Make America Safe Again

After watching some of Trump's campaign rallies last week with MAGA signs in the background, I realized that the Dems missed a great oppty to come up with their own slogan. To wit, MASA or "Make America Safe Again" - increase safety from c-virus with free masks and testing, from racial violence with more police oversight and "in progress", from wildfires consuming western states with increased environmental oversight, and from devastating hurricanes in the southeast by reducing long term effects of climate change. Recently I have been watching reruns of a TV show called Salem from 2014-15, where it turns out the real witches are the Puritans who cover up there own evil deeds by accusing everyone else of being a witch, and the more I watch, the more the Puritans remind me of the GOP.  End of rant.

Last week, I warned of an impending top and as has been seen too often my outlook for a decline over the next couple of weeks was compressed into several days.  The excessive bullishness expressed by the equity put/call indicators matching the Feb 2020 top was the likely cause.  As posted on Twitter before Fri open, the decline to retest the Sept lows was also following the Oct-Dec 2018 analog for Nov where a decline to retest the Oct lows was followed by a retest of the Nov highs before a final plunge.  The Nov low retest was about 1% above the Oct lows, hence my target of about SPX 3225 (act 3234), while a retest of the highs was 1% lower (about 3520-30 now).  The Dec 2018 decline was 140% of the Oct decline (350 vs 250 SPX pts) and today that would be about 550 pts, or below 3000, vs the Sept 380 pt decline.

Obviously, the results of the election and more importantly the markets reaction will determine the markets short term path and I don't think it is as simple as a Trump win means a rally, while a Biden win means a decline.  For instance, a Biden win may mean more stimulus vs a Trump win. so the results may be the opposite of what is expected.  MW had a good read on economic outlook vs POTUS.  I am close to 50/50 between the Oct-Dec 2018 analog and the continuation to SPX 3130 as part of the 1968-70 analog.

This week I am lengthening the indicator timeline back to mid-2018 to include the late 2018 sentiment.  The Tech/Other section includes the SPX charts for 2018 and today for comparison, as well as an update of the VIX Buy/Sell Indicator as now included in the regular graphics program.

I. Sentiment Indicators

The overall Indicator Scoreboard (INT term, outlook two to four months) bearish sentiment has risen only modestly about to the level of the Jan 2020 decline, preceding a 200 pt rally before thr Mar plunge.

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 been even weaker, mainly due to little change in the SB P/C.

The VXX $ Vol rose back to neutral, again matching the level at the Jan lows.

Bonds (TNX).  Bearish sentiment in bonds is virtually unchanged.  Even though rates pulled back as expected Mon-Wed, the Thur auction of 7 year T-bonds went poorly resulting in a Thur-Fri jump in rates from 0.79 to 0.86%.  One of the reasons I am expecting a bear market in equities is that the last 4 years under MAGA the deficit rose from 20T to 27T with lower tax rates, trade wars and the "not a problem" pandemic.  As a result the US has huge borrowing needs with the public having less to invest and foreign gov'ts not interested in buying US bonds.  The result will be higher rates forcing the Fed to become more hawkish to calm the bond market.

For the INT outlook with LT still negative, the gold miners (HUI) bearish sentiment is little changed as PM investors, like POTUS, have their heads in the sand.  Lower prices are likely.

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 barely budged with even the ST EMAs unable to reach the neutral pt since the end of Mar.  To me this looks like a bear market setup with extreme LT complacency, likely due to faith in the Fed.

And the sister options Hedge Ratio bearish sentiment has risen more sharply, indicating slightly more hedging than what was seen at the Sept lows, supporting a Nov 2018 type rally back to the low SPX 3500s.

The INT term SPX Long Term (2x/DM) ETFs (outlook two to four weeks) bearish sentiment is also lagging the Sept decline, showing little LT bearishness.

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 Nov 6. Also, this week includes a look at the GDX & TLT for Nov exp. 

With Fri close at SPX 3270, options OI for Mon has large put support around 3200 with the potenial for a move over the 3325 puts if 3300 is exceeded.  3350 to 3400 are mostly straddles.

Wed has somewhat larger OI where SPX call resustance at 3310 and 3335 will likely pressure prices downward.  There is only modest put support at 3325 and if broken, larger support is at 3125.  With overall low P/C, a washout tp SPX 3125 is possible with a negative election surprise.

For Fri w/jobs report, the huge call OI at SPX 3500 makes the chart unreadable, so the second chart reduces the 3500 calls by 25k.  Now we can see small put support up to 3375 with larger support around 3200.  If a washout does occur Wed, it is likely to reverse to at least 3200 by Fri.  The big question is whether the 3500 calls are smart money as they do seem to represent a hedge fund position and also seem to support the Nov 2018 analog.  If Wed remains over 3300, that is a possibility.

