Time for a Sell in May?

Negative interest rates were bad enough, but last week saw the futures price of oil drop to -$40/barrel for the May contract before rebounding to about $15 for June.  The bears took this as a sign the world was coming to an end and accelerated the expected pullback in the SPX below 2800 and the rapid decline thru Tue to 2720s increased put option support thru the EOM to project a retest of the 2850-75 area shown in the Wed AM update.

Looking at the SPX options OI thru early May, options traders were expecting a decline thru Apr EOM and then a strong rally when the economy re-opens, but the contrarian view supports the "buy the rumor and sell the news" outcome and a retest of the low 2700s looks likely by mid-May.  According to Nomura's M. Takada, CTA buying (trend trading) has been driving the market higher and is set to fade by May 8 for a sell in May.



I. Sentiment Indicators

The overall Indicator Scoreboard (INT term, outlook two to four months) bearish sentiment has fallen to the neutral similar to early Dec 2018, but without SELLs from other indicators lower lows are not expected.

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 continued to remain lower than the composite (likely due to ETFs).

Bonds (TNX).  Interest rates remain under control of the Fed, so bond prices are likely to remain subdued irrespective of record low sentiment.

For the INT outlook with LT still negative, the gold miners (HUI) bearish sentiment has also seems to be ineffective as long as "helicopter money" remains popular.

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 reached extremes where most of the recent pullbacks began.  However, options sentiment seems to be more ST, so a major downleg is not expected.

And the sister options Hedge Ratio  bearish sentiment is lagging an offsets other options sentiment, so a major pickup in volatility is not expected.  A trading range, perhaps SPX 2600-2900 is more likely.

I tried looking at the datamining comparison of the options sentiment variables, but the spread did not seem to be consistently bullish or bearish, and the most consistent was the avg that is now supporting a modest pullback of 5-10%.

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. Delta hedging may occur as negative reinforcement when put support is broken or call resistance is exceeded. The SPX hedge spread (SPX puts - ETF calls) remains slightly positive, indicating that call resistance/put support should hold. This week I will look out thru May 15.  Also, this week includes a look at the TLT for May exp.

With Fri close at SPX 2837, options OI for Mon is very small with little call resistance until 2850.

Wed has smaller OI above SPX 2850 that will likely provide little directional bias, but will allow higher prices.

For Thur EOM with large OI, prices are likely to remain over SPX 2800, and the presence of put support at 2850 and 2860 will likely keep prices at/over those levels while small call resistance at 2890 may allow a spike to/over 2900.

For Fri, smaller OI with call resistance at SPX 2850 and below could put downward pressure on prices at the close with a probable range of 2800-50.

Looking further out, first to May 8 jobs data, the outlook is even more bearish, where a move below SPX 2800 is probable.  The existence of the 2825 calls may provide fuel for a sharp whipsaw, first to 2825 or lower then a move back to the put support from 2750-75.

Finally, for May optn exp, the picture is much the same with call resistance at SPX 2800 and above and put support in the low 2700s.

Currently the TLT is 170.8 with the TNX at 0.6%.  TLT 170 is a major hurdle,and call resistance may contain prices, while higher levels could push toward 175.

IV. Technical / Other - N/A


Conclusions.  I am starting to think that the summer months may turn out to be more of a doldrums with some disappointment that a return to normal is more difficult than expected, but with no specific triggers prices may not fall that much either.  The result could be a trading range of perhaps 2600-2900.  Trumps performance during the crisis has likely reduced his chance of re-election even against the zombified Biden, discussed here with current polls here.  This brings up the possibility of a second downleg later this year after a lengthy expanded flat.

Weekly Trade Alert.  Next week should setup the double top discussed last week with a potential retest of the lows early last week by mid-month.  Updates @mrktsignals.

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 update 2019.04.27 Stock Buybacks,
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Everything is Not So Great

It's hard to believe that only two months ago the only thing POTUS said at his SOTU was "everything is great" which in retrospect marked the top of the stock market.

