The Calm Before . . .

Last week started with a bang with a move to SPX 2910 Tue AM, but ended with a whimper by staying in a 1% range.  Surprisingly, there was very little VIX compression with a range of 16.5 to 15.5.  Most traders appear to be expecting downside fireworks after the FOMC which was my take last week, but the continued relatively high bearishness in options positions indicates otherwise.

In my EOY Dec forecast, I looked at several indicators that pointed more to a 1998 LTCM outcome where a 20% decline saw a 25%+ rally into the 2000 top, rather than a full-fledged 2000-02 or 2008-09 bear market.  One indicator was LT volume analysis (NYAD/NYUD). which never gained the strength seen off the Aug 2015 and Feb 2016 lows.   This indicator is discussed in the Tech/Other section and now points to a May 2015 type top.  Another indicator, the $SKEW, has been consolidating in the low 110's - a warning level.

I. Sentiment Indicators

The overall Indicator Scoreboard (INT term, outlook two to four months) bearish sentiment has dropped down to neutral.

The INT view of the Short Term Indicator (VXX+VXXB $ volume and Smart Beta P/C, outlook two to four months) bearish sentiment seems to be going lower each INT top that may mean a larger decline is on the way, but does not appear to be imminent.

Bonds (TNX).  Interest rates are somewhat of a conundrum as low bearish sentiment does not seem to be having much effect.

For the INT outlook with LT still negative, the gold miners (HUI) bearish sentiment is similar to bonds that may be showing expected Fed rate cuts.

II. Dumb Money/Smart Money Indicators

It's been a few weeks since I looked at the DM/SM ETF indicators and this week I will take a brief look at the SPX ETFs.

The Risk Aversion/Risk Preference Indicator (SPX 2x ETF sentiment/NDX ETF sentiment, outlook 2 to 4 wks/mns) as a INT indicator has remained lower for longer, but considering that it was ultimately right in Q4 2018, bigger troubles may lie ahead.  Feb to Jun 2019 looks a lot like Jun to Oct 2018.

The option-based Dumb Money/Smart Money Indicator as INT term (outlook 2 to 4 wks/mns) dropped sharply early in the week, but has since returned to neutral and does not show significant risk.

And the sister options Hedge Ratio sentiment is somewhat less bearish as options-based hedging has only returned to neutral.

The INT term SPX Long Term (2x/DM) ETFs (outlook two to four weeks) bearish sentiment seems to be making lower highs and lows similar to the Risk Aversion Indicator and does not indicate high risk.

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 21. Also, This week includes a look at the GDX for Jul.

With Fri close at SPX 2887, Mon/Wed have light OI with Mon show a likely range of 2880-2900.

Wed as might be expected on FOMC day shows a wide potential range of 2820 to 2925.

For Fri, due to most options for SPX expiring AM, the PM shows a slightly bearish tilt below 2890, but likely above 2850.

Using the GDX as a gold miner proxy, now 23.33.  For Jul exp strong support appears at 20.5, while strong resistance is 24-5.  The likely range is 21-23.

IV. Technical / Other

The circled areas show a striking similarity between now and the May top of 2015 where the ST MAs dropped sharply as up vol dried up after an expended sideways period in the LT MAs.  This occurred 3 months before a sharp drop Aug 2015, so this may mean a distribution top for a couple of months before trouble in the late summer.

Conclusions.  Overall sentiment indicates the we may see a relatively calm summer, but late summer, early Fall may see a return to volatility.  With everyone focused on the Fed and China, I would not be surprised to see a dark swan appear from nowhere, possibly an Italian debt crisis or a unruly Brexit that drops the SPX toward the 2500 area by Oct.  At that point we may see the Fed step in, creating a similar setup to the Aug 2008 rate cut that was followed by a final top in Oct.

Weekly Trade Alert.  We may see a very ST top next week near SPX 2925 followed by a drop to 2850, but it looks likely that the next couple of months are likely to remain in a range of 2850-2950.  I have been upgrading my graphics software and looking at some new goodies, so don't expect a lot of updates on Twitter for a while.  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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