The Last Buyback

This week I am including a special section on stock buybacks (in Tech/Other).  Many Democrats recently are questioning the validity of buybacks using corporate tax cut money.  My research shows that buybacks (with cash) are simply an accounting gimmick, since exchanging cash as an asset for Treasury stock has no effect on the value of the firm, and only serves as a means to inflate "shareholder value" per share and the CEO's bonus tied to it.

SPX options OI underestimated the markets strength as prices were able to power thru upper call resistance.  TLT weekly options OI continued to do an excellent job forecasting TLT with a pullback early in the week to 122+ after a SELL on TBT/TLT ETFs, then a rally toward the expt close at 124 (act close 123.8).  Next week projects to 123.

Big miss for me on GDP as I was expecting weaker numbers 1.5% expt, 3.2% actual, based on the outlook for strength in bonds (TLT).  The inflation component was weaker than expected, so that pulled int rates down and gold miners up.  Tariff Man may be getting more cocky supported by the recent "no problema" Mueller report and now the stronger GDP that may indicate the trade war is actually strengthening the US economy.  The attitude shown by his recent call to Saudi Arabia to demand lower oil prices may also indicate the potential for a more hard line approach on China trade.

I. Sentiment Indicators

The overall Indicator Scoreboard (INT term, outlook two to four months) bearish sentiment continues to trend around the SELL level similar to Dec 2017.

The INT view of the Short Term Indicator (VXX+VXXB $ volume and Smart Beta P/C, outlook two to four months) bearish sentiment has reached the lowest levels of the last two years, but the SPX topping process for Jan and Oct 2018 took place over a 3-4 month period sentiment-wise.  My best guess is a mid-2015 type rounded top at SPX 3000+ that extends into Jul-Aug.

Bonds (TNX).  Interest rates retraced part of their gains for Apr based on the weak inflation outlook in the GDP report, but I expect a continued rise in rates starting Jun-July.

For the INT outlook with LT still negative, the gold miners (HUI) bearish sentiment briefly rose to a ST BUY, but prices continue to move inversely to int rates, so more downside action is likely starting Jun-July.

II. Dumb Money/Smart Money Indicators

For this week and possibly for the next several months, I am going to replace the DM/SM ETF indicators with other indicators.

The option-based Dumb Money/Smart Money Indicator as short/INT term (outlook 2 to 4 mns/weeks) remains low similar to the June 2018 top.  The slight increase last week was from the dumb money component becoming more bearish, while the smart money is moderately bullish.

And the sister options Hedge Ratio sentiment is very low, but similar to the late 2017 period before the Jan blow off.

The INT term SPX Long Term (2x/DM) ETFs (outlook two to four weeks) bearish sentiment has not reached the extremes of the last two INT tops and supports several months more of upside.

The INT term NDX Long Term (2x/DM) ETFs (outlook two to four weeks) bearish sentiment is near the levels of mid 2018.  More important may be be the almost perfectly symmetrical megaphone top that seems to be forming from the Jan 2018 highs.  The NDX has been the clear leader since, up more than 10% from Jan 2018 and likely to advance another 6-8% to reach the megaphone top at 8300-400.

III. Options Open Interest

Using Wed close, remember that further out time frames are more likely to change over time, and that closing prices are more likely to be effected.  This week I will look out thru Apr 30. Also, This week includes a look at the GDX thru Jun.

With Fri close at SPX 2940, put support is far below at 2900 and 2910, and may stay above calls at 2930 due to hedging and next resistance is 2950.

Tue EOM is much the same as Mon.  If SPX remains over 2925, it could move to 2975.

Wed may see some retracement if SPX remains below 2950 with support at 2910, while a move over 2950 shows little call resistance.

Fri shows the most likely signs of a pullback, assuming more put support is not added during the week, where large call resistance between 2925 and 2965 could push prices down to the 2900-20 range.

Using the GDX as a gold miner proxy.  For May exp, the large call positions at 24-5 somewhat distort the strong put support at 21, and the likely close is 21.5.

For Jun, the outlook is for slightly higher prices to 22.

IV. Technical / Other

Due to length, the stock buyback comments have been moved to the Investment Diary as
Stock Buybacks, Why are they used and how do they effect stock prices?

It's probably time to review the Sornett Bubble.  The SPX has advanced 50% since the graph was constructed (2014) and I first showed it as a possibility in June 2017 and late Oct 2017.  As it turned out, both the Jan 2018 blowoff and what followed fit the chart almost perfectly.

The current rally since Dec 2018 has been even steeper, but the pattern of smaller and smaller pullbacks until the market goes vertical seems to be playing out in 2019.

