Pullback or Correction, a Critical Juncture

Last week, I had indicated that a pullback to the lower portion of the trading range of SPX 2980-3180 was expected.  Apple's conference pulled the NDX to new highs and the SPX back to the 3150 by early Tue, but the SPX OI call resistance finally won out, sending the SPX to a low Fri of 3006 before a 3009 close.  Next week could see early Mon weakness but the EOM shows strong put support from SPX 3050 that may cause a strong reversal thru Thur close.  Early July could continue a pre-holiday push toward SPX 3100 before a fade at the early Thur close .  Failure to move back above SPX 3050 will indicate a more serious correction may be beginning (see Trader Joe).


I. Sentiment Indicators

The overall Indicator Scoreboard (INT term, outlook two to four months) bearish sentiment continues its modest rise still similar to Jun-July 2018 and Jan-Feb 2020.  Expecting at least one more rally phase after pullback completes.

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 its modest rise similar to Jan-Feb 2020.  Expecting at least one more rally phase after pullback.

Bonds (TNX).  Does any one remember that the promise of MAGA was to return the USA to the 4-6% growth rates in GDP seen in the 1980s & 90s which is why interest rates rose the 1st two years of the Trump regime.  The results have been anything but what promised, as first a global trade war cut GDP growth in half then the mismanaged pandemic has sent growth and int rates to historic lows.

For the INT outlook with LT still negative, the gold miners (HUI) bearish sentiment remains at extreme low levels as prive consolidates between 260-280.

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 is very low but approaching the May consolidation levels.

And the sister options Hedge Ratio bearish sentiment is rising but not to levels yet that would support a substantial rally.

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 July 2. Also, this week includes a look at the GDX for July exp.

This week is unusual with 4 trading days (July 3 closed, July 2 closes early) and 4 options exp days including June 30 EOM.

With Fri close at SPX 3009, options OI for Fri showed very large support at 3015 and below and large support at 3050, so the low close was a sign of weakness,

Mon has only small OI with some support at SPX 3000.  We may see an opening spike to 2980s then begin a reversal.

Tue, EOM, has very large OI at SPX 3050 and below, so a potential reversal on Mon could push to 3050 or higher.

Wed has small OI, but there is almost no call resistance to the 3100 area, so a continued push higher is possible.

For Thur, out support is only moderate, starting at SPX 3050, so any rally during the week will likely retreat to that level.

Using the GDX as a gold miner proxy closing at 35.20, any push higher will find strong strong call resistance, while put support starting at 34 will likely limit any downside. 

Currently the TLT is 165 with the TNX at 0.64%.  The TLT is pushing against strong call resistance.

IV. Technical / Other - N/A


Conclusions.  Stock markets have moved down to the lower portion of the trading range indicated last week of SPX 2980-3180, where 2980 is the 50 day SMA.  If the 50 SMA does prove to be support, this may imply an EW triangle for much of July as the 50 SMA provides rising support.  Next week should provide some resolution as to whether we see a pullback with lows just below SPX 3000 or a more serious correction that could reach the 2800 level.  Options OI indicates that the pullback option is more likely.

Weekly Trade Alert.  A bounce is likely mid-week that may see weakness early Mon followed by a move up to or over SPX 3050 with some weakness by Thur's early close before a long weekend.  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

Article Index 2019 by Topic, completed thru EOY 2020.02.04
Article Index 2018 by Topic
Article Index 2017 by Topic
Article Index 2016 by Topic

Long term forecasts

© 2020 SentimentSignals.blogspot.com

Don't Be a Cheerleader

Perception bias is one of the biggest road blocks to understanding stock market trends.  In many cases the economic environment makes us believe that the stock market should go up or down and we fall into the trap of confirmation bias where we believe information that supports our views, while ignoring information that does not.  We all do it, which is why many try to develop a "system" whether it is EW or some other technical approach.  My approach is more statistical using various measures to identify sentiment that tends to swing from one extreme to the other based on market highs and lows.  Most people that read and write online blogs seem to be cheerleaders for the bears, but remember that the stock market goes up 60% of the time.

Last weeks outlook turned out to be decent guideline for the weeks action as early Mon weakness was sharply reversed by the close (higher than expected), then followed weakness into the close Fri (mostly the last few minutes).  More range bound trading is expected next week.

The Tech/Other section takes a look at two volatility measures that should be considered warnings for the bears.

