Are Buybacks Starting to Effect Stocks More Strongly?

A couple of weeks ago I opined that low interest rates now made it cheaper for large cap stocks to borrow money and buyback their stock than it was to pay dividends.  With the SPX yield at 1.9% and the 5-10 year bonds yielding 1.5%, the difference is even greater now.  Wed may have been the perfect example, as the highest yielding stock average, the DJIA (2.5%) led the way up, while the lowest yielding average, the NDX (0.8%), under performed.  Thur saw some catch up by the NDX on the China news rally, but then Fri again saw under performance.

This must have the bears scratching their heads, as the inverted yield curve and signs of a slowing economy are usually enough to begin a bear market in stocks.  However, as pointed out before, the seemingly inane actions of POTUS always seem to support his laissez faire approach to corporate governance, and as a result, the stock market.  What does this mean going forward?

In the Tech/Other section, I will discuss several items that indicate the topping may extend into mid-2020 with bearish implications that are likely to surprise many.

I. Sentiment Indicators

The overall Indicator Scoreboard (INT term, outlook two to four months) bearish sentiment is not extreme, but has matched that of the May correction.

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 has also matched that of the May correction.

Bonds (TNX, sentiment TBT/TLT).  Interest rates continue to hover around the 1.5% level with little change in sentiment.

For the INT outlook with LT still negative, the gold miners (HUI) bearish sentiment continues at low extremes, but seems to be having little effect on 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) LT EMAs have now exceeded that of May, although still below Oct 2018.  This may be why pullbacks have become so short-lived as the Sun O/N retest of the SPX futures lows were reversed by the cash open.  If continued, a sharp rally is likely at some point.

And the sister options Hedge Ratio sentiment is still lagging.  I went back to study historical data back to Aug 2010 and overall the results have been 60% bearish/40% bullish so not a major problem yet, but continued low hedging may result in the more bearish outcome discussed in Tech/Other.

The INT term SPX LT/ST (2x/DM to 3x/SM) ETFs (outlook two to four weeks) bearish sentiment is starting to make more sense.  Although way too bearish early 2019, this may have been due to correct "fundamental analysis" indicating a deteriorating economy, but incorrect forecast of market reaction.  In any case, the outlook has become more favorable the last half of 2019.

The INT term NDX Long Term (2x/DM) ETFs (outlook two to four weeks) bearish sentiment continues to be weak and is likely contributing to NDX under performance.

Also, as mentioned in the intro, the lagging small cap RUT has been a warning sign for some, but one explanation is the lack of buyback support.  Another reason as seen below is that bearish sentiment  (3x TZA/TNA) remains neutral even though prices have been weak.

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 Sept 6. Also, This week includes a look at the TLT for Sept 20.

With Fri close at SPX 2926.  The SPX followed the outlines posted in the Tu/Th updates showing support at SPX at 2870 early in the week and resistance at 2925 later in the week.  Tue shows small OI that may hold the market between put support at 2900 and call resistance at 2925.

Wed with small OI shows SPX 2915 as pivotal in the 2900-2940 range where put support is at 2900 and minor call resistance at 2915, but puts at 2925 may draw prices higher if 2915 is exceeded.  Next resistance is 2940

For Fri with large OI, the employment report is released, and the initial claims (1 yr) has been improving so a strong number is expected that may question further Fed easing.  Calls at SPX 2900 and 2875 offset most of the put support, so a strong number is likely to see stocks reeling below 2900 with strong support at 2850.

Currently the TLT is 147.3 with the TNX at 1.51%.  For Sept 20, options OI has not been that effective for int rates or gold miners lately, but the high call OI at 144 should pressure prices down to that level.

IV. Technical / Other

This week I want to consider the longer term outlook.  The 2015 analog mentioned several times this year continues to seem likely as no breakdown below SPX 2800 has been seen.  Using the 2X timeline with the current correction comparable to Jan 2015 implies a top around May 2020.

Another interesting pattern can be seen looking at the LT volume analysis of NYUPV /NYDNV, the chart below compares the current period to 2006-07 where a LT basing pattern of the 100 SMA around 1.50 was followed by a move up to 2.0, then a quick retest of the 1.50 level.  The current bounce off the 1.50 level is comparable to Jan 2007, or 8 mns before the Oct top, also implying a possible mid-2020 current top.  The 200 SMA followed a gradually ascending route.  If the volume analysis is meaningful, this means more than a simple retest of the Dec lows is in store.

While most are looking at a lower retest around the SPX 2200 level as the upper range of the 2015 support area.

