A Change is Coming

This weeks post will be somewhat shorter than normal to to the holiday weekend.  As mentioned earlier in the week in Twitter, some data mining revealed a potential indicator that may be of some use as a supplement to the SPX options OI.  This indicator is the SPX puts/ETF calls stdvar spread.

Sentiment, overall, seems to following patterns leading up to both the Jan 2018 melt up and the Oct 2018 top.  This weeks time period will extend back to Oct 2017 for better comparison.  If the result is the former, then the following correction may be sharp, such as a "sell the news" of a weak China trade deal followed by new highs mid to late 2020, while the latter could be the beginning of a multi-phase bear market.  Only time and sentiment will tell.  News is starting to surface of turmoil in the Chinese banking system that could lead to another global financial crisis.

I. Sentiment Indicators

The overall Indicator Scoreboard (INT term, outlook two to four months) bearish sentiment appears to be bottoming near the SELL region similar to Dec 2017 and Apr 2019, but the lower lows and lower highs seen over 2019 seem to imply that a larger correction than that seen in Q4 2018 is not that far away.

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 the pattern of lower sentiment highs and lows is even more evident in the ST indicator.  The "curling up" of bearish sentiment is similar to mid-way in the Jan 2018 melt up.

Bonds (TNX).  Strong flows into long bond ETFs are keeping sentiment at low extremes.

For the INT outlook with LT still negative, the gold miners (HUI) bearish sentiment re,aons pinned to the SELL area.

II. Dumb Money/Smart Money Indicators

The option-based Dumb Money/Smart Money Indicator as short/INT term (outlook 2 to 4 mns/weeks) remains near the neutral area similar to late Dec 2017 and Sept 2018, and a decline is expected before a market top.

And the sister options Hedge Ratio sentiment has remained above neutral at somewhat higher levels than Dec 2017 and Sept 2018, but should also see a downturn before a market top.

The INT term SPX Long Term/Short Term ETFs (outlook two to four wks/mns) bearish sentiment (2x DM/3x SM) saw a divergence from 2017-18 as a rising trend, that in retrospect was a indication of potential market strength, but the recent trend breakdown is now nearing levels seen at the Jan and Sept 2018 tops
.

The INT term SPX Long Term (2x/DM) ETFs (outlook two to four weeks) bearish sentiment saw a sharp break downward and is now at the levels of the Sept 2018 top.

The INT term NDX Long Term (2x/DM) ETFs (outlook two to four weeks) bearish sentiment remains near the Dec 2017 levels.

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 Dec 6. Also, This week includes a look at the TLT Dec monthly.

Also this week I want to look at possible SPX hedge indicator that popped up from some data mining.  Please note this not meant to be a general market indicator, but simply a measure of the reliability of the SPX support resistance zones.  High hedging indicates more pressure to push up toward strong call resistance, while low hedging indicates more push toward strong put support.  Last week showed strong call resistance at SPX 3100 and 3150.  Since prices stayed above 3100, hedging pushed prices up to the 3150 area which held by the Fri close.  The SPX hedge spread remains high similar to Sept 2018, a drop to neutral may signal a top is in place as in Oct 2018.

With Fri close at SPX 3141.  Mon/Wed are unusual as both days show large OI. On Mon, strong call resistance is seen at 3160 and 3170 with little put support until 3100.  SPX hedging is expected to push prices higher toward the 3160-70 area.

Wed again shows stron SPX call resistance at 3160 and 3170 with little put support until 3080.  SPX hedging is likely to still support prices unless the hedge ratio falls dramatically.

For Fri, the outlook becomes much more interesting as strong call resistance exists, currently, between 3075 and 3170 with some overlapping put support between 3075 and 3125.  Watch closely for twitter updates, as a decline in the SPX hedge ratio should lead to a drop to at least 3125.

Using the GDX as a gold miner proxy, last week showed a likely range around 26.5 thru Dec where resistance is now forming with the 50 and 100 SMAs at 27.15 and 27.75.

Currently the TLT is 140.4 with the TNX at 1.78%.  SMA support for TLT is 140-139.3.  For Dec 20, prices should stay between put support at 136 and call resistance at 140.  Most likely close is 138 due to large overlaps of puts and calls or "max pain".