For the QQQ (NDX/41, 11k=268), closing at 169.4, put suppoort made no differnce with Thur disappointing iPhone news from AAPL.  Perhaps CCP is telling the 600M Chinese to make China great again by buying Hauwei, not Apple products.  Should see support, but not willing to commit.

Using the GDX as a gold miner proxy closing at 37.5, two weeks ago a move below 39 showed little put support to lower prices, but we now have strong put support at 37 & 38 that should support prices.

Currently the TLT is 157.6 with the TNX at 0.86%, normally I don't show GDX and TLT together, but Nov optn exp is so unusual that I thought it was necessary.  First, no one has asked, but I consider TLT puts as a contrary, or smart money, position due to the excessively bullish ETF indicator.  With last weeks sharp turn around, the huge (100k) puts at 148 & 149, probably indicates that a huge stimulus package approval after the election will push rates much higher  The last time the TLT was 148 (late Feb), the TNX was 1.45%. 

IV. Technical / Other

First, I want to reiterate a couple of items mentioned in the updates that deserve repeating. I had misintrepreted the Oct-Dec 2018 analog which showed a retest of the lows (about 1% higher) shown below. Links to full size charts - 2018, 2020.

Next, I decided to incorporate the VIX Buy/Sell indicator (avg of SKEW and VXV/VIX) into my main graphics package. Using the SPX as a base the "Sell" leads a top by 2 to 4 months, but the "Buy" as shown is very accurate and the strength of the signal approximates the strength of the rally. Not showing a "Buy" yet for the SPX.

Using the VIX as a base, the "Buy" was at or near the low for the VIX and leads a sharp spike by 2 to 4 months. The "Sell" occurred at or near a top in the VIX and has not occurred yet. Note the VIX MAs have reached the level of the Fri and Dec 2018 lows, but the VIX term structure remains near .95 and should fall to around .80 before a top.

Conclusions.   I did not like the BTFD rally at the end of the day Fri as it showed lack of capitulation. Looking closely at the 2018 analog, the low on Nov 23 (Fri) was near the low of the day on low volume making it more likely that last weeks high volume low will be retested on lower volume if not beaten. Sentiment remains mixed, where a drop toward 3100 or a rally toward 3500 seems equally likely. The outlook for bonds is looking increasingly bearish.

Weekly Trade Alert.   An SPX move of 200 pts seems possible, but in either direction. A retest of the lows on lower volume Mon/Tue would probably support the 2018 analog.  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

Nearing an Important Top

Last week was somewhat of a bust as the SPX OI puts at 3425 proved to be support but the 3525 level did not provide the expected positive gamma effect.  On Tue update I warned that rhetoric from DC was not supportive of a ST stimulus approval and the 3400 was possible and after testing the 3410 level Wed the SPX bounced, closing down about 20 for the week.

The sideways/up grind the last half of the week was enough to finally get the vol players moving to the sidelines and it is one of the last factors I was looking for as a top indicator.  A continuation of this trend thru the end of next week will likely provide a setup for another 10% drop after the election.  As I mentioned last week, most are expecting the Pres cycle to provide a rally thru the EOY, much like the positive "seasonal effect" expected in Dec 2018, so this may be a contrarian's dream setup.   Some are expecting an even sharper decline such as Avi Gilbert, who is expecting SPX at sub-3000 by the end of Nov, but I see this as unlikely unless the Dems takeover both the Pres and Senate.  The SPX option OI includes a post-election look at sentiment for Nov 4 and it shows a drop to the low 3300s is possible.

This week in the Tech/Other section is an update of the data mining indicators for the Equity P/C that show extremes last seen right before the Sept 10% selloff.

As an aside, I have to make a comment about the alleged scandal concerning Hunter Biden's laptop.  Am I the only one computer savvy enough to know that emails are not stored on your personal computer?  Whether desktop or laptop, your emails are stored on your email providers server (ie, google for gmail) and the only way to gain access is to hack into your account (illegal without a warrant).  Hillary, on the other hand, was a gov't employee using gov't email account on gov't server, therefore had no privacy rights.

I. Sentiment Indicators

The overall Indicator Scoreboard (INT term, outlook two to four months) bearish sentiment is mostly unchanged for the week and remains similar to what was seen at the Feb 2020 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 started a sharp drop matching the Aug 2020 top (due to VXX $ Vol below).

The VXX $ Vol dropped sharply Th/Fri as the vol players seem to be finally giving up.  The past couple of weeks vol hedging was one of the few things supporting current price levels, but now that support is quickly eroding.

