Jan started with the roar of a lion with the rally to ATHs following Mon 1%+ decline, but increased tension in the Middle East with the US retaliation after attacks on the US embassy in Bagdad resulted in an equally sharp downturn Fri. Increasing ST volatility also preceded the May 2015 top.
Bearish sentiment is consistently at or below levels seen at the last two INT tops of Jan and Oct 2018, but the overall trend seems to be increasingly lower sentiment extremes followed by even larger declines, so more extremes are possible. Pros currently are a weak BUY by the Safety Trade Indicator (SPX/TNX sentiment, may mean SPX higher or TNX rate higher) and VIX call indicator at neutral, cons include options Dumd/Smart Money & Hedger Ratio at dangerous levels, Crash Indicator (Tech/Other) nearing levels of Jan 2018 top and VIX put indicator dropping to neutral (less resistance to higher VIX).
I. Sentiment Indicators
The overall Indicator Scoreboard (INT term, outlook two to four months) bearish sentiment has reached its lowest level of the last two years (blue), while following a similar pattern to Jan 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 continues to drag along the lowest levels of the last two years, possibly pointing to higher LT volatility than previously seen on the next serious downturn.
Bonds (TNX). Interest rates continue to consolidate just below 2.0% with sentiment at low extremes.
For the INT outlook with LT still negative, the gold miners (HUI) bearish sentiment has moved to new low extremes and may help explain while prices were dormant on Fri even though spot gold soared on ME tensions.
Looking at the cross/asset sentiment one thing is particularly striking - someone expects everything to go up. Stock investors face headwinds due to excessive optimism, but we see the same thing in bonds (TNX/TLT) and gold stocks (HUI). The most logical conclusion is that all asset classes will go down together, while stock bears expect bonds and gold to go up if stocks go down.
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 continues to decline, now at or exceeding levels that were always followed by at least 3-5% declines within a few weeks.
And the sister options Hedge Ratio sentiment is bearish sentiment continues to mirror the DM/SM Indicator now at levels only matched by Jan 2018 and July 2019.
The INT term SPX Long Term/Short Term ETFs (outlook two to four wks/mns) bearish sentiment (2x DM/3x SM) is following a similar pattern to Aug-Oct 2018.
The INT term SPX Long Term (2x/DM) ETFs (outlook two to four weeks) bearish sentiment (no chart) has turned up slightly but remains at very low levels.
The INT term NDX Long Term (2x/DM) ETFs (outlook two to four weeks) bearish sentiment continues its rounded bottom similar to Jan 2018.
Finally, the Safety Trade Indicator (SPX/TNX ETFs) has reached the week BUY level (buy stocks or sell bonds or combo) that may provide ST support for the SPX.
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 Jan 10. Also, This week includes a look at the TLT for Jan 17.
Fri SPX P/C was 2.0 w/1M puts, the highest since mid-Dec with the SPX at 3200, so put support is likely understated. With Fri close at SPX 3235, Thur options OI shows a neutral range between 3210 and 3250, while Fri puts likely provide a positive bias.
Wed has light OI as does Mon, but shows stronger call resistance at SPX 3235 and above.
For Fri (jobs data), we have larger OI and stronger resistance at SPX 3225 and above with little support until 3200. Likely a consolidation week between SPX 3200-10 and 3240 with more weakness later in the week. Possibly a setup for a final rally into opt exp Fri 17th.
IV. Technical / Other
The Crash Indicator bearish sentiment declined sharply last week, ending just shy of the Jan 2018 level, however, we may see levels comparable to Dec 2018 or lower before an expected 30%+ decline begins. Currently, we can expect a 7-10% correction to begin soon.
Conclusions. Bearish sentiment is extremely close to levels that have produced pullbacks in SPX of 5% or more, but there are still no imminent signs of a sharp downturn as in the VIX call levels. Best guess is that prices will rollover slowly into earnings then decline more sharply thru the month of Feb. Possible important dates for possible tops are Jan 15 with China trade agreement and end of Fed repo, not-QE purchases, as well as opt exp 17th.
Weekly Trade Alert. Likely a consolidation week, SPX 3210-40 before a final push higher week of 17th. 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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