A Short Term Top is Approaching

Last week was more positive than expected, although a Fri drop closed near last weeks OI support of SPX 2980.  Dismal news included early week news from China that trade talks would not be settled until tariffs were dropped, an earnings bombshell from IBM, and Fri news of design flaw coverups by Boeing.  The stock market, however, seemed to have found a "permanent plateau" at DJIA 27k and SPX 3k until late Fri.

Bullish sentiment mirrored the buoyancy of the stock market as the bears ran for cover, giving an initial indication of a potential setup for a 3-5% pullback in the SPX.  For EW lovers Trader Joe probably has the closest outlook to what sentiment is saying.  He is looking for a ST pullback to SPX 2940-50 before a final leg up to 3070-80 as a B-wave top from the 2018 Dec lows as an INT top.  I disagree with the degree as I still see a longer topping period as likely.

This week will have an expanded Technical/Other section with a discussion of recent data changes at the CBOE, the introduction of two new "data mining" indicators, and how the Smart Beta and Crash Indicators are lining up for a likely pullback.  I may have to cut back somewhere to allow sufficient time for coverage.

I. Sentiment Indicators

The overall Indicator Scoreboard (INT term, outlook two to four months) bearish sentiment saw a sharp drop last week, but with the longer EMA (blue) near neutral, the risk of a pullback is low.

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 to the level of Jul 2018 that may mean a pickup in volatility.

The following chart shows the Smart Beta P/C back to 2017.  The recent spike lows seems to part of a bigger pattern that has preceded the Feb 2018 and Oct-Dec 2018 corrections, namely consistently lower lows in sentiment that indicated increasingly larger corrections as well as a pattern that stretched out over a longer time period.  An even larger correction is ahead, but may be several months away.

Bonds (TNX).  Interest rates remain in a tight range while bearish sentiment is falling to even greater extremes.

For the INT outlook with LT still negative, the gold miners (HUI) bearish sentiment is rising in a mirror image to prices that continue to follow a pattern of lower lows and lower highs, briefly breaking the 200 level last week.

II. Dumb Money/Smart Money Indicators

For this week, I am going to omit the DM/SM ETF indicators due to an expanded Tech/Other section.

The option-based Dumb Money/Smart Money Indicator as short/INT term (outlook 2 to 4 mns/weeks) fell sharply last week, but remains in a pattern similar to Jul-Oct 2018.  Recent changes in CBOE data may effect this series as discussed in Tech/Other.

And the sister options Hedge Ratio sentiment is similar and well short of the high risk area.

The INT term SPX Long Term (2x/DM) ETFs (outlook two to four weeks) bearish sentiment remains at a fairly high level compared to mid-2018, likely indicating that an INT top is several months away.

The INT term NDX Long Term (2x/DM) ETFs (outlook two to four weeks) bearish sentiment remains low relative to the SPX and although new highs are likely more volatity is expected compared to 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 Oct 28. Also, This week includes a look at the GDX for Nov 15.

With Fri close at SPX 2986, Mon shows a possible range for the SPX from 2965 to 3025 with small OI positions in between.  More likely is a range of 2980 to 3000.

Wed although small for Wed and large for Fri, the OI is in agreement with Trader Joes target of SPX 2940-50 before a new ATH.  Wed call resistance shows a likely drop below 2975.

For Fri, overlapping puts and calls leave little net put support until 2950, so the SPX may continue to drop to that level.

Looking to the EOM with large OI, Oct 31 post FOMC, a move back toward the SPX 3000 level seems likely although there is a lot overlap down to 2900 that may mean more volatility.

Using the GDX as a gold miner proxy.  For Nov 15 exp, currently at 27.12, the GDX is likely to trade in a range between 26 and 28+ with very large call resistance at 28.5 and 30 and strong put support is all the way down at 23.

IV. Technical / Other

A.  As of Oct 7, the CBOE changed their daily report format, omitting 80-90% of the data, and moving the old format to an archive.  Two data series that I had been following, the SPXW (weekly and EOM PM options) and SPY ETF have been ommitted.  The new series for SPX combines the monthly AM (SPX opt exp) and SPXW, I had been using only the SPXW in the DM/SM options indicator so there may be some distortions in that indicator going forward.  The SPX monthlies are about 30% of total

B.  Last week I noticed that the SKEW and VIX put volume both saw sharp increases.  Over the last several years, I have discussed how the result be interpreted differently depending on the overall sentiment backdrop, but never came up with a way to show it graphically.  This time I decided to use the "data mining" software with the combined put/call ratio (CPC), revised (less VIX puts & calls) as an overall sentiment measure.  This way the "spread" between std vars is the sentiment as shown below.

The SKEW is a longer INT indicator and the spread with the CPC Revised has done an excellent job of identifying INT tops and bottoms over the last two years.  Most notable compared to the period before the Oct 2018 top is a pattern of rising bottoms and is probably the strongest sentiment indicator supporting a longer term topping formation.

Applying the same procedure to the VIX put volume shows similar results only for ST timing.  The most recent lows are most like the period of July 2018 which saw a choppy but upward trending market.

C.  Next, a followup on the Smart Beta P/C components where last week saw a sharp rise in equity call volume as well as a sharp drop in ETF put volume.  The first chart shows the sharp rise in equity calls as well as the sharp drop in the ETF puts, while the second shows the spread that may indicator a topping pattern with lower lows indicating a larger drop than Oct-Dec 2018 that may be months away.

Finally, a look at the Crash Indicator that shows increasing bearish sentiment much like that seen in mid-2018, also indicating an INT top may be months away.

Conclusions.  The big question is whether a smaller correction has begun from SPX 3010 that may go down to fill Fri 11th gap at 2940 before a larger seasonal rally or not.  This is what is indicated by Trader Joe's outlook as well as the SPX options OI.  However, I am 50/50 between that outlook and a continuation rally to SPX 3040-50 by the EOM, followed by a sharper decline to SPX 2940ish to setup stronger bearish sentiment by mid-Nov before a year-end rally.  Much may depend on earnings which did not seem to have much effect last week.  This weekend China news network confirmed Trumps positive outlook on the trade talks and this may have a positive effect.

Weekly Trade Alert.  A toss up between a SPX 2940 gap fill sooner or later.  Overall sentiment seems too positive for the moment, but really a mixed bag.  More positive though for the INT.  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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