I. Sentiment Indicators

The overall Indicator Scoreboard (INT term, outlook two to four months) bearish sentiment retreated from its recent high and seems to be following the pattern seen in Aug-Sep 2018 and Jan-Feb 2020 prior to INT tops.

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 similar to the INT tops mentioned above.

Bonds (TNX).  Interest rates and sentiment remain extremely low.

For the INT outlook with LT still negative, the gold miners (HUI) bearish sentiment continues to decline as the overall price pattern still seems to be down with only a strong showing Fri preventing a close in the 250s.

II. Dumb Money/Smart Money Indicators

The option-based Dumb Money/Smart Money Indicator as short/INT term (outlook 2 to 4 mns/weeks) remains near the lows seen in Jan-Feb 2020.

And the sister options Hedge Ratio sentiment continues to slowly decline as cautious investors/hedge funds indicate that an INT top may be months away.

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 Jun 26. Also, this week includes a look at the TLT for Jun exp.

With Fri close at SPX 3097, small options OI for Mon show a very slight negative bias down to 3070 as call resistance exceeds put support with strong put support at 3000.  Some early weakness is expected.

Wed has small OI where SPX has mild put support up to the 3090s with modest call resistance at 3110 and larger at 3140.  A mid-week rebound is expected.

For Fri, large OI may influence weekly behavior and shows strong call resistance at SPX 3100 and strong put support at 3050.  A weekly close at 3075-85 seems likely.

Also, for Jun 30 EOM, put support is building at SPX 3100 and below and currently is showing a likely close at 3075-3100.

Using the GDX as a gold miner proxy closing at 33.55, prices moved lower last week as expected then rebounded sharply Fri. 

Currently the TLT is 162.4 with the TNX at 0.7%.  Two weeks ago at 156 after dropping from 165, the TLT was expected to stabilize.  For July, call resistance starts at 160 with put support at 155, so some downward pressure is expected toward 158-160.

IV. Technical / Other

Generally, I find the VIX P/C to be less valuable as a timing indicator since high ratios are less reliable, but looking over the period since Jan 2018, all of the INT declines seemed to be preceded by low P/Cs (.3 to .4) and the current level of .9 is historically very high.

Also, the VXX $ Vol has risen sharply similar to the Jan 2020 decline prior to the Feb blow off and top.

Conclusions.  Last Fri was quad-witching (incl futures) and the SPX cash close at 3097 only showed the beginning of the decline with ES closing at 3057 (low 3044) meeting the potential close low of 3050.  Overall, sentiment is not overwhelmingly bearish and a trading range between the recent gap high at 3180 and the SPX 200SMA near 3000 is likely for the next few weeks.  We not have two potential stimulus packages expected before the election with July's "Heroes Act" package expected to be $1T+ and later an infrastructure package that may be $1.5T.  This could still follow the Bradley Turn cycle with a 1 month delay with the "Heroes Ac" package testing the June high and the later stimulus testing the ATH.

Weekly Trade Alert.  Next week may be volatile, trading mostly in the lower half of the trading range of 2980-3180.  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

Article Index 2019 by Topic, completed thru EOY 2020.02.04
Article Index 2018 by Topic
Article Index 2017 by Topic
Article Index 2016 by Topic

Long term forecasts

© 2020 SentimentSignals.blogspot.com

The Robinhood Effect

Lasr week, I was expecting a decline towards the SPX 3100 level with a continuation to 3000 or lower later in June with higher downward pressure later in the week due to options OI.  One of the effects of the Covid bailouts has apparently been that many of the unemployed with excess cash have turned to day trading in the stock market using the commission-free Robinhood platform.  The result has been increased volatility, on the upside thru early Wed, but more violently to the downside Thur, resulting in a one-day 7% decline in the SPX.

Many EW analysts are now looking for the standard 38% retracement, or a 300-500 pt SPX decline, to about 2800, but sentiment is still favoring a prolonged topping period as seen in Jul-Oct 2018 or Jan-Feb 2020.  This is still compatible with the 2020 Bradley Turn chart from 2014, but there seems to be a lag of one month with the minor top June 11 rather than May 11 and this could mean the major top will be Sept 19 rather than Aug 19.  SPX options OI is suggesting a bottom next week in the 2950-3050 area with a turn up to 3100+ by EOM.


I. Sentiment Indicators

The overall Indicator Scoreboard (INT term, outlook two to four months) bearish sentiment took a sharp turn up last week and next week may raise levels to those see at the July 2018 and Jan 2020 pullback lows.

