Will the Game Go into Overtime?

The recent decline has many EWers calling for SPX lows in the 2800-3000 area with the recent decline a wave A as a diagonal of an ABC. My feeling is still that slightly higher highs are likely before a much larger decline of about 40%. Recent price action reminds me of the SPX 10% decline that occurred in Jul-Aug 2007, the decline was about a month long and was followed by a two month rally to a slightly higher high by 1.5% in Oct.  Today this implies about a six week lag (top late Nov-early Dec), but more interesting is that the recovery was initially strong, then became flattish for a month in a 100+ pt range before the final blowoff.  The Oct EOM options OI indicates something similar for this Oct.  A final blowoff may be due to the approval of a Covid-19 vaccine.

Overall sentiment still resembles early 2020 with little change for the week.  Even with the sharp drop to test the SPX 3225 area indicated as a target due to the huge call position Sept 30 (3230) a total of three times, the SPX closed down only 21 pts from 3319 to 3298.  Tech/Other includes links for SKEW and VIX term structure updates and an updated look at gold relative to TNX and SSEC.

I. Sentiment Indicators

The overall Indicator Scoreboard (INT term, outlook two to four months) bearish sentiment rose slightly for the week.

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 also rose slightly for the week.

The VXX $ Vol fell  slightly for the week.

Bonds (TNX).  Bearish sentiment in bonds is relatively unchanged.

For the INT outlook with LT still negative, the gold miners (HUI) bearish sentiment is also relatively unchanged which is unusual with the 8% drop for the week.  More declines are likely until bearish sentiment increases.

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 unchanged.

And the sister options Hedge Ratio bearish sentiment saw a very slight rise.

The INT term SPX Long Term (2x/DM) ETFs (outlook two to four weeks) bearish sentiment rose slightly back to neutral.

The INT term NDX Long Term (2x/DM) ETFs (outlook two to four weeks) bearish sentiment (no chart. see QQQ OI).


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 Oct 2. Also, this week includes a look at the TLT for Oct exp. 

With Fri close at SPX 3298, options OI for Mon shows mild put support from 3250 to 3295, but strong support above current prices at 3310.  Some weakness may be expected early in the day but a close at 3310 or better is likely.

Wed (EOM) has large OI with 36k+ calls at SPX 3230.  As pointed out last week, this was likely to be a magnet drawing prices toward SPX 3225 and that level was tested three times last week.  With the first Trump/Biden debate scheduled the 29th, the lows may be in.  Higher puts show the potential for an early spike to above 3300 (max 3350-75), but calls at 3230 may cause a fade at the close.

On doing some research last week, I noticed that the origin of the calls was early July with the SPX at 3000 after the June swoon from a top of 3233.  At an original price of $100 and value of $300M for 30k contracts, I wonder if this was a Fed front running ploy to goose the markets higher from the June lows (aka Softbank equity calls), especially since there was no profit taking at the highs of $350 early Sept and the price has since dropped to a low of $40 early Fri.  Something to watch for in the future.

For Fri, there is strong support up to SPX 3300 and if the SPX can make it over the straddle at 3350, there is put support up to 3375 and no call resistance until 3400.  Possibly a strong start to Oct.

For the SPX EOM Oct, strong put support is present at 3300 and below while call resistance shows up at 3425 and above.  Other than a possible strong start to the month, most of Oct is likely to be flat between 3300 and 3450.

For the QQQ (NDX/41, 11k=268), closing at 271.6 after a low of 264.3 Fri, the QQQ had a target close for the week at 271-2 supported by large put positions.  Next week shows modest call resistance at 275 and 279, but little resistance above.  Gains are likely to be limited to 2-3%, but over 279 prices could see sharp gains.