The huge swings in the stock market from mid-Feb 2020 to mid-Apr, first down 30% then up 30%, have been truly historic, but so have been the causes and the results.  An almost complete shutdown of the economy as a result of the very contagious corona virus created an atmosphere unlike anything seen in modern times, while the unprecedented response of the Fed has created a Pavlovian response of BTFD and "don't fight the Fed".

The interpretation of sentiment has also been difficult.  Over the past few weeks, I've considered several different options, but am still uncomfortable with the "all clear" that seems to be the highest priority of Trump.  Bearish sentiment has now dropped to the levels seen in early Dec 2018 after the Oct selloff that resulted in a drop from SPX 2800 to 2350 and we now seem to be likely to see a similar drop from SPX 2900ish to about 2450.  Using comparison to the retracements does not seem appropriate in that a full retest to SPX 2200 should see sentiment comparable to a 20% decline as seen in Oct 2018.

The closest analog using this sentiment approach is that of the period from Mar-Apr 2018 where we saw both complex tops and bottoms.  This could mean that after the first decline to SPX 2450-500 a double top near the 2900 area may be required before bearish sentiment has retreated enough to support an additional 20% decline to retest the Mar 2020 lows.


I. Sentiment Indicators

The overall Indicator Scoreboard (INT term, outlook two to four months) bearish sentiment has now declined to the level seen early Dec 2018 after the Nov rebound and could support a 10-15% decline to about SPX 2500.

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 now declined to the level seen early Dec 2018 after the Nov rebound and could also support a 10-15% decline to about SPX 2500.

Bonds (TNX).  Interest rates continue to slip lower even with extremely low bearish sentiment.

For the INT outlook with LT still negative, the gold miners (HUI) bearish sentiment is again testing its lows as the HUI has retraced essentially all of its sharp selloff last month.

II. Dumb Money/Smart Money Indicators

The option-based Dumb Money/Smart Money Indicator as short/INT term (outlook 2 to 4 mns/weeks).  The longer term EMAs have matched the Dec 2018 highs, matching the composite indicators, and also supports a 10-15% decline.

And the sister options Hedge Ratio sentiment is only slightly above the early Dec 2018 levels, but also supports a 10-15% decline..

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. Delta hedging may occur as negative reinforcement when put support is broken or call resistance is exceeded. This week I will look out thru Apr 24. Also, This week includes a look at the GDX for May exp.

With Fri close at SPX 2875, options OI for Mon are very light, but now showing the opposite of last week where the preponderance of puts supported higher prices, this week mostly calls offers resistance to higher prices.  Early gains are likely to be capped at SPX 2900, while little support is seen until 2800.

Wed has somewhat larger OI where SPX call resistance at SPX 2800 and 2900 could start a significant move down with no put support until 2750.

For Fri, large OI is similar to Wed with strong call resistance at SPX 2800, 2850 and 2900 with no put support until 2750.  A move below 2800 by the EOW is likely.

Using the GDX as a gold miner proxy closing at 29.9, the options OI is showing strong call resistance at 30, 32 and especially 36 with little put support until the mid-20s. 

Currently the TLT is 167.8 with the TNX at 0.65%, last weeks call resistance at 170 did cap the optn exp price level. 

IV. Technical / Other

Another reason why I think a more complex top is likely before a full retest of the lows is the Crash Indicator, which did not give a sharp SELL in Feb and that may have contributed to the strength of the following rally.  Now residing at neutral, the same as mid-Nov 2018 and late Mar 2018, the behavior after the next decline and rally may determine the LT outlook as Nov 2018 indicated a SELL by moving to lower levels, while Mar 2018 indicated a BUY by moving upward.

Conclusions.  Last week, I was looking for higher prices targeting the 2820-30 area, but the news of possible reopening the economy early May sent stocks spiraling upwards.  It is interesting that in a world of 7.8B people that of the 2.2M cases reported of Covid-19, the US has 700K and the EU 1M where each represent only 4% of global population, but combined have 75% of cases.  Much of the world does not monitor as much as the US or EU, but still?  I really don't think this will be as easy to recover from as Trump hopes.