The volume analysis suggests something more like what was seen in the 2011 retest of the 2010 trading range, and implies a potential 40% decline from an SPX 2020 top, possibly  3100-50 down to the 1900s.

Conclusions.  So far, at least, the SPX analog to 2015 continues to hold.  The big test may be in Oct as Brexit looks like it will happen then.  The Sept trade talks with China could also spur a year-end rally if successful.  Longer term, a successful Brexit that helps Britain (probably due to currency devaluation) could threaten the LT EU viability as both Spain and Italy may want to follow suit in 2020.

Weekly Trade Alert.  SPX options OI is showing potential for a trading range of 2900-25 thru Wed, but a late week selloff to 2875-2900.  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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Lower Trading Range for Now

The SPX reached the weekly target gap fill at 2925 early Mon and traded in a range between 2900 and 2940 for most of the week until China trade war rhetoric picked up late Thur and Trump lost his cool on Fri, resulting in the expected pickup in volatility.  The next three weeks are likely to see the SPX trade in the lower part of the 2800-2950 range, roughly 2800-2880.  A hold over the 200 SMA at 2800 should setup a year end rally.

Indications are that SPX futures will open about 30 pts lower Mon following the Mad Hatter's (Trump meister's) response to China's retaliatory tariffs, which is starting to fell like Dec 2018.  Expect the lower bound of SPX 2800 to be tested soon.  Will it hold?

I. Sentiment Indicators

The overall Indicator Scoreboard (INT term, outlook two to four months) bearish sentiment is following a similar pattern as in the May pullback, but I expect the longer term pattern to be more like that of Feb-Mar 2018 with a lower trading range needed to increase support from volatility/hedging measures.

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 is also similar to May with a stronger move likely before a sustained rally.

Bonds (TNX).  Interest rates may be bottoming.

The current rally in gold stocks has not been driven by sentiment as we saw in 2016, but we are seeing extremely low bearish sentiment similar to the late 2016 top.

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 at somewhat higher levels than seen during the May correction.

And the sister options Hedge Ratio sentiment is still lagging which I consider a warning of continued volatility.

Over the past few weeks I have mentioned that the lagging of the Hedge Ratio meant that volatility was likely not over and this week I want to show a graphical representation of this behavior using the data mining software.  Here I show the spread of the two indicators (blue).  Negative spreads are somewhat like the Hindenburg Omen as the Oct 2018 and May and July 2019 readings were followed by sharp declines, while July and Dec of 2017 were not.

The INT term SPX Long Term (2x/DM) ETFs (outlook two to four weeks) bearish sentiment had pulled back to neutral before the late week swoon.

The INT term NDX Long Term (2x/DM) ETFs (outlook two to four weeks) bearish sentiment remains somewhat lower than the SPX which resulted in greater volatility late in the week and is likely to continue.

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 30. Also, this week includes a look at the GDX for Sept.

With Fri close at SPX 2847, below the 2820 support level, the next moderate level of support is 2780.

Wed, below 2870, there is little support until 2750 so there could be a fairly wild start to the week.

For Fri EOM, strong layered put support between 2750 and 2800 should push prices back above 2800 if early week weakness pushes prices lower, if not any strength could lead to regaining 2850.

Using the GDX as a gold miner proxy, Fri close $29.6.  For Sept 20 exp, GDX faces fairly strong resistance at $30 and even stronger resistance at 32, but above $32 hedging could push prices higher.

IV. Technical / Other

From a longer time perspective, I like to keep track of the Rydex Bear/Bull Index ETFs that have proven to be good indicators of INT tops the last two years.  So far, both the level and duration of low bearish sentiment has corresponded to the sharpness and duration of the following decline.  Currently, a decline similar to May seems likely, but of longer duration.  Sentiment is only about halfway to where a BUY is expected.

Conclusions.  Unfortunately, as we have seen in the past, tweet storms from the Mad Hatter can have the effect of a category 4-5 hurricane on the markets, as investors are not used to having a POTUS that acts like a blind man carrying an AK-47 with a hair trigger.  When bullets start flying, best head for cover.

Overall bearish sentiment seems moderately constructive, but the lagging volatility measures are a cause for concern and when daily price declines can reach the SPX 50-100 pt level what would normally be support can be taken out quickly.

Weekly Trade Alert.  Buckle up for a wild ride.  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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Move Over Hindenburg

The Hindenburg was developed as a flying DeathStar by Germany in the late 1930s, but it saw an unfortunate fate and has since the name has been linked to disasters.  For the stock market, the term applies to predicting market crashes, but with about a 90% false positive rate.  The main reason I am bring it up is that the last few weeks my readership has fallen off dramatically after I failed to join the "sky is falling crowd", including Bob McHugh, the H.O. king who now is predicting a massive bear market with the DJIA falling to 4-6000, and Avi G., the EW king who again (last was in May) is calling for a retest of the Dec 2018 lows.

