The Stars are Aligning

Last weeks warning of a looming correction proved timely, especially for the NDX which fell from a high Tue AM at 11k to a low Fri AM at 10.3k or about 6%.  With the FOMC next week expected to see a confirmation of a "lower for longer" int rate policy by Powell, it's very possible we see another test of the SPX 3280 area by Wed/Thu but weakness is expected to emerge by Fri close.  Overall, I am only expecting about a 200 pt drop in the SPX at this time by mid-Aug to about the 3100 area or lower - a break of the previous lows at 3115 and 3127 is likely to increase bearishness.

Many of the sentiment indicators are showing signs of capitulation with ETFs discussed in the Dumb/Smart Money section and several data mining indicators covered in the Tech/Other section.  The extreme volatility in March still has sufficient following in the volatility products (VXX $ volume) to suggest a final rally is still in store, however.  Supporting this idea are Tom DeMark, who last week at ZH discussed the possibility of a top being in already for the NDX, while the SPX was given a target near 3500 over the next few weeks.  OnTheMoneyUK last week also had a write up of the stock market cycle in election years which showed an expected rally thru Aug-Sept after March lows.


I. Sentiment Indicators

The overall Indicator Scoreboard (INT term, outlook two to four months) bearish sentiment fell sharply last week with the ST (grn) reaching a SELL similar to June 2018 and Aug 2019.

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 lagging primarily due to strength in the VXX $ volume shown below.

A closer lookup at the VXX $ volume shows an interesting pattern, which is overall declining bearish sentiment, probably due to the increasingly sharp rallies resulting from larger Fed reactions from market declines.  But the end result is even larger "busts" due to the decreasing bearish sentiment.  The boxed areas in June 2018 and Aug 2019 saw similar sentiment where declines of 3% and 7% were followed by blow offs of more than double the decline.  Now, an SPX 200 pt decline to 3100 would imply a blow off to about 3500.

Bonds (TNX).  Still consolidating pre-election.

For the INT outlook with LT still negative, the gold miners (HUI) bearish sentiment is non-existent, so still waiting to see what happens to 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) has almost reached the level prior to the June swoon.

And the sister options Hedge Ratio sentiment is finally showing capitulation, almost matching that seen at the Jan 2020 highs.

With the recent fallout in the NDX, I decided to take a look at the SPX and NDX ETFs.

The INT term NDX Long Term (2x/DM) ETFs (outlook two to four weeks) bearish sentiment remains surprisingly high, even with the out performance of the NDX, and indicates that outside the momentum FANMGs, technology is still likely to out perform.

The INT term SPX Long Term (2x/DM) ETFs (outlook two to four weeks) bearish sentiment has declined almost as fast as the SPX as risen over the past four months, and likely will reach a SELL similar to Oct 2018 over the next two months.

The Risk Aversion/Risk Preference Indicator (SPX 2x ETF sentiment/NDX ETF sentiment, outlook 2 to 4 mns/wks) as a INT indicator (pref to less risky SPX is bullish), has declined very sharply as a preference to higher risk NDX has created a similar environment as Sept-Oct 2018.

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 reinforcement, negative when put support is broken or positive when call resistance is exceeded. This week I will look out thru July 31. Also, this week includes a look at the GDX for Aug exp.

With Fri close at SPX 3216, options OI for Mon are moderate where larger call positions at 3200 may result in a weak open but likely puts at 3215 and 3230 will cause a reverse to positive by the close.  The down move Fri probably increased put support.

Wed has somewhat larger OI where SPX has weaker call resistance and moderate put support at 3175.  Depending on Mon/Tue action, if the SPX can not make it over 3225 a range of 3175-3200 is likely for the close, but if prices make it over 3225 the put support may push prices to the 3250-75 range.

For Fri EOM, large OI may influence weekly behavior and shows much stronger call resistance starting at 3225 and up, where strong put support will likely keep the close over 3200.  A srong move up mid-week for the FOMC will likely reverse by EOW.

Using the GDX as a gold miner proxy closing at 41.8 . 


Currently the TLT is 169.7 with the TNX at 0.59%.  The TLT remains sandwiched between large call positions at 167 and 170.

IV. Technical / Other

Looking a the Equity P/C to SKEW spread, sentiment continues to follow the July-Oct 2018 pattern, although with more extreme readings.  The 10 day SMA for the equity calls has risen to 1.55M, higher than the 1.5M in Oct 2018, but lower than the 1.7M Feb 2020.  The long term pattern since Jan 2018 suggests an even larger decline than Mar 2020 is possible, but the correction is likely to be more complex, ie similar to Oct-Dec 2018.