A ST/INT decline is likely to begin next week.  Earnings guidance has been neglected to to economic uncertainty, so earnings are likely to be less of a factor than expected.  Lots of economic data will begin to be reported with the PMIs on Wed and the picture is not going to be pretty.  May 8 jobs release is still on target for at least a ST low.

Weekly Trade Alert.  Mon/Tue may see a continued move up to the SPX 2900 area to fill a gap on cash SPX, but a decline is likely to start by Wed, targeting SPX 2720-30 very ST and 2450-500 longer term.  Updates @mrktsignals.

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 update 2019.04.27 Stock Buybacks,
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The Slope of Covid-19 Hope

Last week was lacking of any economic news following the weak jobs data the previous week and the markets focused on the flattening of the covid-19 curve, or slowing of growth in new cases.  After the number of cases had been doubling every 4-5 days, the rate of growth had to slow or half the worlds population would be infected in a few months, but less bad is still not good.

One indication that strength is returning to the stock market was a sharp increase in the NYSE Up/Down volume which had shown little improvement in last weeks Tech/Other section.  This indicator is now showing early signs of duplicating the strength shown after the Aug 2015 flash crash and may support a doubling of prices once a final bottom is achieved.  In this weeks Tech/Other section, a closer look at 2015 shows similar price behavior to today where the Aug 2015 lows were followed by a 3 week rally retracing 58% of the decline (for 2020, SPX 2820-30) before a retest of the lows the next 2-3 weeks, then a larger 90%+ retrace before lower lows several months later (Jan-Feb 2016).

Otherwise, this weeks discussion is somewhat brief due to the holidays,


I. Sentiment Indicators

The overall Indicator Scoreboard (INT term, outlook two to four months) bearish sentiment continues to drop sharply as the SPX has now reached the levels of the Nov 2018 retracement.

The INT view of the Short Term Indicator (VXX $ volume and Smart Beta P/C [ETF Puts/Equity Calls], outlook two to four months, no SPX vol adj) bearish sentiment has dropped even more sharply and may reach the levels prior to the Dec 2018 selloff over the next few days.

Bonds (TNX).  Interest rates continue to disconnect from sentiment as the Fed seems willing to backstop all bond markets, last week adding high-yield corporate bonds.

For the INT outlook with LT still negative, the gold miners (HUI) bearish sentiment has fallen sharply as the increased intervention by the Fed has pressured the US $ lower and gold higher.

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 fallen to levels seen at the Feb 2020 top and at similar levels before the 2019 pullbacks.  Would support retest of Mar lows.

And the sister options Hedge Ratio bearish sentiment failed to rise to levels seen in the 2018 and 2019 corrections and has now moved modestly lower.  Would support a modest pickup in volatility.

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. Delta hedging may occur as negative reinforcement when put support is broken or call resistance is exceeded. The SPX hedge spread (SPX puts - ETF calls) is negative, indicating that put support may not hold. This week covers the SPX for Apr 17 & 30; also a look at the TLT for Apr exp.

With Fri close at SPX 2790, options OI for Apr 17 PM are very small with the only standout large put OI at 2625 that should hold any decline.

For EOM Apr 30, most of the LT positions are puts at close to 2x calls that probably explains the high VIX, but I have noticed ST strikes  show higher calls, so LT reliability may be low.  However, a break below SPX 2700 has somewhat of a bias toward 2450 with most of the in between strikes hedged.  SPX 2400 shows very strong support.

Using the GDX as a gold miner proxy closing at 28.95, last week showed an upward bias toward 26-28 with Fri price jumping from 26.20 to 28.95
. 
Currently the TLT is 165.4 with the TNX at 0.73%.  There is strong support at 160 with a negative bias to that level.  Resistance is strong at 170 and stronger at 175.

