We immediately saw a 1%+ jump in stocks (SPX), but also a 2% drop in bonds (TLT). The jump in stocks turned out to be a "sell the news", but the bigger implication may be from bonds. Former NY Fed Pres Zoltan has been warning recently that the repo market may be close to collapse due to banks concentration of funds holdings in bonds in anticipation of QE4, but if the trade deal causes bond rates to spike would the Fed still start QE4 when the additional stimulus could cause rates to spike further?
Last week, I discussed two possible scenarios that looked equally likely (my preference was the second). The first was a continued melt up setting up a repeat of 2018, where a sharp 1st Q selloff leading to a spike in bearishness then a rally into the election with a Q4 or longer sharp decline, and the second was the rounded top (aka 2015) that may see a larger "flash crash" around May due to fallout from the Trump impeachment process (Trump resigns). The key for impeachment is how long it drags on and it now appears that the GOP controlled Senate will push for an early vote before hearing evidence, much like a dismissal of charges before a trial or a vote of no confidence as we have seen over the past year with Johnson's Brexit.
As discussed below several indicators are showing similarities to the first week of Jan 2018. This may mean that the GOP is expected to be successful in Jan, possibly pushing the SPX toward 3250-3300 in Jan before a sharp correction of 10% or more. I have remained overall bullish since calling for lows near SPX 2350 late Dec 2018 and remain cautiously so.
I. Sentiment Indicators
The overall Indicator Scoreboard (INT term, outlook two to four months) bearish sentiment seems to be forming a rounded bottom similar to what was seen in Jan and Oct 2018, although the "mini flash crash" the previous week may be responsible.
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 showing an upward bias and is more like Jan 2018.
Bonds (TNX). Interest rates continue to meander with an upward bias with extremely low bearish sentiment. See the Safety Trade Indicator in DM/SM section for comparison to late 2016.
For the INT outlook with LT still negative, the gold miners (HUI) bearish sentiment continues to reflect that of int 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) bearish sentiment turned sharply lower last week after being mildly positive for the last few weeks. We are now at levels comparable to the 1st week of Jan 2018.
And the sister options Hedge Ratio sentiment is following the DM/SM options indicator lower and the LT EMA (blue) has just reached the level of the 1st week of Jan 2018.
The INT term SPX Long Term (2x/DM) ETFs (outlook two to four weeks) bearish sentiment has also started climbing as was seen in Jan 2018.
The INT term NDX Long Term (2x/DM) ETFs (outlook two to four weeks) bearish sentiment is mimicking the SPX ETF indicator.
Finally, the Safety Trade Indicator (SPX/TNX ETFs) saw a large spike two weeks ago that generally happens after sharp SPX selloffs, representing panic moves into bonds and SPX bottoms. As a paired trade, this could also mean a significant low in rates. The only time I could find a "BUY level" when stocks were at or near a top was late 2016 when the TNX was trading between 1.4-1.6% and over the course of several months jumped to 2.6%. This may be indicating the spike in rates predicted by Zoltan, a blow off in stocks, or a combo of both.
III. Options Open Interest
Using Thur closing OI, 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 20. Also, This week includes a look at the GDX for Dec.
With Fri close at SPX 3169, the SPX is comfortably over put support at 3100 and call resistance at 3150 (now likely to be support w/delta hedging). Only minor resistance at higher levels may encourage an early week rally.
Wed shows moderate resistance at the SPX 3170 and 3200 that could push prices back to the 3150 area.
For Fri, shows even more resistance above the SPX 3150 levels and may push prices to the 3140-50 level.
Using the GDX as a gold miner proxy, last week saw the GDX bottom just below 27, rally back to 28+, then close at 27.7. For Dec 20 exp, prices should stay between put support at 26 and call resistance at 28.
Currently the TLT is 139 with the TNX at 1.82%. Prices were expected to stay within a 136 to 140 range last week with a high of 140 and a low of 136.6.
IV. Technical / Other
Due to Feb 2018 VIX blow out, VIX option data starts Mar 2018. Last Fri saw a huge spike in VIX put buying at 4x avg daily volume that has preceded several tops of the last two years. But as seen in the accompanying VIX call chart, VIX call buying has just risen to the avg daily level and is expected to see a significant rise before a significant decline in SPX.
VIX call volume just approaching avg.
Conclusions. ST the China trade deal is done for now and focus is likely to switch to the impeachment proceedings. Here is a reasonably unbiased oped from NY Times, unless you believe all media is out to get Trump. It looks more serious than most people recognize, although the causes may just be the arrogance of POTUS, who during the first two years fired over 60% of his staff and in some positions two or three times, until only "yes" people were left.
LT and possibly even ST, if Zoltans predictions are true, the bond market may turn out to be a major concern. Several articles by the Humble Student (here and here) show that global growth has likely bottomed and this, combined with sentiment, could make the bond market particularly volatile. Important factors are relative valuations and stock buyback reduction.
I have been looking for a sizable correction to start Jan-Feb and sentiment is starting to support that view.
Weekly Trade Alert. The pullback last week was milder than expected and admittedly I underestimated Trumps ability to flip-flop on trade issues as I expect a resolution sometime in Jan. The timing may be indicative of the seriousness of the impeachment proceedings since Trump now has more time to focus on his defense. Limited upside and downside for now. 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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