The SPX hedge spread (SPX puts to ETF calls) has fallen sharply from the early July period, indicating options OI put support may be weaker than normally expected.

The Crash Indicator which has been mildly supportive of SPX prices has also taken a sharp turn lower, indicating an SPX 200+ drop similar to May and Jul-Aug 2019 is possible.

Conclusions.  Sentiment indicators are starting to show that the stock market is nearing the end of the "everything is great" rally, just ignore the dead bodies.  A longer trend is also apparent where each of the three INT declines since Jan 2018 of 10%+, 20%+, and 30%+ were each followed by more extreme rallies induced by more extreme measures by the Fed that resulted by more extreme (low) bearish sentiment.  Will the next decline be 40%+ followed by monthly stimulus checks of $2400? 

Given the crashes of Feb 2018 and Mar 2020 were in alternation with the more complex decline of Oct-Dec 2020, the next decline with likely be one of several months following a top probably in Sept.

Weekly Trade Alert.  A high is likely Wed/Thur that may test the 3180 area or higher, only to be followed by a sharper decline of about 200 SPX pts by mid-Aug.  Updates @mrktsignals.

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 update 2019.04.27 Stock Buybacks,
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A Larger Correction May be Nearing

Last week started with a bang on positive news out of China, but reversed late in the day Mon from SPX 3235 to a Tue low at 3127.  A pickup in bearish sentiment on the drop supported prices for the rest of the week, pushing past SPX call resistance to close near the weeks high at 3225.

Jim Cramer of CNBC has been using a timing cycle chart from Larry Williams to predict a correction starting July 27.  Several sentiment indicators, including the VIX term structure (VXV/VIX), seem to support this as discussed in the Tech/Other section.  Looking at the 2019 rally off the Dec 2018 lows, each of three 5-10% corrections were preceded by the VXv/VIX reaching 1.2 shortly before the correction began.


I. Sentiment Indicators

The overall Indicator Scoreboard (INT term, outlook two to four months) bearish sentiment is modestly lower than last week, but a decline down to the early June level is likely needed to get a larger decline.

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 saw a modest bounce on the Mon-Tue decline then reversed to unchanged.

Bonds (TNX).  Bearish sentiment on bonds is nearing zero.  As discussed by B of A, is the recent run up in rates in China a harbinger for what is to come for US rates?

For the INT outlook with LT still negative, the gold miners (HUI) bearish sentiment remains near lows as HUI price consolidates near highs.  Inverse movement to int rates is still expected.

II. Dumb Money/Smart Money Indicators

The option-based Dumb Money/Smart Money Indicator as short/INT term (outlook 2 to 4 mns/weeks) a brief pop in bearish sentiment returned to almost unchanged by Fri.  A drop down to the levels seen early June is expected.

And the sister options Hedge Ratio bearish sentiment saw an even sharper pop on the early week's decline that probably explains the sharp rebound.

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 reinforcement, negative when put support is broken or positive when call resistance is exceeded.  This week I will look out thru July 24 plus EOM for the SPX.  Also, this week includes a look at the TLT for Aug exp.

With Fri close at SPX 3225, options OI for Mon shows call resistance starting at 3225 with put support starting at 3200.  Some weakness is possible early in the day, but there may be news about covid vaccines over the W/E that push prices in either direction.

Wed has somewhat larger OI where SPX shows strong resistance at 3225 although put support is stronger up to 3200.  Backing and filling (trading range) seems most likely.

For Fri, large OI may influence weekly behavior and SPX OI shows call resistance could push prices down to the 3150 area.

For the EOM July 31, large put positions show support up to 3200 while call resistance begins at 3225.  My feeling is that a top similar to last Mon may occur sometime over the next two weeks where we see a strong open (SPX 3240+) that reverses then continues down for the start of a larger correction.

Currently the TLT is 167 with the TNX at 0.63%.  TLT is facing strong call resistance over 167 with little put support below current levels, but it is difficult to see a strong reversal while the Fed is controlling rates.

IV. Technical / Other

First, I want to clarify the reasoning for using some of the data mining tools for analyzing the Equity P/C.  The chart below shows the volume of equity puts and calls over time.  One of the reasons the Equity P/C is so low currently is the very low volume of put buying (red) and tends to have little value as a measure of sentiment, while high call buying as a measure of a high degree of speculation is a clear warning of an important top.  Currently the 10 day SMA is at 1.5M, about the same as Sept 2018, and about 200k below Jan&Feb 2020. 

