A Broken Analog

It had to end sooner or later.  I had been following the Oct 2014 to May 2015 analog for almost a year since calling for a V-bottom in Jan.  Typically, analogs only work for a few weeks so the longevity of this one was amazing.  The general concept of a rounded top extending into mid-2020 is still the most likely outcome according to sentiment, but the hills and valleys from here will probably be different.

The outlook for the week was early strength followed by weakness using the options OI as the level of SPX call buying over 3000 was getting ridiculous.  Tue AM rant against China's patent infringements at the UN by the POTUS was enough to turn the market sour, and later news that the Dems would start an impeachment process over the Ukraine/Trump conversations about Biden threw an anchor around the market.  The result was testing lower OI support at 2950 (2945 act), but 2950 is starting to look a lot like 2825 in Aug.

Overall, the market seems to be led higher by the DJIA and lower by the NDX, supporting the influence of buybacks on the higher dividend paying stocks as pointed out a few weeks ago.  With last weeks ETF sentiment for the NDX near a SELL, I suspected the 2015 analog might be in jeopardy and the upside target was missed by 1% on the SPX.  Implications of DJIA leadership are discussed further in Tech/Other.

I. Sentiment Indicators

The overall Indicator Scoreboard (INT term, outlook two to four months) bearish sentiment has risen back to neutral after reaching a ST SELL a few days ago.  The pattern continues to resemble Jul-Oct 2018 and Mar-Apr 2019.

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 only improved slightly, also resembling Jul-Oct 2018 and Mar-Apr 2019.

Bonds (TNX).  Interest rates moved lower, retracing about half the rise from early Sept as sentiment remains very low.

For the INT outlook with LT still negative, the gold miners (HUI) bearish sentiment remains near an INT SELL as prices may be forming a H&S top.  Recent strength in the US$ due to somewhat positive economic news has put pressure on gold/stocks.

II. Dumb Money/Smart Money Indicators

The option-based Dumb Money/Smart Money Indicator as short/INT term (outlook 2 to 4 mns/weeks) reached a near ST BUY last week and appears to be following the Aug-Oct 2018 pattern.

And the sister options Hedge Ratio sentiment is somewhat similar to the DM/SM indicator, but a sharp drop is warning that continued ST volatility is to be expected.

This week I noticed that the SPX related DM/SM ETF indicators seemed to be working better over the last year so I will switch back to covering them on a trial basis.

The Risk Aversion/Risk Preference Indicator (SPX 2x ETF sentiment/NDX ETF sentiment, outlook 2 to 4 mns/wks) as a INT indicator (pref to less risky SPX is bullish), has seen a rise similar to Oct 2018 and Aug 2019, indicating that the potential for a rally is building.

The INT term SPX Long Term/Short Term ETFs (outlook two to four wks/mns) bearish sentiment (2x DM/3x SM) has been gradually improving since June that may indicate a breakout from the SPX 2800-3025 is ahead, but similarities to Oct-Dec 2018 warn that a final flush lower is possible.

The INT term NDX Long Term (2x/DM) ETFs (outlook two to four weeks) bearish sentiment warned last week of potential weakness in the NDX and a retest of the 7500 area is possible before a turn around.

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 Oct 4. Also, this week includes a look at the TLT for Oct exp.

With Fri close at SPX 2962, the SPX is right at strong put support at 2960, but only moderate support below until 2925.  Weak call resistance starts at 2975 and strong call resistance is at 3000 and higher.

Wed is pretty much the same as Mon with put support at 2960 and similar call resistance.

For Fri, strong put support drops to 2950, but due to overlap there is little call resistance until 3000, so a wider range is possible.

Due to the trade talks with China scheduled for Oct 10-11, I thought I would also add a look at the following Fri, where the outlook is similar with put support at 2950, call resistance moves up to 3010, and overlapping puts/calls in between leave only slight downward bias.

Currently the TLT is 142.7 with the TNX at 1.67%.  There is very strong put support at 139 with almost no call resistance up to 150.  This comes as a complete surprise, but with the various risks to the stock market that are emerging, everyone seems to feel that rates will rise.  My outlook is that rates will hold steady or fall, probably thru mid-2020.  If Dems succeed in ousting Trump, spending policies will likely trip the bond market.

