Summer Heat Wave

Temperatures are soaring around the globe, just don't call it global warming, as Europe recently saw the highest temperatures ever recorded and California-like forest fires are raging across the Arctic north.  The SPX seems to be following suit, as the last two tests of the 2970s in the middle of the week quickly saw a reversal to new highs over 3000.

Bearish sentiment is still showing a gradual erosion, not unlike what was seen at the beginning of the Jan 2018 melt up.  Last week did see a noticeable pickup in VIX call volume, but not enough to trigger a SELL.  Possibly a "sell the news" event after next weeks FOMC, but maybe only 2-3% pullback, more in Tech/Other.

I. Sentiment Indicators

The overall Indicator Scoreboard (INT term, outlook two to four months) bearish sentiment briefly popped up to the same level seen at the end of Dec 2017, so we could be beginning the melt up.

The INT view of the Short Term Indicator (VXX+VXXB $ volume and Smart Beta P/C [ETF Puts/Equity Calls], outlook two to four months) bearish sentiment move to news similar to early Jan 2018 when the melt up began.

Bonds (TNX).  Interest rates may have bottomed, which could indicate declining recession fears going forward.  As shown in the next chart, bank stocks sold off strongly at the end of 2018 before the interest rate decline, but have recently seen a strong rally that may be forecasting a stronger economy.  My outlook for 2.5% GDP growth for 2019 is close for the first 2 qtrs with 3.1% and 2.1% for an avg of 2.6%.

The banking ETFs (FAZ/FAS) have rallied strongly and seem to be breaking out of the downtrend that began early in the trade war with China and seem to be leading the bond market by 6-8 months.

For the INT outlook with LT still negative, the gold miners (HUI) bearish sentiment has reached an extreme based on forecasts of ZIRP and NIRP from the perennial gold pundits, but economic improvement will likely squash those expectations.

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) saw the expected bounce to the neutral level, but slightly weaker than in Dec 2017.

And the sister options Hedge Ratio sentiment only bounced by half as much as Dec 2017 and could indicate a more volatile upward move than seen in Jan 2018.

The INT term SPX Long Term (2x/DM) ETFs (outlook two to four weeks) bearish sentiment has reached a point similar to Aug 2018 that could mean a couple of months of topping pattern ahead.

The INT term NDX Long Term (2x/DM) ETFs (outlook two to four weeks) bearish sentiment has reached a level equal to the late Apr top that may mean relative weakness ahead.

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 Aug 2. Also, This week includes a look at the GDX for Aug.

With Fri close at SPX 3026, the SPX is sitting right on resistance and a move toward the 3000 level seems likely.  Moderate put support is at 2980.

Wed is FOMC day with most options traders positioned for a rally to SPX 3050 or higher, there is only minor put support at SPX 3000 and 2975 and strong support at 2950.  Any disappointment or "sell the news" is likely to drop to 2975 or lower.

Fri is NFP (jobs report) day, so this could be a volatile week.  Early week weakness is likely to increase put support at SPX 2975 and 3000 with a second day of large open int.  SPX 2975-3000 is the most likely range, but a strong jobs report may repeat the pattern of the last two weeks with a mid-week selloff to the 2970s followed by a late week bounce back over 3000.

Using the GDX as a gold miner proxy.  For Aug exp, sentiment is about as lop-sided a it gets with more than 3 times as many calls as puts.  With Fri close at $27.28, there is very strong resistance above 27 and only small net put support between 25 and 26.

IV. Technical / Other

I still have not found a way to duplicate the "old" VIX call indicator using the "new" graphics, but the move of 50% of the mean in Aug 2018 ("old" method) was 2.5 SD (-1.5 to 1.0) so I am going to use that as a benchmark.  Currently the VIX calls are up about 38% of mean ("old") or 2 SDs in a similar pattern seen in Feb-Apr 2018.

And finally, a look at one of my old time favorites, the long term NYUPV/NYDNV, which shows that a move below 1.5 for the 100 SMA was a warning of a nearing top in June 2015 and Aug 2018, but so far 2019 has held above the line.

Conclusions.  Overall, a top of significance seems to be approaching, but may be several months away.  Aug-Oct 2018 seems more likely as a topping pattern, ie, volatile rather than straight up as in Jan 2018

Weekly Trade Alert.  The SPX sentiment supports a 2-3% pullback following the FOMC as a "sell the news", but is unlikely to be THE top.  Options OI indicates a possible volatile week with a possible selloff to the SPX 2970s followed back a rally back to 3000 or higher.  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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