As discussed in the intro the VIX term structure is a measure of ST/INT volatility and when the INT VIX falls compared the the ST VXV this generates a measure of complacency.  In the past a level of about 1.2 has been an important level that acts as a necessary, but not sufficient condition, for most 5%+ corrections.  More important (INT) tops tend to show longer periods of complacency.  Looking at the 2019 rally off the Dec 2018 lows, each of three 5-10% corrections (red) were preceded by the VXv/VIX reaching 1.2 shortly before the correction began.

Finally, a look at my original Dumb/Smart Money options indicator (CPCI/CPC) where high values are a SELL and low a BUY.  The significance is the breakout over the 8 year range of 1 to 1.3.  The series starts in late 2005, and the last two times the values were this high were mid-2007 and mid-2010.  Does this mean a longer term bear market is around the corner?

Conclusions.  Trader Joe's outlook may be the best outlook which is w5 of an EW B wave, but sentiment indicates that a 5-10% correction may still be a week or two away.  Higher prices last week ignored SPX OI call resistance so I am not sure if it will contain prices, but more consolidation between 3200 and 3225 seems likely with a possible late week pullback to 3150 unless more put support is added.  A ST breakout to 3240-50 is likely over the next two weeks before a larger correction.

Weekly Trade Alert.  None.  Updates @mrktsignals.

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Another Pullback is Approaching

The stock market is caught between a rock and a hard place as the summer heat is providing no solace for a resurgence in covid cases that are likely to threaten the return to economic normalcy.  Second quarter EPS may not be a complete disaster due to temporary re-openings, but future quarters may need to be discounted under renewed threat of viral infections.  Talks of the next stimulus package now indicate some reluctance to continue the largess seen in the past as the additional $600 bonus over unemployment checks maybe limited.  Current election polls are also showing the Dems as a clear favorite with Biden's new plan to include higher corporate taxes and limits on stock buybacks, the pillars of the "Trump rally".  However, we still have the Fed.

Sentiment still seems to be following the script from July-Oct 2018 with the recent June swoon matching July 2018 with several months expected before an INT top.  Everyone is expecting a "C" or crash wave to follow the next INT top, but alternation could result in a more complex correction.  Both Jan 2018 and Feb 2020 tops were followed by crashes, but Oct 2018 saw a multi-month correction lasting thru Dec.  The next time may be more like the latter, with an initial decline in the Fall and a second wave after the election if the Dems win.

Shorter term, the question is whether the next stimulus round is a "buy the rumor, sell the news" reaction or the reverse for the stock market.  Current price action is indicating the former with the next potential top around the SPX 3250 over the next week to 10 days.  The following pullback as evidenced by current sentiment is likely to be only half that of June as seen in Aug 2018 or to about 3100-50.


I. Sentiment Indicators

The overall Indicator Scoreboard (INT term, outlook two to four months) bearish sentiment is again falling, hovering around the levels seen during the Aug-Sept 2018 period.  Both this and the ST indicator failed to spike strongly above neutral during the June pullback and may mean a failure to reach an ATH.

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 remained at levels last seen between Nov 2019 to Feb 2020 that may be pointing to a large increase in volatility once an INT top is reached.

Bonds (TNX).  Interest rates and bond sentiment remain at record lows.

For the INT outlook with LT still negative, the gold miners (HUI) bearish sentiment remains very low and will probably see prices inversely follow int rates (TNX).

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 remains similar to late 2019-early 2020.

And the sister options Hedge Ratio sentiment remains somewhat higher than other sentiment measures, probably indicating "cautious bullishness" as hedges are maintained against bullish positions and may provide some support for the markets ST.

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

With Fri close at SPX 3185, options OI for Mon shows small support at SPX 3150 and strong resistance at 3200.  Futures show further gains after hours, but a move over 3200 seems unlikely.

Wed has modest OI where SPX shows modest support at 3180 and only small call resistance up to 3300.  The large straddle at 3150 may tend to pull prices lower.

For Fri PMs, moderate OI shows stronger call resistance over SPX 3150, but stronger put support below 3150.  The most reasonable outcome is a close near 3150 to cause "max pain" or loss of option premium.

Using the GDX as a gold miner proxy closing at 38.4, the GDX is completely ignoring all call resistance and over 38, the next resistance is at 40. 

Currently the TLT is 166.3 with the TNX at 0.63%. 

IV. Technical / Other

First, a look at the NYSE Adv/Dec Line shows a weakening trend in advancing issues that has spelled trouble each time it has occurred in 2020 and indicates the potential for a retest of the recent lows (SPX 2950-3000).

Recently the Equity P/C to SKEW spread has again been testing the lows last seen right before the SPX June swoon of 8% which seems to be following the pattern of July-Oct 2018.

