Looking Backwards

One of the things I have noticed about the stock market over the years is that most investors look at the immediate past to project expectations for the future.  This, unfortunately, results in many being bullish at the top and bearish at the bottom.  Thus, the use of sentiment indicators to look at a variety of measures to avoid following the crowd.  As an example, in April 13's conclusions, I mentioned that a bearish blog I followed was talking about DJIA 30K, and today the same blog is looking for a repeat of 2018's Oct-Dec selloff to retest the lows by Aug.  Maybe this time will be different.

Sentiment this week is decidedly bearish, exceeded only by the Feb and Oct-Dec 2018 lows.  The large SPX 50-60 pt declines on Mon/Tue of last week have awakened the bears, but my feeling is that any follow thru to the downside is likely to be disappointing.  As shown in Tech/Other, the markets seem to be following the pattern off of the previous V-bottom of Oct 2014.


I. Sentiment Indicators

The overall Indicator Scoreboard (INT term, outlook two to four months) bearish sentiment has risen to levels exceeded only by Aug 2017, and Feb and Oct-Dec of 2018. Upside is probably limited, as is downside.

The INT view of the Short Term Indicator (VXX+VXXB $ volume and Smart Beta P/C, outlook two to four months) bearish sentiment has lagged other indicator due to low volatility hedging (shown below).

Taking a closer look at the VXX (ticker is now back from VXXB in Jan) shows extremely low readings, and even if prices do not move substantially lower, expect a continued high level of volatility.

Bonds (TNX).  Bearish sentiment remains extremely low, and compared to the levels of Dec and Oct 2018 is warning to sell bonds and buy stocks,.

For the INT outlook with LT still negative, the gold miners (HUI) bearish sentiment has retreated back below neutral as the recent surge in bearish sentiment did little to lift prices.

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), as shown in the Twitter Update Wed AM before a SPX 75 pt rally, surged to levels matching the Feb 2018 lows and is likely to be supportive of prices at this level.

And the sister options Hedge Ratio sentiment is lagging behind, showing that hedging activity is still moderate, so that volatility is likely to remain.

The INT term SPX Long Term (2x/DM) ETFs (outlook two to four weeks) bearish sentiment rose moderatly last week, matching that of the Jul 2018 lows..

The INT term SPX Short Term (3x/SM) ETFs (outlook two to four weeks) bearish sentiment rose to levels almost matching that of the Apr 2018 retest.  Recently, the SM has been a Gartman look-a-like, having missed most of the rally, so short at your own risk.

The INT term NDX Long Term (2x/DM) ETFs (outlook two to four weeks) bearish sentiment also rose sharply, matching the levels of the Apr 2018 retest, and is consistent with a 10% rally in the NDX.

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.  The late Fri selloff probably increased put support at 2850.  This week I will look out thru May 22. Also, This week includes a look at the TLT for Jun 21.

With Fri close at SPX 2860. Mon with light OI show support at 2860, but large calls at 2850 may pull prices down intra-day.

Wed shows strong call resistance at SPX 2875, so a range of 2850-75 is likely.

For Fri, a range of SPX 2825-75 looks likely, but prior volatility will probably increase put support.

The GDX options open int for June 21, shows no love for GDX on the horizon, as strong call resistance at 22-3 is likely to hold prices at or below 21.

Currently the TLT is 126 with the TNX at 2.39%.  Last weeks TLT options open int show strong put support at 123 and below with call resistance decreasing over 124.  The Jun 21 monthly is much the same with very strong put support at 120 decreasing up to 123 with moderate call resistance over 124.  123 to 126 is likely. (no chart)


IV. Technical / Other

Last weeks decline exceeded my downside target with Trump's surprise announcement of plans to implement the 25% tariffs on $200 billion additional goods.  The timing was more of a surprise than the outcome, as this was expected later in the summer.  The interesting result was that the 5% decline was a match to the Dec 2014 selloff after the Oct V-bottom rally.  Volatility is likely to continue, but with most expecting a repeat ot the Oct-Dec 2018 decline followed by a pre-election rally in 2020, don't be surprised if we follow the pattern of 2015.

Conclusions.  If sentiment were supportive, I would love to join the crowd calling for a crash into Aug, likely to be followed by a pre-election rally into mid-2020.  However, to follow sentiment you have to learn to play chess while everyone else is playing checkers.  Sentiment is now the opposite of what it was in Oct-Dec 2018 when everyone thought the market could not go down due to positive seasonality, so sentiment-wise the SPX should hold the 2800-3000 level thru late 2019 with a couple of sharp selloffs in 2020 similar to the last half of 2915 and early 2016.

Weekly Trade Alert.  Choppy trading is likely for the next couple of months similar to Jan-Feb 2015 with a retest of the SPX 2800 before the bulls can gain any traction.  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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