IV. Technical / Other - N/A

Conclusions.  Last week may end up being a preview of the week ahead.  Bearish sentiment is approaching rock bottom levels for most indicators, while several options (ST) related indicators show that hedging is still likely to support a higher SPX, at least thru Wed.  SPX OI shows a strong resistance zone at 3160-70 thru Wed, while Fri shows the potential for a drop to 3125 or lower by Fri, assuming hedging subsides.

Weekly Trade Alert.  Upside bias early in the week with the potential for Thur/Fri selloff of 1+%.  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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One Hand Clapping

From the 1970s thru 2008, the economy and the Fed seemed to dance to the two step where the Fed would cut rates until growth accelerated and inflation picked up and then the Fed raised rates until the opposite effect was seen.  Since 2008, however, the cycle seems to have been broken and now we only heard the sound of one hand clapping, or essentially a permanent state of malaise, or low growth where everyone knows something is wrong, but can't understand what is or how to fix it.

The result in financial markets is much the same where movements up and down seem to be less tied to fundamental economic changes and more tied to animal spirits.  Fortunately, the role of sentiment analysis is to measure the changes in animal spirits and hopefully glean the forces pushing markets to and fro.

This weeks sentiment analysis is mostly pointing to more of the same.  Poor fundamentals are encouraging the bears to short the market, thereby creating support thru hedging, while lower and lower overall bearish sentiment is creating a backdrop where sudden downdrafts are more likely.

I. Sentiment Indicators

The overall Indicator Scoreboard (INT term, outlook two to four months) bearish sentiment has now reached levels consistent with the start of previous corrections of the past two years, but not as low as Jan 2018 or Apr 2019 and not for an extended period as seen in July thru Oct 2018.

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 for each of the last INT tops in Jan 2018 and Oct 2018 and now, has been preceded by increasingly lower plateaus for longer periods, only to be followed by larger corrections.

Bonds (TNX).  Interest rates seem to be forming a multi month up trending channel, while sentiment remains at extreme lows.

For the INT outlook with LT still negative, the gold miners (HUI) bearish sentiment is once again declining as fresh China trade fears surface..

II. Dumb Money/Smart Money Indicators

The option-based Dumb Money/Smart Money Indicator as short/INT term (outlook 2 to 4 mns/weeks) bearish sentiment has moved back to neutral with only a small price decline similar to Aug 2018 that saw a continued rise for SPX and Aug 2019 that was the start of a larger decline.  Could go either way.

And the sister options Hedge Ratio sentiment had reached the levels of Oct 2018 and Apr 2019, but the recent move up to neutral looks more like Aug 2018 where another move down was required before a top.  No immediate follow thru to the downside is likely to lead to 6 to 8 weeks more of upward bias.

The INT term SPX Long Term (2x/DM) ETFs (outlook two to four weeks) bearish sentiment here has only gradually moved down due to the more INT outlook, and now has reached the level seen in Aug 2018.  Combined with the options outlook, the Aug 2018 fractal of 6-8 weeks of more upside bias is likely

The INT term NDX Long Term (2x/DM) ETFs (outlook two to four weeks) bearish sentiment has now reached a low extreme last seen in Dec 2017.  Last weeks chart of AAPL/WDC may have marked a ST top for AAPL as Tue run to the channel top was sold the rest of the week.  It's interesting that when looking at APPL, a similar run up of 50% was seen from June to Nov 2017 as in 2019.  In 2017, APPL then plateaued before a final spike in Jan.  The extreme sentiment may indicate a repeat for the APPL-led NDX.

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 Nov 29. Also, This week includes a look at the GDX for Dec.  Last week the TLT chart was mis-labelled as SPX.

With Fri close at SPX 3110.  Light OI shows a negative bias toward 3000 with call resistance at 3110 and above.

Wed also has light OI where some volatility may occur between SPX 3070 and 3100, if 3100 does not hold.

For Fri with heavy OI where call resistance is likely to exert downward pressure below 3130 to 3100, and below 3100 to 3070.  Very strong resistance at 3150.

Using the GDX as a gold miner proxy.  For Dec exp, now at $26.76, GDX should stay in a tight range around $26.50.

