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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