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