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.

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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