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 briefly reached new ST lows last week, but as seen in mid 2018 vs early 2019 vs late 2019, a pattern of lower lows may mean a larger INT decline will follow.

Bonds (TNX).  Interest rates fell from 0.9% to 0.65 before rebounding Fri as sentiment remains at extreme lows.  As I have mentioned before, rates may remain low until after the election, but a win by the Dems is likely to send rates soaring.

For the INT outlook with LT still negative, the gold miners (HUI) bearish sentiment remained positive for almost a year and a half until mid-2019, so LT prices may stay elevated even though sentiment has reversed, possibly thru the EOY.

II. Dumb Money/Smart Money Indicators

The option-based Dumb Money/Smart Money Indicator as short/INT term (outlook 2 to 4 mns/weeks) remains stubbornly low and actually seems to be in a LT down trend.  Overall, still similar to the rounded bottom seen in July 2018 and Jan 2020.

And the sister options Hedge Ratio sentiment saw a sharp spike lower Wed, showing hedgers are finally reducing positions, but have not reached extremes that have preceded other serious downturns.

The overall options indicator CPC Revised (less VIX options) did see a very extreme last week with extreme equity call buying, but other extremes as July 2018 and Jan 2020 preceded serious declines by several months.

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 Jun 19. Also, This week includes a look at the GDX for Jun exp.

With Fri close at SPX 3041, options OI for Mon is moderate with support at 2990 and 3040.  Calls at 3000 and 3025 may cause early weakness, but prices should close unchanged to higher.

Wed has smaller OI where SPX put support may push prices toward the 3100 area if 3040 holds early in the week.

For Fri, large OI may influence weekly behavior and shows strong call resistance at 3100 and higher with at likely close at 3050 or lower.  A weak market below 3050 could see call resistance push prices back to 3000 or lower with strong put support at 2950.

This is what Fri exp OI looked like a week ago and definitely showed the potential for a drop to SPX 3000, but I was expecting more put support to be added during the week.

For SPX Jun 30 EOM, much stronger put support is evident up to 3100 as most options players are expecting a rally into opt exp then a selloff, while the contrary view is weakness next week then up to EOM.

Using the GDX as a gold miner proxy closing at 32.64. GDX has been dropping about $1 a week since hitting 36+ a month ago even though gold has remained around 1700+.  High calls are expected to continue downward pressure

Currently the TLT is 162.3 with the TNX at 0.7%.  Two weeks ago at 156, TLT had reached put support and was expected to stabilize and put support helped push prices to 160+.

IV. Technical / Other - N/A


Conclusions.  Summer doldrums may be upon the markets for the next few weeks.  Surprising rises in Covid-19 cases in the warmer states of CA, AZ, TX and FL bring into question POTUS views that warmer weather will solve the virus crisis, what happens in the winter?  The markets may remain on pause until the end of July when the current bailout package is expected to be replaced (likely last until after election), "more free money" may be the impetus for a final move higher.  We may see something similar to Q4 of 2018 with highs in Sept and Oct then down to EOY.

Weekly Trade Alert.  Not a lot of fireworks are expected next week, but a move down to the SPX 2950-3000 area (esp Fri close) may be a BTFD for a rally at least to EOM targeting 3100.  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

Article Index 2019 by Topic, completed thru EOY 2020.02.04
Article Index 2018 by Topic
Article Index 2017 by Topic
Article Index 2016 by Topic

Long term forecasts

© 2020 SentimentSignals.blogspot.com

Early Warnings, but No SELLs

The SPX bolted higher last week after a sharp pickup in hedging measured by the options Hedge Ratio on Monday.  My standing target over the last few weeks has been an 80-90% retracement of the March pandemic-related selloff to SPX 3100-3300 and Fri high was 3212.  Many of the sentiment indicators are approaching levels seen in July 2018 and Dec 2019, just a few months prior to an INT top and it is possible we see a marginal new ATH similar to Sep-Oct 2018.  The NDX did make an ATH last week and seems to be headed to 10k+.

In this weeks Tech/Other section I will take an in depth look at the Equity P/C as a sentiment indicator using the data mining software.


I. Sentiment Indicators

The overall Indicator Scoreboard (INT term, outlook two to four months) bearish sentiment fell sharply last week and is about the same level of June 2018, four mns before the Oct top .

