indicators will look at the period from Jan 1, 2018 to better compare the likelihood of a C-wave down beginning now.

I. Sentiment Indicators

The overall Indicator Scoreboard (INT term, outlook two to four months) has climbed to a level even higher than the Mar-Apr retest and the sentiment pullback is about at the level of the mid-Apr top that saw an 80 pt SPX pullback.  This index is more heavily wtd by options sentiment.


The INT view of the Short Term Indicator (VXX $ volume and Smart Beta P/C, outlook two to four months) shows sentiment topping in between the Feb lows and retest, but has declined to the level of the late Feb high before a 100 pt SPX pullback that was followed by a retest of the prior high before the larger retest.


Bond sentiment (TNX) has remained slightly positive that should keep rates between 3.1 and 3.25% for now.


For the INT outlook with LT still negative, the gold miners (HUI) bearish sentiment remains moderately negative with HUI prices likely to hold between 140 and 150.  The apparent IHS pattern has failed.


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 very ST indicator moved briefly to neutral then fell to a near SELL Thur.  Risk preference for NDX continues to remain high relative to SPX, the opposite of what you want to see for a sustained bottom.


The option-based Dumb Money/Smart Money Indicator as short/INT term (outlook 2 to 4 days/weeks) reached a higher level than the Feb and retest declines and is now at the level of the late Feb top.


The INT term SPX Long Term/Short Term ETFs (outlook two to four weeks) bearish sentiment remains at stubbornly low levels arguing for the lower for longer mid-term 2010 scenario or worse.  The difference between this and other indicators led me to construct a new indicator in "Technical/Other" that combines this with the ST Composite,


Long term neutral, the INT term NDX Long Term/Short Term ETF Indicator (outlook two to four weeks) was much stronger relative to the SPX since the Feb decline, but as sentiment shown by the Risk Aversion indicator points out, there may be more downside with a retest of the Feb-Apr lows likely.  Sentiment is now nearing tops seen since Sept.


III. Technical / Other

I was just curious to see if there a way to compare other sentiment to the SPX LT/ST ETF indicator over several years so I combined it with the ST Indicator.  Combined Composite X clearly shows the LT change in sentiment as Oct 2014's V bottom to new highs was the result of the highest bearish sentiment and the recent Sep-Aug top had the lowest bearish sentiment.  Does this mean a multi-year bear market is likely?



IV. 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 Nov 23.  Fri weakness may have raised put support.

With Fri close at SPX 2781, SPX remained over support at 2775 with little resistance to 2800.  Stronger resistance is at 2815 and 25.  Light open int overall.


Wed is peculiar with out support on both sides of higher resistance at SPX 2800.  A Strong market could rise to 2815, while a weak market could fall to 2750.


Fri AM shows large open int with large support at SPX 2750 and strong resistance at 2820-5.  The overlaps in between show little net support/resistance.


Fri PM, shows moderately put support at 2790 that may indicate a close at SPX 2800 or higher, but if prices remain below 2775 they could fall to 2725.


For the following Fri, a large open int day, the focal point is SPX 2765 where above price could rise to 2815 and below could fall to 2725 or even 2700.



Conclusions.  Last weeks rally was inline with the options open int bullish outlook, but for the next two weeks give little guidance other than a range of SPX 2725 to 2820.  The high P/C ratios should give a positive bias as well as the traditional Thanksgiving period, so another visit to SPX 2800+ seems likely.  After that the market should start focusing on the China trade war situation.  The election did little to change Trumps strong stance against China and an increase of $200 billion in tariffs is likely to create a swift challenge of the Oct lows.  The next two weeks could see a consolidation between the 100 and 200 SMAs or SPX 2750-2820.
 
Weekly Trade Alert.  None, but a retest of 2820 next week should be a good INT short with tight stops.   Updates @mrktsignals.

Investment DiaryIndicator Primer,  update 2018.03.28  Dumb Money/Smart Money Indicators
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Saturday, November 3, 2018

The Emperor has No Clothes

One thing that stands out about earnings season this time is that investors are now looking past "EPS beats" due to stock buybacks and one-time tax cut benefits, and are focusing on sustainable growth as evidenced by revenue growth and future outlook. Trump can pretend that trade wars are easy to win, but increased uncertainty are causing both consumers and businesses to cut back on spending. The honeymoon of increased growth outlook due to pro-business Trump policies has over-inflated stock prices, and if as I expect some trade agreement is finally made with China, the "halo effect" has worn off and it will be impossible to return to previous optimism.

On a lighter note, several weeks ago Elon Musk (Tesla) was fined $20 million for stock manipulation and forced to step down as CEO for Tweeting news about a deal with Saudi Arabia that fell thru, so how can Trump get away with Tweeting fake news about his trade deals with China and get away with causing gyrations in the entire market.  Trump's actions on Friday almost seemed like desperation, does this mean a big surprise is looming in the mid-term election?

I. Sentiment Indicators

This week will use the regular time period (from June 2017) and EMAs.  The overall Indicator Scoreboard (INT term, outlook two to four months) shows that sentiment has peaked short term higher than the Mar-Apr 2018 retest that may mean the lows are in for several months.