IV. Technical / Other

Since the relative strength of the DJIA to SPX/NDX favored by the buyback spread (Div/TNX) seems to be consistent and getting stronger, I wanted to look back over the last couple of years to see what this has meant.  As you can see from the chart below, the $INDU/$SPX ratio is mid-range for the last two years and rising.  Notably the last two peaks were Jan/Feb and Nov/Dec 2018.  Both Jan and Oct 2018 saw the ratio rise to 9.3 before an INT top, while initial downturns saw spikes to the 9.6 level.  Apparently, more money flows into the largest and most liquid stocks (DJIA/INDU) as the top approaches and risk increases.  We are not there yet.

Conclusions.  Trade talk, the economy,  the Fed and now impeachment.  The stage of possible candidates for an INT correction or more keeps increasing, but no immediate catalyst is in sight.  What seems to make most sense now is for a continued media circus similar to what we saw in 1998-99 with the Clinton/Lewinsky affair when the POTUS was accused of lying under oath about getting a BJ in the WH.  With the Reps firmly in control of the Senate, conviction seems like a remote possibility, but similar to Clinton, the daily airing of dirty laundry between now and the 2020 elections can swing things in favor of the Dems. 

A Dem win for POTUS and/or Senate is likely to swing things in favor of those that spend (middle class/elderly) and away from those that invest (1%) with strong negative implications for the stock market.  The potential should be clear by mid-2020 which fits in my expected timeline.  Longer term, stronger consumer spending and a move back to global cooperation, instead of isolationism, is likely to restore growth that may provide the impetus for a final blow off.

Weekly Trade Alert.  Bearish sentiment shows a balance between bulls and bears that is likely to result in a ST trading range of roughly SPX 2950-3000, but the INT term sentiment is building for a rally.  SPX 3100-50 by mid-2020 still doable.  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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Repo Madness

The most interesting news in the financial markets the last two weeks has been the spike in the repo rates.  Although not a common topic, the repo rate represents the over night inter-bank lending rate and is the underlying rate to the fed fund target rate set by the Federal Reserve.  Briefly last week the overnight rate hit 10%, indicating a severe shortage of funds.  This prompted action by the Fed to provide additional liquidity which some are saying will lead to some form of QE-light that may have propped up the stock market last week more than expected.

Typically this type of funding shortage has preceded broader financial problems and prompted Martin Armstrong to predict that this is the result of negative interest rates world-wide, as banks see extremely low reward to risk for short term lending, and will be cause of the next financial crisis.  This fits into my thesis that investors focused on China trade and actions by the Fed will not see the source of a stock market downturn.  The ICMA Group discusses several aspects of repo rates and the effects of negative rates if anyone wants more info.

Last week showed more strength than expected with only a brief "sell the news" reaction to the FOMC actions, but did succumb in the last couple of hours Friday to the high level of bullishness in the options OI.

I. Sentiment Indicators

The overall Indicator Scoreboard (INT term, outlook two to four months) bearish sentiment saw a brief sharp drop before bouncing late in the week and may be repeating the stair step decline seen from Jun-Oct 2018 and Mar-Apr 2019.

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 fallen more slowly and seems to be following the Jun-Oct 2018 pattern.

Bonds (TNX).  Interest rates have consolidated off their recent lows as bearish sentiment remains very low.

For the INT outlook with LT still negative, the gold miners (HUI) bearish sentiment remains at extreme lows as prices consolidate.

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) bearish sentiment is similar to the ST Indicator and has not dropped much, also like the Jun-Oct period.

And the sister options Hedge Ratio sentiment did see a sharp drop and reversal and may support a larger rally when the ST EMA (gr) reaches a BUY.

The INT term SPX Long Term (2x/DM) ETFs (outlook two to four weeks) bearish sentiment has declined considerably, but nowhere near the point of a significant top.

The INT term NDX Long Term (2x/DM) ETFs (outlook two to four weeks) bearish sentiment has again fallen more than the SPX even though the NDX is a couple % below its high and may under perform .

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 27. Also, This week includes a look at the GDX for Oct.

With Fri close at SPX 2992, we see a sharp reversal of opex OI as put support is likely to hold at 2975, while weak call resisiance and put support could push prices back to SPX 3010.