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 fallen even more sharply, reaching the levels of Oct 2019, four mns before the Feb 2020 top.  A sentiment pattern bottoming similar to late 2019 may mean an equally sharp selloff to that seen in Mar 2020.

Bonds (TNX).  Interest rates may have bottomed and could continue to rise to the bottom of a multi-year channel between 3 and 1.5%.  Sentiment has not budged from its extreme lows and a move over 1.5% may mean a crash is in progress targeting 3%.

One ETF sector that still seems to have plenty of room to run based on sentiment is the BKX.  Banks profits come from borrowing ST and lending LT, and a rising LT rate environment with ST rates fixed by the FED is an optimal environment for BKX.

For the INT outlook with LT still negative, the gold miners (HUI) bearish sentiment remains extremely low after a 10%+ correction.  Surprisingly the main argument of the gold bugs was that bailouts would crash the $US and cause a surge in gold, but a 4% drop in the $US in May saw a selloff in gold as both seem to be acting as "safe haven" assets.

II. Dumb Money/Smart Money Indicators

The option-based Dumb Money/Smart Money Indicator as short/INT term (outlook 2 to 4 mns/weeks) remains extremely low similar to late 2019 that may be an early warning of trouble ahead.

And the sister options Hedge Ratio sentiment is still showing too much hedging by conservative investors for a strong selloff and is similar to the Jun-July period of 2018 and may mean several months of continued advance before an INT top.

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 June 12. Also, This week includes a look at the TLT for June exp.

With Fri close at SPX 3194, options OI for Mon show very little put support until 3000 with only calls over 3150.  There may be a slight negative bias.

Wed has similar OI where SPX may be negatively biased toward the 3150 level of highest calls.

For Fri, large OI may influence weekly behavior where moderate call resistance is at the 3200 level and 3150-3200 is a likely weekly range and a drop below 3150 may cause negative delta hedging pressuring prices toward 3100.

Using the GDX as a gold miner proxy closing at 32.4 after bottoming at 31.2, last week at 34 OI showed a negative bias toward 30 for June exp.

Currently the TLT is 156 with the TNX at 0.90%.  Two weeks ago at 165 the TLT was expected to have a negative bias toward 160 and last weeks job data pushed prices down to 153 before rebounding over put support at 155.  Rate may stabilize for the next two weeks.

IV. Technical / Other

The Equity P/C Std Var is approaching the low levels last seen in Jan,  but overall since early 2018 has not been a consistent sentiment indicator.  In Feb, I tried using a comparison to the Composite P/C, but that did not adequately warn of the Mar 2020 decline.

Looking at other comparisons, I found another option related indicator, the SKEW, as a measure of OTM premium.  This indicator as a spread with the Equity P/C acts as an INT indicator and warned of the Jan and Oct 2018 tops as well as the Feb 2020 top.  There is a varying lead time of 1 to 4 mns (avg 2.5) between first reaching the -2 StdDev mark and a market top.  This implies a top in the late Aug/early Sept period with the avg advance in the SPX from the first SELL of close to 200 pts (blowoff).

Looking at other variations to improve the timing, the Equity P/C spread to Equity calls as a focus on extreme bullishness worked well as a ST indicator, and sharp moves below -2 SD as seen currently indicated that a ST pullback was likely over the next few weeks.

Another variation using ETF calls, seemed to work best as a late stage topping indicator as Equity call buyers seem to get in early while ETF call buyers wait until the rally is confirmed, ie, near the top.  The low ETF call buying now is similar to Jun-July 2018 and may indicate an INT top is several months away.

Conclusions.  Many are now convinced that a new bull market was confirmed by last weeks actions, but sentiment is starting to show warning signs.  Most similar sentiment was seen in June-July 2018 and Oct 2019 which preceded important tops by several months and were followed by continued advances of about SPX 200 pts before a top was reached.  An important change may be brewing in the bond market where a combination of less demand due to better economic conditions and greater supply from funding the multi-trillion $US bailouts could push rates significantly higher with TNX 1.4-1.5% the first target over the next several months.

Weekly Trade Alert.  A minor pullback to SPX 3150 or lower is possible, but a major trend change is unlikely.  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

Article Index 2019 by Topic, completed thru EOY 2020.02.04
Article Index 2018 by Topic
Article Index 2017 by Topic
Article Index 2016 by Topic

Long term forecasts

© 2020 SentimentSignals.blogspot.com