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