IV. Technical / Other

The sharp increase in NYSE Adv/Dec Vol last week is now on track to match the Sept 2015 retrace of 58% off the Aug flash crash lows (below).  It remains  to be seen how closely the current period will track with 2015, but a similar rise in Adv/Dec Vol over the next few months would support a 100% rise in the SPX from the lows over the next few years.

Although the Aug 2015 flash crash occurred over 4 days vs the 4 week crash of Mar 2020, the rallies of the lows have so far been similar.  In 2015 the SPX rallied for 15 days with a reversal on day 16 to complete a 57.5% retrace.

So far in 2020 the SPX has rallied for 13 days and a similar time frame pts to a top Tu/Wed next week.  Raj at Time & Cycles also indicates a turning date of Wed/15th.

Also, one of the data mining indicators, the SPX hedge spread (SPX Puts/ETF Calls) is nearing a SELL level.  This indicator is designed to show the strength of options OI put support/call resistance.

Conclusions.  Sentiment indicators are showing that the meteoric rise from the Mar crash lows may be near an end.  However, the lack of strong SELLs are pointing to no more than a retest of the lows with most expecting a mild pullback to SPX 2350-2450, but a break of those support levels could target 2200-2300.  New lows seem unlikely.  With the resurgence of the Adv/Dec volume indicator similar to 2015, a double bottom could result in a 90%+ retrace to near the ATH before a potentially stronger decline late Summer/early Fall.

Weekly Trade Alert.  Some of the timing indicators are pointing to a mid-week top, possibly SPX 2820-30.  With monthly opt exp Fri, there may be some upward bias late in the week.  Updates @mrktsignals.

Investment Diary,  Indicator Primer,
 update 2020.02.07 Data Mining Indicators,
 update 2019.04.27 Stock Buybacks,
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Is Bad News Finally Becoming Bad?

On Friday, I was watching intently to see the stock markets reaction to the March jobs data as that may be a key indicator as to how the market reacts to the "depression like" economic data expected to be released over the next few weeks.  The first two hours after the release were unsure before the markets finally decided to head south.  For may years now, bad news was considered "good news" because it meant that the Fed would increase liquidity, but the Fed is now running very low on gas after the March 1.5% cut in the Fed funds rate and announcing QE-finity, and more bad news may not have any effect on Fed actions.  If the latter is true then I expect the SPX to grind lower into to the Apr jobs release in early May that may be truly historic (bad).   In 2009, I predicted that the March lows would occur with the jobs release early March, and again feel that this may mark a significant low (SPX 2050-2150).  Barring a "miracle cure" for Covid-19, how significant will depend on sentiment.  Several LT indicators discussed in Tech/Other indicate not that significant.

For the next few weeks, if the markets do grind lower, I expect this to be a much less volatile decline, ie, down days of SPX 30-50 pts with intermittent rallies rather that a series of 100-200 pt down days as we saw in March.  The VIX will probably fall to the mid-30's during the decline, and if there is a full 50% retrace for a "summer rally" to the mid-, upper-teens.

Going forward I will start the charting period from July 2018 rather than Jan because the charts are becoming difficult to read.


I. Sentiment Indicators

The overall Indicator Scoreboard (INT term, outlook two to four months) bearish sentiment remains high and should fall toward neutral similar to Nov 2018 before a final move down.  Potential exists for distortion due to included extreme ETF sentiment, more in Tech/Other.

The INT view of the Short Term Indicator (VXX $ volume and Smart Beta P/C [ETF Puts/Equity Calls], outlook two to four months, no SPX volume adj) bearish sentiment has fallen sharply and much like the Indicator Scoreboard is expected to reach neutral before a final move down (w5 of A).

Bonds (TNX).  Interest rates continue to move lower even as sentiment follows.

For the INT outlook with LT still negative, the gold miners (HUI) bearish sentiment is again moving lower as "helicopter money" has the gold bugs looking for higher inflation.  Direxion has announced that DUST & NUGT will be converted to 2X in May due to extreme volatility recently with both now down about 90% from highs over the last year.

