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