Using the GDX as a gold miner proxy closing at 38.5 after a low at 37, the break I has been expecting finally came as the hype over the Fed's new inflation targeting seemed to be a "sell the news" event

Currently the TLT is 165.1 with the TNX at 0.66%, and call resistance starts at 165.5.  However, what really stands out here are the 82k puts at 160.5 and 92k at 155 since this means someone with deep pockets are betting on a sharp rise in rates.  Early Mar when the TNX was 1.0% the TLT was at 156, so a 20-30 BP jump in TNX may be expected.  This is likely due to an expected large stimulus package causing an increased pressure on rates.  Sept two weeks ago saw about 50k puts at 160 and 25k at 155, so no guarantees.  How will inflation expectations effect gold/miners?  See Tech/Other for charts.

IV. Technical / Other

Just a quick look at the SPX indicators (links only).  Both the SKEW and VIX term structure are in similar positions as Jan 2020.

Several weeks ago, I pointed some INT relationships between gold and both the TNX inverse and the China stock exchange SSEC.  Below is the 1/TNX chart with gold in black.  This estimates that fair value for gold at current rates is about 1850, but a spike in rates is likely to put downward pressure on gold.  In early Mar when the TNX was 1%, gold was 1700.

For the SSEC, the relationship is less reliable, and with SSEC down 7%, gold is down 10%..

 

Conclusions.   The stock market appears to be in the final innings, but it's likely that the recent decline (larger than initially expected) will extend the topping process longer than expected.  The large SPX volume on Sept qtrly optn exp was likely accumulation and could mean that the next oppty for large distribution is Dec 18 optn exp, and should be near the top.  Comparison to the last half of 2007, indicates a late Nov top which may coincide with an apparent Trump re-election.  What happens next?  Election reversal, or possibly China refuses to allow US firms access to China's rare earth supply in retaliation to Trumps cutting China off from access to US markets in high tech areas.

Weekly Trade Alert.   The first week in Oct is likely to be strong with an upside potential of SPX 3425.  Wed may start strong to 3350+, but could close lower due to large call OI at 3230.  A a close of 3330 the unknown buyer of the 3230 calls would be made whole for a $100 price.  Fri could be close to 3400.  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

A Rosh Hashanah Setup

Last week, I was looking for a relatively strong rally of 3-4%, and the result by Wed was a 3.5% rally with the NDX missing the lower target by 5 pts at 11,495 (11,500-900) and the SPX by 22 pts at 3428 (3450-500). Much closer than the SPX 3200 area many were calling for. Wed's update late AM warned of a ST top Wed/Thu, but I did not expect a retest of the SPX 50 day SMA so soon. The Wed/Fri selloff was net Negative for the week from SPX 3341 to 3319.  Vol products (VXX, UVXY) got crushed as expected, but did comeback with the late Fri SPX/QQQ selloff.

Next week is traditionally weak due to the Jewish holidays and is likely to be the low for this pullback, and a lower low, SPX 3250-75 is possible. However, SPX and QQQ options OI present a different story where strong put support around current levels (SPX 3290-50, NDX 10,800-11,200) may hold for this coming week, but allow a sharp EOQ decline the following week. Additionally, the second option would mean a continued selloff in the vol products, moving that sentiment closer to a SELL by EOW.

Last week Biden unveiled part of his tax plan that includes raising the cap gains and div rates to the orinary tax rate and may be part of the decline in high flyers for this year.

I. Sentiment Indicators

The overall Indicator Scoreboard (INT term, outlook two to four months) bearish sentiment declined sharply during the week, even with a lower close.

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 had rallied more strongly (due to VXX $ Vol below) but has fallen more swiftly with the collapse in the vol products.

The VXX $ Vol rose sharply,   but last week's collapse in vol prices (VXX down -4%, as low as -7% Fri) has moved this indicator into negative territory and a repeat next week could generate a SELL.

Bonds (TNX).  Bearish sentiment in bonds remains near the lows as int rates remain stable.

For the INT outlook with LT still negative, the gold miners (HUI) bearish sentiment remains below neutral as prices mirror int 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) bearish sentiment also turned down and remains near record terriory.