Conclusions.  Overall, there no signs of any significant reversals in the SPX or other assets.  The Sornett bubble properties indicate the possibility of a blow off in May, possibly due to a trade deal with China.  The NDX megaphone potential for an additional 6-8% of upside may be the best guide price wise.  My instincts tell me that this may be more of a rounded top as May 2015 and not a crash as was seen in Feb 2018.  There seems to be progression in time and price of the recent INT corrections.  Time wise, the Jan-Feb 2018 correction was 3 wks and Oct-Dec 2018 was 12 wks or 3 months, so the next C-wave may take 48 wks or 12 mns into mid 2020.  Price wise, the first correction was 10%, the second 20%, so will the next be 30%?

Weekly Trade Alert.  SPX options OI seem to indicate early week strength into EOM with the possibility for a late week pullback, depending on bearish put positioning.  Updates @mrktsignals.

Investment Diary,  Indicator Primer,  update 2019.04.27 Stock Buybacks, update 2018.03.28  Dumb Money/Smart Money Indicators
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Good Friday for a Holiday

Last week was a good week for each class of assets I cover. The SPX tested the target range (2910-20) twice with gap up openings on Tue and Wed to 2916 and 2918 with each followed by downside action reaching a very ST oversold.  Bonds (TLT) completed a 50% retracement of the Mar run from 118 to 126.5, briefly touching 122 before bouncing on Thur to the 123 weekly target posted on Twitter last week.  GDX sold off more sharply than expected, falling over 4%, almost reaching the mid May options OI target of 21.

For the SPX, prices continue to follow the Jun 2018 period of a rounded top,  Options OI indicate that next week will continue to do so, with another move over 2910 possible on Mon, a target for Wed of about 2900 and then 2875 looks probable by Fri.

This week will look back to mid 2017 as some of the indicators are showing signs of sentiment alternation between the periods before the Jan 2018 top and the Oct 2018 top.

The article index for 2019 has been updated.

I. Sentiment Indicators

The overall Indicator Scoreboard (INT term, outlook two to four months) bearish sentiment is starting to look more like Dec 2017 than Oct 2018.  This could be alternation for an upcoming market top, meaning that a blow off type top may happen, possibly due to a trade deal with China in May.

The INT view of the Short Term Indicator (VXX+VXXB $ volume and Smart Beta P/C, outlook two to four months) bearish sentiment has reached the lowest of the last two years.  Sentiment reaction to the next pullback may indicate the nature of the next rally, as a BUY spike preceded the Oct 2018 runup, while Jan 2018 blow off saw weak preceding bearish sentiment.

Bonds (TNX).  Interest rates appear to have broken out of the INT consolidation with a blow off low and now may be preparing for a sharp runup in rates.   Bearish sentiment showed a sharp drop on Thur as the volume in TLT swelled to 4 X the daily avg.  This increases the chances of a sharp runup in rates if a China trade deal is done or if "green shoots" of economic growth appear in June-July.

For the INT outlook, the gold miners (HUI) bearish sentiment rose sharply as the apparent H&S now looks valid, but as seen in the LT chart, this may be a reaction of the test of a two year downward sloping channel.

I was very bullish on gold/miners in 2000 after a multi year basing around $300 and again on the miners late 2015 when bearish sentiment was off the chart, but for the LT, sentiment remains a long way from a BUY.

II. Dumb Money/Smart Money Indicators

For this week and possibly for the next several months, I am going to replace the DM/SM ETF indicators with other indicators.

The option-based Dumb Money/Smart Money Indicator as short/INT term (outlook 2 to 4 mns/weeks) remains low similar to the June 2018 top.

And the sister options Hedge Ratio sentiment is somewhat in between that seen of Jan and June of 2018, similar to the Oct 2018 top.  Lack of hedging can mean more volatile corrections.

The INT term SPX Long Term (2x/DM) ETFs (outlook two to four weeks) bearish sentiment is low, but not at the level of major tops.

The INT term NDX Long Term (2x/DM) ETFs (outlook two to four weeks) bearish sentiment is much more like June 2018 than preceding the Jan top.

Finally, the Safety Trade Indicator (SPX/TNX ETFs) saw a large spike with a strong move into bonds usually preceding a bottom in stocks and supports the melt up or blow off top scenario.

III. Options Open Interest

Using Wed close, remember that further out time frames are more likely to change over time, , and that closing prices are more likely to be effected.  This week I will look out thru Apr 30. Also, This week includes a look at the TLT thru Jun.

With Fri close at SPX 2905, Mon shows strong put support at 2900 and lower, while call hedging may push the SPX to 2920 intraday, but is likely to reverse by the close.  Moderate open int overall.

