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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The market has hit your upside target today on Monday, the beginning of the week it seems Arthur. I suspect it will go a little higher into the middle of the week and then back down again. Keep up the great work.
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