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 moved down sharply but not yet reaching the levels seen before the Dec 2018 downturn.

And the sister options Hedge Ratio sentiment remains near neutral, indicating only moderate expected volatility.

The INT term SPX Long Term/Short Term ETFs (outlook two to four wks/mns) bearish sentiment (2x DM/3x SM) has moved to the SELL level as DM is showing more bullishness than SM.

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. Delta hedging may occur as negative reinforcement when put support is broken or call resistance is exceeded. This week I will look out thru Apr 17 end of week only. Also, This week includes a look at the GDX for Apr exp.

With Fri close at SPX 2489, options OI for Thur is light with modest put support at 2450 and a likely close for the week over 2500.

For Fri 17 PM, large OI over SPX 2500 could result in a sharp rally, but below 2500 there is little put support to prevent a large decline.  Hard to call.

Using the GDX as a gold miner proxy closing at 25, overlapping puts and calls indicate a wide potential range possible between 23 and 30, with a bias to 26-28. 

Currently the TLT is 168.5 with the TNX at 0.59%. 

IV. Technical / Other

For the very ST, the past couple days have seen the SPX compressed between 2550 and 2450 using the 4hr SMAs (23, 46, 69) and a sustained break either way will probably indicate the next trend.

From an INT perspective, the McClellan Summation Index was shown two weeks ago with the SPX at 2305 to indicate a probable ST bounce, but since readings of < -1000 are crash warnings, the weak bounce indicates trouble ahead.

Even with the strong bounce of the SPX off the Mar lows of 20%, the NYSE AD Line has only seen a very weak bounce, much like the Nov 2018 bounce from the Oct lows compared to the strong bounce off the Feb 2018 lows.

My LT favorite volume indicator, the NYUPV/NYDNV has reached a level comparable to the Aug 2015 "flash crash" lows, but has failed to rally further as the market has rebounded.  The very strong rally in 2015 for the indicator to well over 2.0 for both LT SMAs was followed by an almost 100% gain for the SPX from 1800 to 3400 over the next few years.  For those expecting the same from the 2020 selloff are likely to be disappointed without a dramatic improvement in the indicator.  The weak indicator showing after the Feb 2018 lows was only followed by a brief return to the ATH before an even larger decline, and the rally off the Dec 2018 lows resulted in stronger indicator readings and stronger move to ATH.  It;s too early to see where this will end up in 2020, but so far looks very weak.

Finally a look at the Rydex Bear/Bull ETF ratio that may indicate why the high bearishness currently for the SPX and NDX is not as bullish as it seems.  First, the current readings look very bullish (high bearish sentiment) for the last three years.

However, when for the LT, the rounded bottom in very low sentiment is much like that seen in 2000 which many consider to be the first in a series of Fed-induced liquidity bubbles.  The first was Greenspan after the 1998 LTCM crisis, leading to the "dot-com" bubble, next we had Bernanke with the 2008-09 financial crisis following the housing bubble, and now J. Powell and the "everything bubble".  Comparing 2001 to 2020 the current spike in bearish sentiment resembles that of the first leg down from mid-2000 to early 2001 and may indicate that only 40% of the bear market is over.

Conclusions.  Last week I indicated an expected retest/lower lows on SPX mid-Apr partially due to the expected return to work date proposed by Trump, but that has been put off to the end of Apr.  Now with the Covid-19 crisis stronger than expected, the most likely bottom seems to be early May with the Apr jobs data.  The target remains SPX 2050-2190 before a summer rally and with more downside expected thereafter.

Weekly Trade Alert.  ST remains hard to call and some EW analysts are calling this a W4 expanded flat that whipsaw between a wide range before a final move, usually a continuation move (down).  Updates @mrktsignals.

Investment Diary,  Indicator Primer,
 update 2020.02.07 Data Mining Indicators,
 update 2019.04.27 Stock Buybacks,
 update 2018.03.28 Dumb Money/Smart Money Indicators

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