Germany is again in the news as their economy has recently shown negative GDP for the first time in ten years, as China funneled much of the money supplied by the US buying goods from China into buying superior goods from Germany rather than the US.  Trump that!  So Friday, Germany announced a massive stimulus plan in Sept that will likely include fiscal stimulus as well as dropping the ECB int rate to -0.7%.

The real reason for the title, however, is that although this has turned into a summer of side projects, with two minor ones yet to go, that I have been able to spend a few hours combing thru the new data mining software and have discovered a "Crash Indicator" that is two for two with signals in late Jan and late Oct of 2018.  See more in the Tech/Other Section.

I. Sentiment Indicators

The overall Indicator Scoreboard (INT term, outlook two to four months) bearish sentiment continues to rise, now somewhat higher than in May, but lower that the major bottoms of 2018.

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 is at similar levels to May, but likely to need a few more weeks to sustain a rally..

Bonds (TNX).  Interest rates continue to fall as bearish sentiment remains very low.  This could be a blowoff top, as both bonds and gold stocks have reached the parabolic stage.

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

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 high similar to May 2018, but does not rule out another leg down as seen in late May.

And the sister options Hedge Ratio sentiment is still lagging, so more volatility for several weeks is expected.

The INT term SPX Long Term (2x/DM) ETFs (outlook two to four weeks) bearish sentiment has risen well above the levels seen in May, indicating that a more sustainable rally is likely when the final bottom is made.

The INT term NDX Long Term (2x/DM) ETFs (outlook two to four weeks) bearish sentiment is lagging that of the SPX, indicating relative under performance is likely.

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 23. Also, This week includes a look at the TLT for Sept 20.

With Fri close at SPX 2889, OI is small and SPX is currently at small put support (large is 2850), a hold over 2890 may go to 2900, but below 2890, 2850 is possible..

Wed has slightly larger OI, but overlapping positions make anything between 2850 and 2925 possible.

For Fri, OI is fairly large with a positive bias from put support toward the 2925 to 2950 area.

Currently the TLT is 146.1 with the TNX at 2.4%.  For Sept 20, TLT has entered into a large call resistance area.  The large calls at 144 may provide hedging support, but more likely prices fall to at least the 143 put support area.

IV. Technical / Other

This week I will first take a look at the Technical Indicator Composite (NYMO+TRIN +NYAU+NYUD) where extreme bearish sentiment is higher than May 2019, although lower than Feb and Dec 2018 lows.  Closest comparisons are Mar 2018, before a multi-month rally, and Oct 2018 which was followed by a second down leg in SPX after a following SELL.

Second is a new "Crash Indicator" found using my data mining software.  Note that similar to the options DM/SM and Hedge indicators more of the "new" indicators are considered proprietary so that the components have been "whited out".  The Crash Indicator is in blue.  This indicator has worked well for both BUYs (> 1.0 SD) and SELLs (< 1.0 SD), but the extreme SELL levels shown in late Jan and Dec 2018 are notable.  Looking back over 2014-15, a SELL was not given before the Aug 2015 flash crash, but reached a similar negative extreme late Dec 2015 before the Jan-Feb 2016 decline, so overall 3 for 4.  There was a false BUY in Oct 2018 after the first bounce, but reversed to a SELL before the Dec decline began.  The current BUY is similar to the May SPX lows, but a strong rally could reverse sentiment sharply as seen in Oct 2018.

In conclusion both indicators could reverse, indicating a second larger down leg, if a sharp rallies occurs soon, but continued volatility is more likely for a few weeks.

Conclusions.  Overall sentiment has reached the point where a rally could start at any time and may even reach SPX 2950 or higher, but as highlighted in the Tech/Other section, a strong rally now may precede an even bigger drop later.  My personal bias is still a trading range (SPX 2800-2950) for several weeks with plenty of volatility until the volatility measures show stronger support.

Weekly Trade Alert.  We got the rally back to the SPX 2940 area that I expected by Fri  during the first hour of trading Tue, then back down to the previous lows.  We are likely to see slower moving patterns thru mid-Sept within a similar range.  The large gap at SPX 2925 is likely to be filled by Fri.  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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Crash or No Crash?