And the sister options Hedge Ratio bearish sentiment is only slightly higher.

The INT term SPX Long Term (2x/DM) ETFs (outlook two to four weeks) bearish sentiment remains above neutral which may indicate another rally attempt after the Sept lows.

The INT term NDX Long Term (2x/DM) ETFs (outlook two to four weeks) bearish sentiment remains high.

(no chart. see QQQ OI).


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 Sept 25, plus EOM. Also, this week includes a look at the GDX for Oct exp.  Fri's downturn likely increased put support over what is shown.

With Fri close at SPX 3339, options OI for Mon is somewhat distorted due to the 12k puts at 3200 (ie, unlikely below this level) with small put support (1k) up to 3350.

Wed has somewhat larger OI where SPX put support is moderate at 3320 (2k) and almost no call resistance until 3450 (1k) .

For Fri put support is much stronger as most put buyers seem to be expecting an overall negative week due to the Jewish holidays where strong support is at 3300 (4k) and small support (1-1.5k) extends up to 3360.  The contrarian position is rangebound 3300-400.

For SPX EOM, there is an unusual configuration where strong put support at 3300 (10k net) may be challenged by a huge ITM call position at 3225 (30k net) and could draw prices lower with a significant break of 3300.

For the QQQ (NDX/41), currently at 267 (Fri low 262), the large put position at 270 could easily result an additional 4 to 5 pt jump to 271-2.  Again, seems to be a Jewish holiday bet.

For QQQ EOM, we see that below 271, moderate put support drops to 260 (10k) and strong (30k) at 255.  Is everyone expecting a rally after next weeks lows?

Using the GDX as a gold miner proxy closing at 41.36, Oct shows that strong call resistance levels have moved up from the 40-42 levels to 45-46 with only minimal net resistance at 42.  Perhaps another stimulus package will push inflation expectations higher.

Currently the TLT is 163.6 with the TNX at 0.69%, as put support did keep prices over 163. 


IV. Technical / Other - N/A


Conclusions.   This week's outlook is highly contrarian as put option buyers and vol players are clearly betting on a down week next week based on the typical patterns seen during the Jewish holidays.  So, the contrarian outlook is for a rangeboud week next week, possibly SPX 3300-3360 with continued volatility compression, only to be followed by a breakdown the EOQ, EOM Sept, possibly to SPX 3225 or lower.  The end of quarter window dressing could get ugly when you consider that many of the high flying mega-tech stocks like AAPL amd AMZN are already down 20% or more just during Sept and that recent gains could be taxed at a much higher tax rate if Biden wins.

Rumors are flying that the GOP may be more will to do a larger stimulus closer to the election.  So the potential for a late Oct blowoff are not out of the question.

Weekly Trade Alert.  Will it be the calm before the storm?  A mild downturn followed by a rally to the SPX mid-3350s by EOW could be a setup for a sharp EOM decline to the low 3200s.  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

Vol Gets Slammed as Gamma Unwinds

One of the more interesting news items last week was that much of the fervor in the mega-cap tech sector was huge call spread buying by a Japanese hedge fund, Softbank.  The estimated investment was about $7 billion and netted about a $4 billion profit. but the effects on the tech sector proved to be overwhelming as the size of the trades and continuity created a feedback loop where options writers were forced to cover by buying the underlying shares (delta hedging), and the buying was picked by the Robinhood momentum traders.  At least until it stopped two weeks ago.  The call buying also increased option premiums, driving up the VIX even as prices rose, which convinced the bears that similarities to Jan 2018 meant another volmagedon was likely, but as call spreads were unwound last week so was the cause of an inflated VIX, even as stock prices fell.

Bearish sentiment has now reached the point where the correction is likely to end, however, gains are likely to be limited to the SPX 3600-50 area.  I would not be surprised to see a rounded top similar to the May 2015 highs, only this time techs may have topped first while cyclicals (DJIA) continue to rally as the economy slowly returns to normal.

