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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