The "old" VIX Call Indicator for several years was one of the most reliable SELL signals for significant market declines with the last official SELL on Jan 10, 2018. In late Jan and early Feb of 2018, however, as the VIX rose from a low of 9+ to 37, most of the short vol instruments blew up (ie, XIV and probably the VIX call writers accts) and the VIX call volume dried up for many months. Comparing this to Oct-Dec 2018, the VIX went from 11.6 to 36 over a 3 month period. Mon, Feb 25th, there was a surge in VIX call volume to about 900k. So I decided to see if I could come up with a new indicator for the post apocalyptic world. The results showed a SELL this week (possible 3 week lead time) and are discussed in the Tech/Other section.
One more interesting tidbit this week is, that in spite of all of the dismal economic numbers coming out, interest rates seemed to have bottomed with the TNX up sharply. What effect will rising rates have on a faltering housing market? With higher rates and a bottoming US $, gold and gold stocks took it on the chin. For what is ancient history for many, in the 1970s and 1980s, the Fed used to fear the bond vigilantes and would have to raise short term rates to keep long term rates from rising too high. It's possible that the slowing economy is actually putting upward pressure on rates since this means lower tax receipts to pay for the higher deficit spending. Powell's put maybe in jeopardy.
I. Sentiment Indicators
The overall Indicator Scoreboard (INT term, outlook two to four months) bearish sentiment appears to be bottoming at the SELL level.
The INT view of the Short Term Indicator (VXX+VXXB $ volume and Smart Beta P/C, outlook two to four months) bearish sentiment continues to decline a may be a warning of high volatility ahead (VXXB).
Bond sentiment (TNX) is still looking like the Jun-Sep 2018 period where a three month consolidation was seen but may be in the early stages of an up move. Since the 2017 move was from 2.1% to 3.2%, this move may be from 2.6% to 3.7% or higher. Given the stock market rise for Jan-Feb was the strongest since 1987, it would be interesting to see what happens if the TNX rate rises to 2X the DJIA div yield, currently 2%, as also happened in 1987. We may see a consolidation at 2.8%, but a continued rise into the FOMC Mar 19-20 may pressure the FED to be more hawkish.
For the INT outlook with LT still negative, the gold miners (HUI) low bearish sentiment with rising rates and a stronger US $ may too much for gold/miners. From the 2017 highs the HUI fell 80 pts from 220 to 140, could we see a similar decline to 100 from 180?
For the ST outlook for the gold miners, bearish sentiment may have reached a pt where a pause or H&S pattern could appear.
II. Dumb Money/Smart Money Indicators
The Risk Aversion/Risk Preference Indicator (SPX 2x ETF sentiment/NDX ETF sentiment, outlook 2 to 4 mns/wks) as a INT indicator continues to show dangerous risk seeking behavior.
The option-based Dumb Money/Smart Money Indicator as short/INT term (outlook 2 to 4 mns/weeks) rose to a weak BUY last week which is why I warned Fri (Twitter) of a possible retest of recent highs. This is exactly what happened in 2014 after an initial 1%+ pullback.
Comparing the option-based Dumb Money/Smart Money Indicator to 2014, the weak BUY shown last week only saw a few days of reprieve before a strong downdraft produced a stronger BUY.
The INT term SPX Long Term/Short Term ETFs (outlook two to four weeks) bearish sentiment is mostly unchanged with "smart" money neutral and "dumb" money buying.
Long term neutral, the INT term NDX Long Term/Short Term ETF Indicator (outlook two to four weeks) no longer seems to be following prices and may be following the 2014 analog where the SPX DM/SM Indicator failed but the NDX indicator worked.
Comparing to 2014, the INT term NDX Long Term/Short Term ETF Indicator sentiment in Feb 2019 is very similar to the Nov 2014 highs.
III. Options Open Interest
Using Thurs close, remember that further out time frames are more likely to change over time, and more puts now seem to be added one/two days before expiration. This week I will look out thru Mar 15.
With Fri close at SPX 2804, Mon seems to indicate a pullback to at least 2790, but there is very little resistance above 2800 if prices hold 2800. Light open int overall.
Wed is similar with the SPX over 2800, where resistance begins at 2825, below 2800 there is some support at 2790. Very light open int overall.
Fri, jobs report, holding SPX 2800 here is critical, as there is almost no net put support down to SPX 2675. Possibly a strong jobs report could rattle the bond market that already seems to be falling apart, or some other news (Mueller report) could shake the stock market. Large open int.
For the 15th, optn exp, AM & PM show about the same thing where support is up to SPX 2750 and resistance is above 2750 with a likely close around 2750. With PM more positive.
IV. Technical / Other
In order to compensate for the "new regime" for the "old" VIX Call Indicator after Feb of 2018, I decided to start a new data series beginning in Mar 1, 2018. A complete data series should include at least one bull/bear cycle and with the rally from the 2018 Apr lows to Oct highs then to the Dec lows, we got a complete cycle. Results are shown below. Remember for the dual axis the "0" line is the 20 day SMA for the SPX and the 10 day VIX SMA / avg number of VIX calls, while 1 unit on the Y-axis is 6% above/below the SMA for the SPX and 100% of the VIX calls above/below the avg. A rise of 50% of the avg for the 10 day VIX SMA is a SELL if the SPX is above the 20 day SMA and a BUY if below. Three weeks is considered the avg lead time.
Four SELLs have been generated since Mar 1,2018. In 2018, Mar 7-21 saw the indicator rise 50% low-high and by Apr 6 the SPX had fallen 150 pts in 2.5 wks, from Apr 4-17 the indicator rose 50% low-high and by May 3 the SPX had fallen 100 pts in 2.5 wks, from Aug 1-21 the indicator rose 72% low-high and the Sept 21 high at SPX 2940 occurred a month later. Lastly Feb 1-26, 2019 saw the indicator rise 50%. Three weeks from Feb 26 is Mar 19, which happens to be the monthly opt exp for the VIX options.
For the VIX options, most of the VIX options are between 20-25, so assuming this represents "smart" money a rise in the VIX to 24-5 is likely.
Conclusions. Evidence continues to mount of an approaching "moderate" seismic event first with the sentiment indicators and the Oct-Dec 2014 analog, and now the "beware the Ides of March" of Nomura's C. McElligott and the VIX Call Indicator. The timing is somewhat uncertain, but likely sometime the next three weeks. A slightly higher SPX level is likely first in the 2815-25 area. Options OI indicates the top may be in as early as next Wed.
Weekly Trade Alert. A slightly higher high (SPX 2015-25) is expected before a sharp decline of 5%+ targeting the mid-low SPX 2600s. In Dec 2014, the SPX retraced 42% of the V-bottom rally from the mid Oct lows in seven trading days. A similar decline could start any time over the next three weeks, but is likely to be BTFD for a rally back to the SPX 2840-50 and DJIA 26.5K areas. Updates @mrktsignals.
Investment Diary, Indicator Primer, update 2018.03.28 Dumb Money/Smart Money Indicators
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