Bears Get Tranked

Last week I warned that overall sentiment was indicating a sharp rally was approaching, while SPX options OI indicated strong put support Mon at 2725 and puts at higher strikes could push prices over 2800 by the EOW.  The outcome surprised even me with a Mon low at 2728 and prices Fri pushing up to 2885 before a slight pullback.

Rehashing a chart that I have shown several times after warning of a possible V-bottom in Jan, we are again following closely the Oct 2014 V-bottom with a longer time frame, where a 38% rally retracement in Dec 2014 was followed by a very sharp rally to higher levels.

A continuation would lead to a top around FOMC 18-19, where I see a less than 25% chance of a change in policy due to high stock prices and an unemployment rate (UR) near all time lows at 3.6%.  As I pointed out in Dec, the last two rate cycles did not see a cut until the UR rose above 4%.  Additionally, the first cut represented a major LT SELL as in 2008 where the first cut was in Aug after a 10% correction and the markets topped in Oct, and in 2000 the first cut was in Dec several months after the markets topped.

Due to the similarities between 2019 and late 2014, I have to give a 50% probability of a 2015 type distribution top, especially with the rush into bonds.  However, my preference is to see a sequence of lower highs leading to a higher retest of the Dec lows before a rate cut cycle and then a retest of the Jan 2018 highs before a serious downturn, but only time will tell.

This week for the stock markets I am going to take a long term view from mid 2014 using 3x EMAs which shows weaker sentiment that may mean a weaker outcome than 2015.


I. Sentiment Indicators

The overall Indicator Scoreboard (LT term) bearish sentiment has seen a weaker move up than Dec 2014, similar to what was seen in early 2015.

The LT view of the Short Term Indicator (VXX+VXXB $ volume and Smart Beta P/C) bearish sentiment has moved up much less than the Dec 2014 38% retrace.  More volatility is expected.

Bonds (TNX).  Interest rates have been a major surprise as I expected a drop down to about 2.4-.5 on the TNX, but we are close to retesting the mid-2017 lows.  The public in particular has had enough of the volatility in the stock market.

For the INT outlook with LT still negative, the gold miners (HUI) bearish sentiment is nearing levels seen at recent highs, so that a sustained rally is unlikely.

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 LT term has risen to levels comparable to the Feb-Apr 2018 lows so may be more supportive LT.

And the sister options Hedge Ratio LT sentiment is virtually identical to the DM/SM indicator.

The LT term SPX Long Term (2x/DM) ETFs bearish sentiment has barely reached the neutral level, and combined with the options indicators and volume indicators in Tech/Other, indicate a rally fueled by ST short covering that is not likely to last.

The LT term NDX Long Term (2x/DM) ETFs bearish sentiment has risen to levels comparable to Feb-Apr 2018 and is likely to support further gains.

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 Jun 14. Also, This week includes a look at the TLT for Jun optn exp.

With Fri close at SPX 2873, both Mon/Wed are light open int.  Mon shows call resistance starting at 2850 so there may be some downward pressure toward 2850.  No put support until 2800.

Wed, although still light, shows more call downward pressure toward SPX 2830..

For Fri, with heavy open int, downward pressure should continue toward SPX put support at 2825 and call resistance starting at 2850.  This looks like a typical optn exp week setup, where a decline gets bears excited before a sharp rally into optn exp, possible target SPX 2925.

Currently the TLT is 131.7 with the TNX at 2.08%.  For Jun 21, put support is huge at 129 with only small call resistance above.

IV. Technical / Other

Another indication of a problem with this rally is the lagging NY Adv/Dec volume $NYUD compared to the NY Adv/Dec issues $NYAD.  Below you can see that the $NYAD has been strong,

But the $NYUD remains weak, indicating the rally is mostly short covering and is likely to be at least followed by a retest of the price lows.

Conclusions.  Overall, sentiment is more supportive of a short term rally, but not a LT move higher.  Similarities to the Oct 2014 rally continue to amaze, leaving the possibility open for a longer distribution top as in 2015 before a major leg down.  At least a ST top is expected by Jun 21 triple witch optn exp, a new recovery high above SPX 2950 supports the 2015 type top, while a lower high would be more ominous.  Either way an expected Fed disappointment is likely to lead to a retest of the recent lows.

Weekly Trade Alert.  Next week is likely to present a pullback to SPX 2825-50 with an options OI target Fri close at 2830-40.  A rally the following week is expected with a target of around SPX 2925, and the high for the week may be an important indicator for the INT outlook.  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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