However, using the absolute measure of Equity P/C to equity calls (higher calls = more speculation) as a ST indicator, we see that speculation is weaker and currently implies a smaller pullback.

Likewise for the ST Equity P/C to ETF calls that is barely below neutral.

Conclusions.  Several weeks ago, I indicated that the next round of stimulus, expected to be a $1T+ Cares package, would likely raise the SPX to test the June highs at 3250.  Now with projections of $1.5T due late July to early Aug, the question remains as to whether the pullback will precede or follow a test of SPX 3250.  Recent price action is stronger than expected, implying a "buy the rumor, sell the news" event but options OI is still suggesting a less direct route forward.

Current sentiment supports a 3-5% pullback from current levels, but a continued advance may result in more extreme sentiment followed by a larger pullback.  One such scenario is suggested by Trader Joe where an EW WXY pattern reaches SPX 3250 then pulls back to 3000.

Weekly Trade Alert.  No clear path at this time.  Updates @mrktsignals.

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 update 2019.04.27 Stock Buybacks,
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Independence Edition

While everyone was expecting a sharp selloff last week, I warned that options positioning favored a rally instead after a brief respite below SPX 3000.  Indeed, the actual Mon low was SPX 2999 and the SPX soared even higher than expected on Wed/Thur to 3165 before the expected fade, closing at 3130 for the week.  The next couple of weeks are likely to see continued weakness back towards the 3000 level as Wall Street tries to encourage politicians to open their wallets and pass out more "free money" to prop up the stock market before the election.  If a triangle is indeed forming for the months of June-July the next low may be as high as SPX 3030-40, but a retest of 3000 or lower is also possible.

For the INT term another important indicator, the SKEW, has joined the Equity P/C as an early warning of a potential turn.  Last discussed early June, both indicators showed spikes 1-4 months before the INT tops of Jan & Oct 2018 and Feb 2020, but after blow off tops of SPX gains of 5-7% before the decline began.  See the Tech/Other section of an update.


I. Sentiment Indicators

The overall Indicator Scoreboard (INT term, outlook two to four months) bearish sentiment remains in a narrow range similar to Aug 2018 and Feb 2020.

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 remains in a narrow range as well.

Bonds (TNX).  Bearish sentiment for bonds continues to push lower although there are some indications of rising inflation, especially at the grocery store.

For the INT outlook with LT still negative, the gold miners (HUI) bearish sentiment remains very low.

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 moved down sharply last week, but not near recent extremes yet.

And the sister options Hedge Ratio sentiment also turned down sharply near the lows seen previously in 2020 that may mean some downward momentum is possible.

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 10. Also, this week includes a look at the TLT for July exp.

With Fri close at SPX 3130, options OI for Mon shows fairly large put support at 3050 and call resistance at 3150.  In between, calls currently show negative bias down to 3100, but the puts at 3135 are likely to cause any early weakness to be reversed by the close.

Wed has small OI where SPX where anything between SPX 3000 and 3200 is possible, but a probable close is likely between 3075 and 3125.

For Fri, moderate OI are mostly hedged between SPX 3050 and 3150 and added positions during the week will likely clarify, but the 3075 to 3125 seems most likely.

Using the GDX as a gold miner proxy closing at.36.1 moved up $1 for the week and remains in a strong call resistance range.
 
Currently the TLT is 163.6 with the TNX at 0.67% and was up about a pt for the week.  161 to 164 seems like a probable range.

IV. Technical / Other

Several bloggers have noted the recent rise in the SKEW and have interpreted this as an imminent decline warning, but looking at the SKEW since late 2017, the cycle highs in the SKEW preceeded the SPX top by several months and about 200 pts.  For instance, in late 2019 the SKEW peaked in late Dec with the SPX at 3200, while the SPX peak in Feb was 3390.

In early June, I showed the spike low for the Equity P/C and its spread to the SKEW using the data mining stdvar spread.  With the Equity P/C in green and the SKEW in red, the SKEW saw extreme highs and the Equity P/C extreme lows before each of the last three INT tops, but with different lead times.  Jan 2018 and Feb 2020 saw the SKEW peak before the Equity P/C low, while today's readings appear more like Oct 2018 where the Equity P/C low preceeded the SKEW high by a couple of months.

Conclusions.  The longer term outlook of a trading range for SPX between 2980-3180 is largely unchanged other than being near the top of the range.  A retest ot the lower portion of the range due to earnings season starting the next two weeks is possible and may be a setup for a post-stimulus ramp later in July to test the June highs.

Weekly Trade Alert.  Options OI is indicating a likely range for the week of SPX 3075-3150 with a slight negative bias to Fri close of 3130.  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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