IV. Technical / Other

Several items will be covered this week including updates for the Crash Indicator, SKEW, VIX puts, NYMO, and Rydex Bear/Bull ETF ratio.  The Crash Indicator has turned up as higher bearish levels are now in similar position as either the May 2019 top or more likely the Aug 2018 period, given overall sentiment.  The latter aligns with the SPX ETF indicator, pointing to a top about 2 months away or mid Jan.

The SKEW has also turned up in the general vicinity of the Apr and July tops, indicating that the next downturn will likely be a ST pullback, not an INT downturn.

THE VIX put indicator has reached a level where more volatility is expected since there is too much betting the other way, but an improvement in VIX calls indicates only a short term effect.

The Rydex Bear/Bull ETF ratio continues to be an excellent INT indicator, as the Oct spike even provided a warning of the current melt up.  Sentiment levels are about the same as early Apr, about 6 weeks before the May correction.

Finally the NYMO is waving a warning flag, but it is unclear whether we are at the Aug 2018 level (more to go) or Sept 2018, Apr and July 2019 (near a top) levels.

Conclusions.  The global economy seems to be broken, but the stock market doesn't seem to care.  Due to a surplus in liquidity, weakness in the economy may actually be what are supporting equity markets, since there are no other growth opportunities.  As John Maudlin opines, it seems like a "great reset" is on the horizon, and it is possible that Elizabeth Warren as President may provide that catalyst.

For this weeks investment outlook, a continued increase in volatility, but with continued higher prices seems likely.  As mentioned last week 2020 is looking more like a repeat of 2018 where a sharp decline sometime Dec-Feb 2020 seems likely, while an end of year collapse may also occur.

Weekly Trade Alert.  Continued hedging appears likely to keep SPX prices elevated for the next few weeks, while ST volatility is also likely to increase.  SPX OI shows the potential for a drop to 3070 by Fri EOM, but hedging may prevent that much of a drop.  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 Mini Melt Up Continues

Although not my preferred scenario, the last couple of weeks I have talking about a slow motion melt up as a possibility.  Supporting sentiment was shown in the SPX LT/ST ETF ratio where bearish sentiment remained high relative to recent tops, the options Hedge Ratio that showed moderate hedging and the VIX options indicators showing little indication of a pickup in volatility.  A pullback of 1-2% was expected before a rally into mid-Dec, but last weeks pullback of just SPX 20 pts from 3095 to 3075 caused a spike in the ST options DM/SM and Hedge Ratio indicators that aborted the pullback.

Otherwise, bearish sentiment seems to be slowly unwinding and could reach the Jan 2018 levels by Dec.  If so, given the potential of a plethora of possible unsettling events from Dec-Feb 2020, China's intervention in the HK riots, blowup of US-China trade progress, Brexit, and Deutsche Bank failure, a repeat of 2018 is possible with an initial 10%+ correction followed by a rally into the pre-election period. Trump's supporters would certainly love to see a stock market crash if he loses the election.

The Tech/Other takes a look at the LT NYUPV/NYDNV ratio, the ST VIX options indicators and a paired APPL trade.

I. Sentiment Indicators

The overall Indicator Scoreboard (INT term, outlook two to four months) bearish sentiment continues to slowly fall, now matching all but the Jan 2018 and Apr 2019 tops.

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 reached the lowest level of the past two years.

Bonds (TNX).  Interest rates fell back from the recent stab at 2.0%, but still seem to be in an uptrend from the Sept lows.

For the INT outlook with LT still negative, the gold miners (HUI) bearish sentiment dropped sharply as the miners continued to move inversely with interest rates.

II. Dumb Money/Smart Money Indicators

The option-based Dumb Money/Smart Money Indicator as short/INT term (outlook 2 to 4 mns/weeks) saw a fairly large jump in bearish sentiment last week, similar but from a lower level than what was seen at the pullback from the Sept 2018 top.

And the sister options Hedge Ratio sentiment saw an even stronger increase in bearish sentiment matching the level seen before the run to the Oct 2018 top.