I. Sentiment Indicators

The overall Indicator Scoreboard (INT term, outlook two to four months) bearish sentiment has risen somewhat less than what was seen in the Jan 2020 pullback, about the same as the June pullback of 7-8%.  A strong rally is unlikely, but marginal ATHs are possible.

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 rallied more strongly (due to VXX $ Vol below).

The VXX $ Vol rose sharply, matching the levels last seen during the first leg down of Mar 2020 with much less price declines in SPX.  Again, long vol players were likely fooled as much by the recent runup in VIX as the Robinhood crowd was on the momenum in certain tech stocks.

Bonds (TNX).  Bearish sentiment in bonds remains subdued as interest rates remain stable, but a significant change seems likely after the election.

For the INT outlook with LT still negative, the gold miners (HUI) bearish sentiment remains mostly unchanged as are prices.  Surprisingly last week gold was weak even as news came out of higher than expected inflation (CPI, PPI).

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 saw only a very modest rise about the same increment as seen in June's pullback.

And the sister options Hedge Ratio bearish sentiment saw a stronger move, reaching the level of the June pullback, supporting the idea of a ST low.

The INT term SPX Long Term (2x/DM) ETFs (outlook two to four weeks) bearish sentiment also saw a strong increase, rivaling that of the VXX $ Vol, that may be indicating more than a ST bottom.

The INT term NDX Long Term (2x/DM) ETFs (outlook two to four weeks) bearish sentiment remains on a ST BUY (no chart. see QQQ OI).


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 Sept 18. Also, this week includes a look at the TLT for Sept exp. 

With Fri close at SPX 3339, options OI for Mon has small OI with put support up to 3350 and virtually no call resistance until 3400.  Mon may see a strong move up to 3400.

Wed has somewhat larger OI where SPX shows small OI where 3400 is hedged (straddle), but put support extends up to 3440 and the first level of call support is 3480.  Anywhere in the 3400 to 3480 area is possible.

For Fri PM, modest OI shows put support at SPX 3350 and 3460 with call resistance at 3500, but lower calls below 3460 may impede price gains.  A move toward 3500 seems likely.

For the QQQ (NDX/41) this week's close is 270.5 (11,090) with strong put support up to 275.  a move up to 280 (11,500) is likely and 288 (11,900) is possible.

Using the GDX as a gold miner proxy closing at 41.16 remains over 40 put resistance.

Currently the TLT is 164.5 with the TNX at 0.67%, rates were expected to rise with put support up to 164 and may remain in the range of 164-7. 

IV. Technical / Other

The LT monthly SPX bollinger bands have extended over the upper band three times the last 5 years, Jan 2018, Dec 2019-Feb 2020, and Aug-Sept 2020.  The LT results have not been promising with a trip down to the lower BB or lower over the next year.  MACD showing negative divergence at ATHs.

The SPX ST, 1-hrly, is showing a potential bottom at low Fri with lower prices and higher MACD setting up a positive divergence.  Closing MACD crossover same as Tue before Wed gap up and go.

Looking at the SPX 4-hr ES chart shows higher lows and MACD with MA resistance at 3420 and 3450 if 3360 is surpassed.

Conclusions.   Overall sentiment is supportive of a decent rally with the potential to crush VIX and vol products.  SPX options OI is about as bullish as I have ever seen, showing the potential for an optn exp week rally to the 3450-500 area, and for the NDX (QQQ) to 11,500-900.  The strong bearish sentiment for the ETFs (SPX, NDX) may be indicating more of a rounded top.  Watch out for the Sept-Oct 2018 effect as a high at Sept optn exp on high volume and a retest early Oct was followed by a multi-month decline.

Weekly Trade Alert.   Next week is likely to be strongly positive with the potential for an SPX rally to 3450-500.  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