The INT view of the Short Term Indicator (VXX $ volume and Smart Beta P/C, outlook two to four months) shows that sentiment has peaked lower than the Feb crash levels with the blue (20 dy) EMA dropping to the level of first Feb rally peak.


Bond sentiment (TNX) dropped sharply back to neutral following the mid-Oct BUY that saw only a small decline in rates.  In the technical indicator section I will show a pair trade chart of SPX/TNX sentiment that could indicate a flight from bonds to stocks in the next few months.


For the INT outlook with LT still negative, the gold miners (HUI) bearish sentiment continues to hover near the SELL level and rallies seem to more related to fluctuations in the US $ than anything else currently.


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 has broken out of the down TL.  The strong selloff in the NDX pushed sentiment back to neutral, but has turned downward again.  This looks like the pattern that started after the July 2017 pullback, where a BUY wasn't generated until Aug 2017.  So another decline seems likely over the next few months.


The option-based Dumb Money/Smart Money Indicator as short/INT term (outlook 2 to 4 days/weeks) sentiment rose to almost the same level as Feb with a sharp drop in bearish sentiment matching the rally top from the Feb lows, same as the ST Indicator.


The INT term SPX Long Term/Short Term ETFs (outlook two to four weeks) bearish sentiment continues to remain below neutral indicating overall complacency by dumb money (2x ETFs).  This indicator continues to indicate that the mid-term 2010 (flat) scenario is more likely than the Oct 2014 (fast rise) scenario.  Combined with the ST Indicator and options DM/SM Indicator, another retest of the 400 SMA (SPX 2636) could happen next week with a target range of 2610-50.


(Long term neutral, INT term BUY) The short term outlook for the NDX Long Term/Short Term ETF Indicator (outlook two to four weeks) has captured much of the gyrations of the past few months.  Currently sentiment has dropped to neutral, so prices may go either way.


III. Technical Indicators / Other

I follow the SKEW regularly although it seems to have a split personality, for instance in May 2017 and Jan 2018 the SKEW was very low right before the market dropped, while in Jan 2016 and Apr 2018 the SKEW was very low before a strong rally.  I like to look at this as demand and supply.  Since the SKEW represents premium for OTM puts, at market tops there is little demand so the premium is low, but at market bottoms the supply is high so the premium is low.

The SKEW now is extremely low, so with high bearishness, the smart money does not see a lot of risk in selling puts.  The last time it was this low was 2013 and in fact is almost at exactly the same level as June 2010 and the Aug 2007 lows.  The big difference between 2010 and 2007 was that it marked the bottom in 2010 while in 2007 the SKEW continued lower indicating complacency.  So a continued move lower may be a warning for a larger bear market.


The following chart uses the ratio of sentiment for the SPX 2x ETFs to the TNX (TBT/TLT ETFs).  The BUY represents low bearish bond sentiment to SPX or that investors should move from bonds to stocks.  In Aug 2017, a BUY was followed by an immediate sharp run up in rates, while in Feb the BUY did not see rates rise substantially until Apr when the SPX LT/ST ETF Indicator reached a BUY.  If the same logic follows the next BUY for the SPX ETF Indicator should see a sharp run up in rates.


IV. 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 Nov 16.  With SPX below many of the put option strikes, dynamic hedging can put downward pressure on prices (put writers sell futures to hedge loses if put prices rise).

With Fri close at SPX 2723, Mon has a lot of overlap between 2700 and 2750 with little net support or resistance.  Call resistance at 2750 is strong, while a drop below 2700 finds little support until 2650.  Light open int overall.


Wed would normally seem very bullish with put support pushing prices up to SPX 2760-70, but the potential for put delta hedging and light open int overall make the interpretation less clear.


Fri shows larger open int with very strong put support at SPX 2650, there is virtually no "net" call resistance up to 2800.  With "net" overlaps cancel out.


For the following Fri, options exp, the AM outlook is the same as 11/09 with put support possibly pushing prices up to SPX 2800.  The PM outlook is even more bullish if SPX prices rise over 2750 then over 2790 seems likely.




Conclusions.  Overall bearish sentiment is high, but several of the indicators (ST Indicator, options DM/SM and SPX L/S Term ETFs) indicate the a pullback for a few days below SPX 2700 is likely.  So far the mid-term 2010 scenario is being followed with a double top below the 200 SMA (now 2740, 2756), which was followed by a retest of the 400 SMA (2636) before a sharp rally over the 200 SMA (2765).  The options open int is somewhat more bullish, but is somewhat less reliable due to delta hedging.  Trump's almost frantic bid to paint lipstick on the pig he has made of global trade before the election as well as the plethora of hate crimes that have sprung up due to his white supremacist followers may lead to surprising losses for the GOP that could cause a very short term stock market swoon.  Longer term this should be positive as Dems would likely try to muzzle Trump.
 
Weekly Trade Alert.  This week I agree with EW/Caldaro where a pullback is likely below SPX 2700 before a possible run toward SPX 2800.  There is a gap target of SPX 2680, EW target 2662, but the 2010 analog indicates a test of the 400 SMA (2610-50).  Either way, the pullback should be followed by a sharp rally into options exp Nov 16 that could reach 2800.  Updates @mrktsignals.

Investment DiaryIndicator Primer,  update 2018.03.28  Dumb Money/Smart Money Indicators
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