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