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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