Bonds (TNX).  Bearish sentiment in bonds surprisingly turned down, even though rates rose steadily thru the week from 0.74% to 0.87% at the high.  This indicates higher rates ahead.

For the INT outlook with LT still negative, the gold miners (HUI) bearish sentiment fell sharply last week even as the HUI has fallen about 7% the last week and a half.  Now approaching a SELL, lower prices are likely, especially with the lack of put support as shown in the GDX options OI last week if below $39.

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 rose last week, surprisingly similar to what was seen just prior to the Feb and Aug 2020 tops.

And the sister options Hedge Ratio bearish sentiment also showed a modest uptick.

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 30. Also, this week includes a look post election SPX for Nov 4, and at the TLT for Oct 30. 

With Fri close at SPX 3465, options OI for Mon only shows very weak put support over 3400 and strong call resistance above 3500.  Likely more range bound moves.

Wed has small OI where SPX has little call resistance up to 3500 and recent patterns of put rollover may provide enough support to move prices toward 3500.

For Fri Oct EOM,  SPX has large OI, but again little resistance up to 3500, so put rollover may support a move to 3500.

For Post election Wed Nov 4, negative gamma with large call OI at 3310 and 3335 may indicate the start of a sharp selloff beginning early Nov with the low 3300s possible by Nov 4.

For the QQQ (NDX/41, 11.5k=280), closing at 284.7, indicates strong put support at 285 and little call resistance until 290 or 2% higher.  This is the main reason I see a positive bias next week for the SPX.

Using the GDX as a gold miner proxy closing at 38.8, even as I warned that 40-41 had proven to be strong resistance and that there was little put support below 39.

Currently the TLT is 158 with the TNX at 0.84%, for the week the TNX rose from a low of 0.75% on Mon to a high of 0.87% on Fri AM. The TLT 158.5 puts rose from a low of $.20 Mon to a high Fri AM of $1.60 or 8x.  Even though the P/C is high, there are no "big money" bets and put support extends up to 161.5.  Expect rates to fall w/TNX back to 0.8% or lower and TLT 160+.

IV. Technical / Other

This week I want to look at the data mining indicators for the Equity P/C. One of the things I discovered was at important tops, most recently Aug 2020, there is a presence of both high speculation as measured by the equity call to equity P/C spread (dumb money) and also a high level of hedging as the equity put to equity P/C spread (smart money).

Below is a chart of the equity puts and calls which shows the level of puts and calls just below that of the Aug high.

Here is the equity call to equity P/C spread where the spread is just above that of the Aug highs and the double dip is very similar to what was seen at the Feb 2020 high.

While below, the equity put to equity P/C spread is just above that of the Aug highs and the double dip is very similar to what was seen at the Feb 2020 high.

Conclusions.   The next few days are likely to see an important top.  Current ST indicators are pointing to the possibility of another 10% correction by comparison to Aug 2020, but could end up being part of a larger decline.  It is possible that a Dem sweep of Pres and Senate cold result in a sharper selloff due to Biden's plan on raising the cap gains tax, otherwise the prospect of a viable vaccine by late Nov and or additional fiscal stimulus may limit the immediate downside.  My preference is the beginning of a 1-2 year bear market similar to late 1969-72 discussed in the LT outlook for 2018 which started with a series of 10% corrections.

Weekly Trade Alert.  The SPX appears to be in an IHS pattern from 3550 which I doubt will complete, but with positive QQQ OI may push to an upside target of 3510 by late next week or possibly Nov 2/3.  Continuation of current sentiment trends would then support another 10% decline.  With Sept decline at SPX 380 pts, a C=A decline would be to SPX 3130, the 200 day SMA.  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 Complex Topping Process is in Progress

Last week finally saw the 3-5% (act 3%) pullback expected into Fri optn exp and closed the week only slightly higher than predicted by the SPX options OI. 

Next week could even be more interesting.  With most expecting lower prices to complete an ABC decline from last Mon SPX 3550 the B wave top.  However, an unusual combination of options indicators indicate otherwise.  First, the Index P/C jumped to 2.0 (dumb money) Fri and the number of VIX puts rose to 500k+ (smart money) and the last time this divergence occurred was over a two day period Oct 8-9 with the SPX jumping 100+ pts the next few days.  Next the SPX options OI is showing huge put positions Fri at 3430 and 3530 with posiive gamma likely pushing prices over 3530.  Finally, another jump in OTM TLT puts indicates another jump in int rates is expected.  Together, something positive is likely to happen next week.  Will Amy Barrett's confirmation allow the Senate time to come up with a compromise on the next stimulus package?