Most are probably wondering why the SPX did not crash down to the 2600-700 level as many were predicting.  Believe it or not we are still following the script from the Oct 2014 selloff where a sharp decline of 10% was followed by a V-bottom rally of 12% to new highs.  The primary difference is that for 2018-19 the declines and advances were about twice as great in percentages and the timeline is roughly twice as long.  If the analog continues to play out, the SPX is likely to trade in a range of 2790-2940 thru mid-late Sept, then begin a year-end rally to new highs.  Is this forecasting a more aggressive easing by the Fed in Sept-Oct or possibly a China trade agreement before the next round of tariffs begins?

As you can see by the chart above, the recent 3-day decline mirrored the early Jan 2015 decline that gave a "false signal" when breaking what appeared to be an ending diagonal.  As long as the SPX 200 day SMA continues to hold at 2790-800 in 2019, this seems to be the highest probability outcome going forward.

In the Tech/Other section, I will also show two technical indicators which seem to support the above analog.

I. Sentiment Indicators

The overall Indicator Scoreboard (INT term, outlook two to four months) bearish sentiment has reached a level similar to the first leg down in May.  With the May decline about SPX 200 pts, a similar decline would be the low 2800s with another down leg likely.

The INT view of the Short Term Indicator (VXX $ volume and Smart Beta P/C [ETF Puts/Equity Calls], outlook two to four months) bearish sentiment has also matched the first leg down in May, but also indicates a few more weeks of volatility is likely.

Bonds (TNX).  Interest rates have reached what can only be described as "panic" lows.  I've mentioned before that Trump seems like a two-headed genius/madman as his apparent behavior is completely mad, but the results seem to be that of a genius.  Yes. the economy is slowing, but not falling apart, and interest rates are declining dramatically, now at a point where it is cheaper for large corporations to borrow money and buy their stock back than it is to pay dividends - a plus for the stock market.

For the INT outlook with LT still negative, the gold miners (HUI) bearish sentiment seems to be completely ignored as gold miners continue to follow bonds higher.

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) is now at levels seen at the June 2018 and May 2019 declines, but likely need more work before a sustained rally.

And the sister options Hedge Ratio sentiment is somewhat lagging other sentiment measures, and a multi-week trading range as seen in Jan 2015 seems like an ideal outcome (similar to Mar 2018).

The INT term SPX Long Term (2x/DM) ETFs (outlook two to four weeks) bearish sentiment has reached a level below the INT SPX lows of Mar and Dec 2018, but higher than June 2018 or May 2019 and may indicate support forming for a multi-month rally longer than 2-3 months.

The INT term NDX Long Term (2x/DM) ETFs (outlook two to four weeks) bearish sentiment is similar to that of the SPX.

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

With Fri close at SPX 2919, Mon opt OI shows the SPX should close near 2920, but overlapping puts and calls down to 2900 may mean an AM decline followed by a PM recovery.  EOD open int is relatively light all week, so may be less important.

Wed is somewhat more positive where puts at SPX 2925 and 2950 should keep the SPX in that range.  Call resistance is at 2975.

For Fri, call buyers are more optimistic with strong resistance at 2950-5 and put support at 2925.  Likely closing price is 2930-40.

Using the GDX as a gold miner proxy.  For Aug exp, GDX at $29.60 has clearly pushed into strong call resistance and should pullback to at least $29 with put support at $26.

IV. Technical / Other

As regular readers know, I sometimes use other indicators such as the LT $NYUPV/$NYDNV volume indicator in my long term forecast (see Appendix) of Dec 28 which lead me to conclude that the Oct-Dec 2018 decline was likely a repeat of the 1998 LTCM panic, also a 20% decline, that preceded the dot-com bubble.  This week another volume indicator which I call a Capitulation indicator, the NYDNV/NYDEC or NY declining volume/declining issues, reached a high only matched at the June 2018 lows before the run to the Oct highs and also at the Dec 2018 lows.

Another indicator, a composite of the NYMO, TRIN, NYAD, and NYUD shows that panic levels have been reached and has exceeded the levels seen on the second leg down in May, and may indicate the lows may be near in price, consistent with Jan of 2015.

Conclusions.  Overall sentiment seems consistent with the distribution or rounded-top for the SPX similar to 2015 that has been my preferred scenario since Jan when I first broached the idea of a V-bottom from the Dec lows.  The most confusing aspect has been the timeline, which now seems to be 2X that of 2015.  If the 2X timeline continues, Aug-Sept may be volatile, setting up for a year-end rally to new highs as long as the SPX 200 SMA holds (currently 2792).

Weekly Trade Alert.  The SPX is likely to hold in the 2930-40 area for opt exp Aug 16 to make sure all the Aug puts bought last week expire worthless, but another leg down to the low 2800s is likely to soon follow.  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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