The INT term SPX Long Term (2x/DM) ETFs (outlook two to four weeks) bearish sentiment continued downward, breaking the pattern of rising bottoms that could spell trouble around the 0.70 level.

The INT term NDX Long Term (2x/DM) ETFs (outlook two to four weeks) bearish sentiment is reaching the levels last seen in Jan 2018, which is one factor making me consider that a repeat of the 2018 volatility could be seen in 2020.

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 Nov 22. Also, This week includes a look at the TLT for Dec 20 opt exp.

With Fri close at SPX 3120.  Last weeks SPX call options resistance was overcome mostly by increased hedging.  Next week shows similar sentiment and may not be as effective until hedging subsides.  Typically the SPX would be pressured toward 3060, but delta hedging will support prices as ling as 3010 holds.  There is little resistance overhead if 3125 is surpassed.

Wed shows SPX put support at 3075 with little call resistance over 3130.

For Fri with larger OI, we have similar support/resistance and any weakness early in the week will likely increase put support ay 3075.

Currently the TLT is 137.76 with the TNX at 1.83%.  Two weeks ago the options OI showed that the sharp break of put support at 141 to 138.5 was likely to lead to more weakness toward support at 137.  Now 138 should act as a fulcrum with slight negative bias, a small range around 138 seems likely

IV. Technical / Other

The volume indicator, the NYUPV/NYDNV ratio, has provided some interesting insight into INT market trends and now shows that we may be approaching an INT top (circles).  The circled areas represent June 2015 and Aug 2018, about 2 months before a sharp decline, but high risk did not occur until the 100 SMA (red) reached the 1.5 line.

The ST VIX put and call indicators relative to CPC Revised were a recent warning of dormant volatility, where low VIX call buying has been a supporter of higher SPX prices and has only recently dropped to neutral.

While the VIX put indicator that is less reliable when not supported by the VIX call indicator (as in Oct where only a trading range resulted from, low sentiment levels) is now moving towards the -1 SD level.

I starting watching the APPL/WDC pair early Oct (no position) as a mega-cap/mid-cap ratio and was surprised at how it correctly predicted the recent AAPL strength.  This is not an exact market timing indicator, but the almost exact matching highs and lows for the last 18 months are unusual and the Nov 2018 peak preceded the Dec plunge by a month, while the mid-June peak preceded the Aug selloff by 6 weeks.

Conclusions.  A number of indicators show that an INT top is approaching with the most likely time frame being some time in Dec.  For stargazers, I also believe there is a major Bradley turn date early Dec.  Much of the run up since June has come from AAPL that is up 50% from the June low, adding about 1200 pts to the DJIA, and the ratio compared to WDC indicates that may soon come to an end.  One INT indicator to watch is the NYUPV/NYDNV that still needs to fall further to signal an INT top.  ST term indicators that have also not indicated an imminent top are the VIX put and call volume.  Optons DM/SM and Hedge Ratios are also need to reverse sharply prior to an expected selloff.

SPX options OI may not be as effective this week

Weekly Trade Alert.  The SPX was able to power thru the low 3100 option OI resistance as a sign of strength, so don't expect an immediate reversal.  We have now reached my LT target of 3100-50 and it looks like that may be marginally exceeded before any sizable pullback.  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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Bonds & Gold Crash as Stocks Soar

My contention for most of the year was that bond investors had it wrong and the problems facing the economy were mostly artificial brought on by Trump's over inflated ego.  Unlike the 2008-09 banking crisis about which I spent most of a year warning (mostly ignored by) friends and family, much of the China trade war could be resolved by the flick of a pen and we appear to near that point.  Unfortunately, this means we go back to where we were before the trade war began with soaring deficits and a hollowed out middle class that is close to collapsing due to rising consumer/student/pension debt.

Overall, bearish sentiment is approaching the area of an INT top, but still may be several weeks away from a significant downturn.  This weeks Tech/Other section looks at the Crash Indicator and VIX options that show no immediate warning of a pickup in volatility.

I. Sentiment Indicators

The overall Indicator Scoreboard (INT term, outlook two to four months) bearish sentiment continues to gradually decline, now reaching the level of the Aug 2019 and Sept 2018 tops, but an INT downturn is likely to see several weeks of extremes before a major turn.