Wed shows strong call resistance at SPX 2910 with little put support until 2885.  A close at or below SPX 2900 is likely

For Fri, call resistance could push SPX prices down toward put support at 2850.  As we have seen the last few weeks, however, addl puts may be added during the week.

For the EOM, currently shows the possibility of an SPX drop to 2800-25 due to call resistance at 2825 and 2850 if prices fall below put support at 2875.  Strong call resistance is at 2900.

The TLT 20 year bond fund is used as a proxy for interest rates.  For the last several years  when the TNX was 112 when the TNX was 3.2% (11/2018), the TLT was 124  when the TNX was 2.5% (12/2017), and the TLT was 140 when the TNX was 1.5% (08/2016).

Currently the TLT is 122.9 with the TNX at 2.56%.  Since the Twitter update predicted a weekly close of 123, I may start providing weekly outlook updates.  For Apr 26, put support should lift prices to 124.

For May monthly exp, large put support rises to 125, but is offset by call resistance.  Close likely between 124-5.  This seems to correspond to a pullback in stocks to mid May, increasing safe haven demand for bonds.

for Jun monthly exp, very large put support moves up to 120 with moderate call resistance at 122 and a likely close at 120-122.

IV. Technical / Other

Early last week continued to show huge VIX put buying, pushing the VIX Put Indicator to an +83% rise of the mean or about the same as June 2018.  However, this is a "weak" indicator compared to the VIX Call Indicator which rose only 24% of mean compared to June 2018, when it rose 36%.  Therefore, a 2% decline may be all that is seen.

Conclusions.  Overall bearish sentiment for the SPX continued to fall last week that oddly may indicate a milder pullback into mid May then a blow off top similar to Dec 2017-Jan 2018.  A possible cause is a positive outcome from the China trade talks.  The constant addition of puts OI for the SPX during the week may also continue to cushion the SPX.  Last weeks surge of buying in the TLT may also be an indicator of misplaced fear.  The main difference between my primary outlook of a pullback into to mid May to 2800+ is mainly one of degree as the upside target is still SPX 3000+ by summer.

Weekly Trade Alert.  Mon may again see a retest of the upper target of SPX 2910-20 with a current target of 2875 by late in the week.  Updates @mrktsignals.

Investment Diary,  Indicator Primer,  update 2018.03.28  Dumb Money/Smart Money Indicators
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Should Gold Bugs Fear a Pickup in Inflation?

A couple of weeks ago I discussed the potential for a short term pickup in inflation due to diminished agriculture output from the weather weary mid-west, and last week the potential long term inflation policies from a Trump reelection.  For the short term it was not clear how the market would react since the Fed uses "core" inflation, ex food and energy, but Thurs pickup in the PPI to 0.4% pushed int rates upward and gold prices down sharply.  Some attributed gold's selloff to an uptick in the dollar, but Fri saw the dollar back down and gold barely moved.  I remember an article from the 1980s that showed that moderate inflation in the 3-4% range can be negative for gold due to increased hawkishness by the Fed (higher rates), and that only inflation in the 6-8% range tends to push gold prices higher.  Be careful what you wish for.

Bonds (TLT) fell 1% for the week, pushing below put support - a sign of weakness.  Most of the decline was Fri where we saw an uptick in inflation both in imports, likely due to a delayed effect of tariffs after the late 2018 inventory build wore off, and exports, possibly due to agriculture.

There was a sharp pickup in VIX put buying last week and the VIX Put Indicator (Tech/Other) should reach a SELL early next week.

Overall, sentiment indicators for the SPX are looking very much like June 2018 before a 100 pt decline to 2700 before a late summer rally to 2940 in Oct.  A similar SPX rally from a 2800 low could put a summer high at 3040.

I. Sentiment Indicators

The overall Indicator Scoreboard (INT term, outlook two to four months) bearish sentiment remains at the SELL level similar to Jun 2018.

The INT view of the Short Term Indicator (VXX+VXXB $ volume and Smart Beta P/C, outlook two to four months) bearish sentiment has remained lower for a longer period of time than at the 2018 Sep-Oct highs.  Looking back for two years, this may be a predecessor to a volatility event similar to Aug 2017 and may be similar to the fractal discussed in Tech/Other.

Bond sentiment (TNX) is still looking like the Jun-Sep 2018 period where a three month consolidation was seen before a sharp runup in rates.  We have already seen indications of higher inflation, if the GDP slump in Q1 was due to inventory runoff, Q2 may show a surprising bounce.

For the INT outlook with LT still negative, the gold miners (HUI) bearish sentiment remains low.

• For the ST, the bounce last week was weak and stronger sentiment may be required for a rally.