Wed, however, shows signs of an expected EOQ window dressing rally with large call OI at 3055, so likely a drop back below SPX 3000.

For Fri, continued pressure toward SPX 2975 looks likely although early week weakness could increase put support where a 3000 close is possible.

Looking out to the Oct exp for SPY (1/10 SPX), call resistance is likely to keep prices below SPX 3000, but the large put OI at 308 may lead to a rally well over SPX 3000 by mid-month.

Using the GDX as a gold miner proxy, currently 28.7.  For Oct exp, rhe like;y range is 27-29.

IV. Technical / Other

It's probably time to revisit the 2015 analog again as last week's intra-day pullback followed the same general pattern with a couple weeks of higher prices before a 50% retracement of the previous rally.

While the longer term Rydex Bear/Bull ETF Ratio is in about the same position as the SPX 2x ETF ratio and implies several more months of uptrend before a significant top.

Conclusions.  Last week was range bound between SPX 2875 and 3025 as the bullish OI positions did put some downward pressure on the SPX.  Next week looks like more of the same.  Given the recent chatter comparing Sept 2019 to Sept 2007 which preceded the Oct 2007 high, my preference is a delayed rally top into mid Oct.  If this follows the 2015 analog, a sharp 50% retracement of the rally from the Aug lows will setup sentiment for a rally several months long.

Weekly Trade Alert.  The next couple of weeks may be pretty boring, but by mid-Oct the SPX should reach a top in the 3040-50 area before a late Oct swoon down to the 2930-40 area.  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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Did the Bond Bubble Just Burst?

Most non-economist (POTUS) seem to think that the term structure for bonds always stays the same, so that lowering ST rates will lower INT and LT rates as well.  But, as we saw this week with Draghi's farewell hug to negative rates in the EU, if a drop in rates is viewed a stimulative, then the result can be higher LT rates.

This raises an interesting conundrum for the Fed next week.  Although a 25 BP cut in the Fed funds rates is likely already decided, more stimulus may also push longer rates higher.  It's possible if an economic turn around appears by next summer, the Fed may be forced to raise rates to stop a bond market rout. Then wave adios to Trump.

Since the beginning of Sept, bonds (TLT) are down 8%, dropping almost twice as fast as they rose in Aug.  It's interesting, however, that everyone thought the end of the world was coming when the SPX fell 7% in Aug, but judging by bond sentiment, bond holders seem to have shrugged off a similar drop in bonds.

In this week's Tech/Other section, I will take a closer look at the comparison of the NYUPV/NYDNV comparison between 2007-09 and today.

I. Sentiment Indicators

The overall Indicator Scoreboard (INT term, outlook two to four months) bearish sentiment saw a sharp drop last week and is consistent withe Jun 2018 and Mar 2019 where a 75 pt drop followed in the SPX.

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 dropped somewhat more slowly, but is also not far from the levels seen in Jun 2018 and Mar 2019.

Bonds (TNX).  Interest rates in Sept have risen about twice as fast as they fell in Aug, but bondholders seen not to have noticed as sentiment remains near low extremes.  The first support level is at 2.1-2.2% which could be seen as early as next week.

For the INT outlook with LT still negative, the gold miners (HUI) continue to move inversely with interest rate levels and bearish sentiment remains at very low levels after a 15% correction.

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 lagging other sentiment indicators and appears to be setting up a repeat of the July-Oct 2018 period where skepticism proved to be correct thru the Oct decline, but the strong BTFD optimism for a year-end rally in Nov provided the sentiment backdrop for the Dec collapse.  I am expecting a similar sentiment setup in 2020 on a somewhat larger scale, where an early year pullback sets up expectations for a strong BTFD for the presidential cycle rally into the election.

And the sister options Hedge Ratio sentiment is dropping very quickly and is likely to see the LT EMA (blue) drop to 1.05 before a significant pullback.

The INT term SPX Long Term (2x/DM) ETFs (outlook two to four weeks) bearish sentiment has fallen more slowly than the shorter term (options) sentiment and is consistent with several months more of upward bias..

The INT term NDX Long Term (2x/DM) ETFs (outlook two to four weeks) bearish sentiment has now caught up with the SPX ETF sentiment, so it may start to performing more closely to the SPX, but still faces lack of buyback support.