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 reached the extremes of the Apr and Aug 2019 tops.

Bonds (TNX).  Interest rates broke upward sharply last week as indicated by the bank stock index breakout, but surprisingly bearish sentiment fell as investors saw this as a buying opportunity.

For the INT outlook with LT still negative, the gold miners (HUI) bearish sentiment took an even sharper drop as the HUI held above the 200 level while gold fell from the 1530s to the 1450s.  It's interesting that the TNX is hovering below 2.0% as the HUI hangs in over 200, will it require a TNX over 2.0% for the HUI to break 200?

II. Dumb Money/Smart Money Indicators

The option-based Dumb Money/Smart Money Indicator as short/INT term (outlook 2 to 4 mns/weeks) has reached the level wjere a top could occur at anytime, but compared to Apr and Aug tops, lower levels or more time is likely before a market downturn.

And the sister options Hedge Ratio sentiment is still showing moderate levels of hedging that may prevent an immediate downturn or limit downside such as in Jun 2018.

The INT term SPX Long Term/Short Term ETFs (outlook two to four wks/mns) bearish sentiment (2x DM/3x SM) was showing a strong INT uptrend similar to that seen in Apr-Aug 2018.  It's really too early to tell if an INT turn is indicated, but now looks like the Aug 2018 period, a couple of months before the Oct 2018 top.

The INT term SPX Long Term (2x/DM) ETFs (outlook two to four weeks) bearish sentiment continues to gradually fall, now also approaching the Aug 2018 level.

The INT term NDX Long Term (2x/DM) ETFs (outlook two to four weeks) bearish sentiment remains very low. but not as extreme as Jan 2018.

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 Nov 15. Also, This week includes a look at the TLT.

With Fri close at SPX 3093, faces moderate call resistance at 3100, which held last week, with little put support until 3050.  Barring unforeseen news events over the weekend 3075-3100 is the likely range.

Wed shows fairly large call OI that may turn out to be resistance if the SPX shows weakness.  Wed is scheduled to start the public airing of the House impeachment hearings and there is a good possibility that uncertainty will push prices down to the 3050 (put support) to 3080 range.

For Fri, OI shows the most optimistic (bearish) setups I've seen in quite a while.  Call positions are very large, especially for SPX PMs and there is virtually no put support all the way down to 3000, while call resistance over 3100 is huge.  This may not be result in a large decline, but weakness Wed could spell big trouble by Fri close.

Currently the TLT (not TJT) is 135 with the TNX at 1.93%.  The push thru huge put resistance at 137 and 135 does not bode well for bond bulls, but any weakness in the SPX may provide temporary support.  A push below 135 could result in negative delta hedging with next support at 131.

IV. Technical / Other

The Crash Indicator fell sharply early in the week, but then stabilized just short of the warning level of -1 SD about the same as in Sept.

Using the volatility measures for SKEW, VIX calls and VIX puts compared to the overall options sentiment, CPC revised.  The INT SKEW indicator has now reached the level seen in Mar 2018 and Apr 2019 before SPX 200 pt drops.

But the ST VIX options indicators are near neutral.  Chart 1 is calls and chart 2 is puts.

Conclusions.  Most of the INT indicators are showing that a downturn is approaching, but the options Hedge Ratio and LT/ST SPX ETF indicator are showing more time is needed before a downturn.  The VIX options indicators show no warning of an immediate pickup in volatility.  The overall outlook simliar to Nov-Dec 2015 is still viable, but so is a slow melt up, and either way, a top around mid Dec with a Jan-Feb decline to SPX 2950 or lower seems likely.

For options OI, the SPX held over the 3050 area early in the week with Mon gap up to 3080 where there was little resistance, resulting in positive delta hedging the rest of the week.  GDX showed stiff resistance at $28.5, and ended up falling from $28 to 26.2 near the $26 resistance.

Weekly Trade Alert.  The wildcard this week is the House impeachment hearings, scheduled to go public on Wed.  SPX options OI shows the potential for some downside volatility, but surprisingly the VIX options are mostly neutral. SPX 3100 is going to be hard to beat by mid week and currently a slow fade the next couple weeks toward 3000-50 seems likely.  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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