With last weeks relative calm in the markets, I spent a few weeks working on the data mining software - adding some ETF indicators as well as a VIX BUY/SELL indicator which recently gave its 4th BUY in three years.  See Tech/Other.

I. Sentiment Indicators

The overall Indicator Scoreboard (INT term, outlook two to four months) bearish sentiment actually fell last week even as the SPX saw a 3% pullback as we saw in late July in the first pullback after the rally off the June swoon.

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 contined to decline and is now testing the lows seen in Jan and late Aug.

See Tech/Other for volatility update with VIX (volatlity) BUY signal.

Bonds (TNX).  Bearish sentiment in bonds remains largely unchanged even as rates pulled back below 0.75%.

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

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 continued to fall and is now testing the lows seen at the Aug ATH..

And the sister options Hedge Ratio bearish sentiment has continued to fall and is now between the levels seen at the Jan and Aug ATHs.

The SPX and QQQ ETFs are discussed in Tech/Other using the data mining tools. .


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 23. Also, this week includes a look at the GDX for Nov exp. 

With Fri close at SPX 3484, SPX showed the expected weakness and closed slightly above the range showed by Fri OI of 3430 to 3475.

SPX options OI for Mon show small put support extending up to 3450 with small  call resistance at 3500.  High P/C may contribute to a positive bias.

Wed has small OI where SPX stronger put support drops to 3400, but given recent history of very ST put additions, this will likely be stronger by Wed.  Also, the unusually large put OI Fri may contribute to a positive bias.

For Fri, the huge put OI at 3430 and 3530 is almost the opposite of what was seen on Sept 30 where large call OI contributed to negative gamma (delta hedging) and the result is likely to be a catapult over 3530 by Fri with moderate call resistance starting at 3550.

For SPX EOM, there is moderate call resistance starting at 3500 with a low P/C and negative bias down toward 3450.  Beginning to look a lot like the setup in Nov 2018 when the SPX went thru a month long flat wave before the Dec flush lower. Q3 GDP Oct 29 may provide a negative bias.

But with a wider view, the SPX EOM does show strong put support below 3250.

For the QQQ (NDX/41, 11k=268), closing at 288.5/NDX 11,852, there is strong put support about 2% lower and this may temper any pullback in the SPX..

Using the GDX as a gold miner proxy closing at 39.8, the 40-41 area has proven to be strong resistance and strong call resistance at 41 is likely to keep it so thru Nov exp.  Also, low put support can be a problem if prices fall below 38.

Currently the TLT is 161.4 with the TNX at 0.74%, no chart this week but Fri 23rd TLT OI shows new posiion of 28k puts at 158.5 that may be the same smart money betting on higher rates again. 


IV. Technical / Other

This week I took a few hours to add the SPX and QQQ ETFs to the data mining software as well as a VIX indicator using the SKEW and VIX term structure.

First, the SPX 2X ETFs (SDS & SSO) have performed better as BUYs than SELLs other than the Jan-Fen 2020 top.  Current period most resembles that of Oct-Nov 2018, ie neutral.

Next the 3X (SPXU & UPRO, has been better at both BUYs and SELLs except Jan-Feb 2020 top and is now approaching a SELL.  Not sure about the upward trend.

For the NDX, only the 3X (SQQQ/TQQQ) made sense.  Mostly flat before late 2018, and now approaching a SELL.

Finally, looking at the VIX vs the 100/SKEW and VIX term structure.  Both SKEW and VIX term structure track the VIX much more closely that the SPX which is probably why they do not generate good Buy/Sell signals for the SPX.  However, for the VIX the composite (avg) of the StdVars has produced 4 BUY signals for the VIX at the -1.25 StdDev level over the last three years.  The first three were followed by sharp spikes in the VIX with a 2-4 month lead time.  The last signal was late Aug and with alternation may be a similar setup to Oct-Nov 2018.

Conclusions.   As pointed last week, sentiment is pointing to an important near term top, but it is likely to be complex enough to catch most off guard.  ST options sentiment is pointing to another rally next week that may reach or exceed Mon top at 3550.  Looking back at Nov 2018, there were three rallies making up a flat where the first was the highest, so this time may alternate with the last being the highest forming a diagonal like form.  If so next week may be the second based on some form oj agreement on a fiscal stimulus package, and then finally a third after the election.  This would likely set up a failure of the Pres cycle with most expecting a continued rally into year end.

Weekly Trade Alert.  Several options indicators are showing a setup for a rally by next Fri to at least reach the 3530 level and possibly as high as 3550-80.  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