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

Last weeks momentum was able to push the SPX over the 2980-3000 call resistance levels after the expected drop early in the week toward the 2950 area (2957).  Sentiment this week looks like a repeat of the July FOMC week where a "sell the news" reaction was expected and resulted in a 50 pt drop in the SPX. 

With Fri close at SPX 3007, the SPX is in a neutral pocket at 3005-10, but the higher level of calls at 3000 indicates a power struggle at that level.

Wed  there is little support above 2990 and a drop to the 2990-3000 level is expected..

For Fri, things become very interesting.  Due to the fact that most exp options for SPX are AM and mostly hedged, the OI for PMs are very light, but show a strong negative bias toward the 2950 level or lower.

As confirmation, I also looked at the SPY for Sept exp (price 1/10 SPX), but this also shows a strong negative bias towards SPX 2950.  My conclusion is another "sell the news" event, whether the market is disappointed with a rate cut, or potentially gets "freaked out" if selling continues in the bond market as we saw after Thurs ECB rate cut.

Currently the TLT is 136.5 with the TNX at 1.9%.  The TLT dropped through strong put support at 139 like a hot knife thru butter and the next significant support is at 128, so there is definitely room for continued turmoil in the bond market.  TLT 128 is about TNX 2.1-2.2%.

IV. Technical / Other

A couple of weeks ago I mentioned that one of the LT indicators I look at, the NYUPV/NYDNV was following a similar pattern to 2006-07 and today I will take a closer look at that comparison.  First for 2006-09, the green circles represent smart money buying, while the red circles are dumb money buying.  Smart money were buying mid 2006 before the runup to ATH and heavy buyers at the late 2008 and early 2009 lows, while the dumb money were mostly BTFD buyers buying pullbacks most of the way down in late 2007 and early 2008.

In 2018 and 2019, we have seen similar patterns as the dumb money has consistently piled in at the tops while smart money scoops up bargains at the bottom.  With 2020 an election year similar to 2008, I expect to see the same BTFD behavior by dumb money if there is a correction early 2020 based on the expectation of a strong rally for the presidential election.

Conclusions.  Many of the people who were looking for SPX 2600-700 two weeks ago are now looking for the SPX to advance to 3100-50 over the next two weeks, but I am highly skeptical given their recent track record.  The last quarter of 2017, I was comparing the SPX setup to 1999 where we had a sharp spike in bearish sentiment (ST Indicator vs LTCM crisis), but were facing rising TNX rates due to the Fed's ending QE.  In 1999, as rates rose the SPX typically stalled, but then chugged forward when rates paused.  We may see something similar today, but I am not expecting a "melt up" unless there is a trade agreement with China (probability < 40%).  A trade agreement could push the SPX to 3200-300.

The highest probability is a continued upward bias thru the end of the year, although the 2015 warns of the probability of a 50% retrace from the Aug lows.  If there is a "sell the news" following the FOMC that backtracks to SPX 2940-50, EOQ window dressing will likely push the SPX to 3025-50 by EOM, then an Oct retrace may begin.  LT 2020 could be a very interesting year.

Weekly Trade Alert.  M-W looks like the SPX will dance around 3000 according to options OI, but W-F will provide a negative bias toward the SPX gap at 2940 at least thru 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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Did Dorian Sweep the C-Wave Out to Sea?

Over the weekend as hurricane Dorian ravaged the Bahamas, the bears were hoping that the SPX had completed a B-wave at 2940 and a disastrous C-wave to the 2600s was to follow.  But early in the week as Dorian turned northward missing the US coast, the SPX also turned northward tacking on 100 pts from the early week lows.  I had been warning the last two weeks that extremely high bearish sentiment could start a rally at any time, even though an ideal mid-Sept low was expected.  News of more trade talks with China in Oct were all that was needed to spark a blazing short covering rally.

About 78% of the entire Aug decline has been retraced the last two weeks, but bearish sentiment remains high, so much farther in time (months) or price is expected for the rally.  As posted on Twitter early Wed AM, the LT (20 day) SPX P/C has reached the highest level of the last two years, surpassing both the Feb and Dec 2018 SPX lows.