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 does not show much guidance as preference for risky NDX remains high.

The option-based Dumb Money/Smart Money Indicator as short/INT term (outlook 2 to 4 mns/weeks) bounced slightly off its recent lows but remains similar to Jun 2018.

• And for the sister Hedge Ratio much the same.

The INT term SPX Long Term/Short Term ETFs (outlook two to four weeks) bearish sentiment bounced also but remains near a SELL.

• The recent uptick in bearishness is due to the "smart money" (3x ETFs) being in drag for 2019 and now pulling a "wrong-way Gartman" after being strong sellers at the last ST bottom, now being strong buyers at what appears to be a top.

Long term neutral, the INT term NDX Long Term/Short Term ETF Indicator (outlook two to four weeks) has performed worst than the SPX ETFs for 2019, so this week I want to look at the individual 2x and 3x ETF indicators.  The 2x ETFs are showing the lowest level of bearishness since Jun 2018.

• While for the NDX 3x ETFs, sentiment mirrors the SPX 3x ETFs, where strong buying has generated a weak SELL.

III. Options Open Interest

Using Thurs close, remember that further out time frames are more likely to change over time, , and that closing prices are more likely to be effected.  This week I will look out thru Apr 30. Also, this week is GDX week.

With Fri close at SPX 2907, Mon shows no put support above 2900, while call resistance is light.  Light open int overall.

Wed looks more likely to show a reversal below SPX 2900 with modest call resistance at 2910 and 2925, while hedging could push prices down to 2865-90.

Fri, optn exp, this week uses SPX AM that are mostly hedged and SPY PM.  Large SPX call positions could push prices down to the 2850 level before put support appears.

• And SPY, Fri close 290, shows similar call resistance should prices down toward the 285 level. 

For Apr 30 (EOM), below SPX 2875 there is little put support until 2800 and call resistance all the way down to 2825 that should push prices lower.  SPX 2800-25 looks likely by EOM.

Using the GDX, Fri close 22.21,  as a gold miner proxy.  For Apr exp strong call resistance at 23 should cap the highs, while 22 is the most likely close.

• While for May exp, options OI is extremely large, and calls at 24 and 25 should cap prices and the likely close is 21.  The most unusual aspect of the OI is the lack of put support.  GDX options traders are betting on a one-way trade, possibly due to inflation expectations, but have created a sentiment backdrop similar to the SPX last Nov-Dec when everyone assumed seasonality would save the markets.

IV. Technical / Other

Late last week finally saw the volatility compression predicted by the low volume of VIX puts and has raised the VIX Put Indicator to a near ST SELL (44%) similar to Jun 2018 amd Feb 2019.  VIX Calls also rose (20%) where 50% of the mean rise is an official SELL.

Another indicator, the "Safety Trade" Indicator of SPX/TNX sentiment is finally starting to fall as increased relative bearishness in bonds (indicating bondholders moving to stocks) has finally started to fall but appears to be several months from a INT SELL.

Finally, last week I was tracking a fractal from the Feb highs measuring the SPX rise relative to the 4 hr MAs (23,46,69) that measures to a high at 2915 the next 1-2 days.  Whether the reaction is the same is uncertain, but it does fit the current options OI outlook.

Conclusions.  It's interesting that the Brexit decision has been put off to Oct, a possible flash point for another rhyme with 1987.  Another worrisome sign is that on a beary bearish forum I belong to, there has recently been a lot of talk about how great the economy is and that the DJIA is nearing a breakout to 30k.  This reminds me of the summer of 2008 after the DJIA recovered most of the losses from the Lehman crisis and everyone was predicting 20k by the EOY.

For now, next week looks like it will be a top in the SPX with an expected drop to about 2800 by mid May.  Depending on the sentiment outlook, a comparable bearish sentiment level to July 2018 may produce a summer rally to about SPX 3040.  Int rates may stabilize if stocks falter into May, but an economic rebound late Q2 will likely push rates higher.  Gold/miners is a wildcard here, but a mild pickup in inflation may cause a surprising downside reaction.

Weekly Trade Alert.  Last weeks SPX target of 2910-20 still looks valid with an ideal of 2915.  Volatility to start the week may increase SPX put support below 2900, but currently options OI shows there is an air pocket down to 2850 for the week that could cause a sharp reversal starting Wed.  Weakness is possible into the end of month toward 2800.  Updates @mrktsignals.

Investment Diary,  Indicator Primer,  update 2018.03.28  Dumb Money/Smart Money Indicators
Article Index 2019 by Topic
Article Index 2018 by Topic
Article Index 2017 by Topic
Article Index 2016 by Topic
Long term forecasts

© 2019 SentimentSignals.blogspot.com