The late 2014-15 analog shown on Aug 19 continues to track nicely with a sharp rally off of a triple bottom as seen in Jan 2015, but the timeline has accelerated from the 2X to 1X that could mean an earlier top than expected.  This could be 4-8 months from now, or sometime the first half of 2020.  More in Tech/Other.

I. Sentiment Indicators

The overall Indicator Scoreboard (INT term, outlook two to four months) bearish sentiment has fallen to a similar level to the first thrust off the early June lows to the SPX 2875-2900 area.  This ended up being about 50% of the entire rally, and a similar percent this time would result in a rally to the SPX 3100-50 area.

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 is also a a similar level to the June rally to 2875-2900.

Bonds (TNX).  Interest rates seem to be leveling off as bearish sentiment remains very low.

For the INT outlook with LT still negative, the gold miners (HUI) bearish sentiment remains extremely low even with the 8% drop in HUI late last week.

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) bearish sentiment saw a sharp drop similar to the early June rally, but the LT (blue) will likely take several months to reach a SELL level..

And the sister options Hedge Ratio sentiment is still lagging, now at a level similar to late July 2018.  A continued drop that meets or exceeds that of Jan, Sept-Oct or Dec of 2018 or May 2019 would be the first warning of a possible bear market.

The INT term SPX Long Term (2x/DM) ETFs (outlook two to four weeks) bearish sentiment rose to a higher level than seen during the May decline, so more prolonged rally is expected.  With EW, normally W1 > W3 > W5 in price, so that with W3 300 pts, W5 should be < 3125 unless extended, but time may alternate so s short W3 may mean a long W5.

The INT term NDX Long Term (2x/DM) ETFs (outlook two to four weeks) bearish sentiment is somewhat lower than the SPX 2x ETFs, so some under performance is expected.

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 13. Also, This week includes a look at the GDX for Sept 20.

With Fri close at SPX 2979, the rally carried over the call resistance levels of last week with current resistance levels at 2975 and 3000.  A move below 2975 could drop to 2950 and a move higher should stop between 2995 and 3000.  Light OI overall.

Wed OI is very light with resistance levels scattered between 2960 and 3010.

For Fri, OI levels show strong call resistance levels at 2980 and 3000, a move down to 2950 is expected sometime during the week, but could bounce back toward 2980.

Using the GDX as a gold miner proxy,  For Sept exp with Fri close at 28.5 after reaching a high near 31 on Wed, GDX fell to the first line of weak put support.  There is only moderate put support at 25 and almost no support below that level.  26 to 29 is the most likely range.

IV. Technical / Other

This week I will take a micro-look at two of the technical indicators, the NYAD and NYUD with 5 day SMAs.  The NYSE NYAD had been improving with each of the three tests of the SPX 2825 area which pointed to a strong reversal in that area the end of Aug.  Comparing declines over the last two years, however, the closest analog is Apr 2018 where a stair-step improvement hinted at a more prolonged choppy rally rather than the impulses off the Dec 2018 and May 2019 lows.

For the NYSE NYUD, the volume support was much weaker than off the Dec 2018 and May 2019 lows, now reaching levels lower than Apr 2018.  This is more indicative of a short covering rally that may limited in price support and is likely to be choppy as in Apr-Oct 2018.

Conclusions.  As discussed since early Aug a minor correction similar to Jan 2015 was expected that showed a "fake" breakdown from a so called "ending diagonal".  The late 2014-15 analog has held up much better than expected with the most variation occurring in the timeline.  The last twist to a faster timeline again brings questions as to when a May 2015 type top can be expected.  Currently this appears to be 4-8 months from now.  I don't really adhere to EW, but a top in the SPX 3100-50 area seems consistent with a 5 wave rally from the Dec 2018 lows.  This may be the "ultimate fake out" if a bear market ensues afterwards since any pullback should be corrective.

Weekly Trade Alert.  Some consolidation, pullback next week seems likely to the SPX 2950 area.  Oct could prove to be a volatile month with possible Brexit, China trade talks and Fed uncertainty on the line.  Mar 2015 saw a 50% pullback from the rally off the Jan lows, so if the analog continues to hold, a similar pullback from the next high is expected.  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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