Another Top is Nearing

The previous week the SPX closed at 3509 and I was expecting a "pop&drop" to occur Mon/Tue targeting 3540-50 for a high and the Sun O/N ES was indicating an open in that range, but before the open Mon, Pfizer announced a positive vaccine trial with a "90% success rate".  This sent prices flying to SPX 3645 the 1st two hours, but a selloff began late aft that fell back to 3515 by Tue AM. This vaccine requires storage at -100 degrees C, so you have to wonder about the ease of dispersal. 

There was an interesting article in Project Syndicate recenly comparing the Trump/Biden POTUS election to that of the 1932 Hoover(GOP)/FDR(Dem).  Economic conditions were somewhat similar. and post-election Hoover also refused to accept defeat, claiming that FDR was "unfit" due to his bout with polio.  FDR ended up winning 4 consecuive elections, dying in offifce in 1945.

This week sentiment is shown back to Jan 2018.  The Tech/Other section takes a look at the current trend in Equity puts and calls that may be indicating a shift to extreme complacency similar to Sept-Nov 2018 as well as a Tech Indicator composite that is pointing to a near term top.  Sorry for last weeks editing, I didn't get a chance to proof read until Sun AM.

I. Sentiment Indicators

The overall Indicator Scoreboard (INT term, outlook two to four months) bearish sentiment has turned down and seems to be following a pattern similar to Jan-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 is also following the Jan-Feb 2020 pattern.

The VXX $ Vol is now testing the lows seen at the Aug and Oct 2020 tops.

Bonds (TNX).  Bearish sentiment in bonds remains vitrually unchanged in the strong SELL region.

For the INT outlook with LT still negative, the gold miners (HUI) bearish sentiment fell sharply, nearing the SELL region, questioning the durabiity of any bounce higher.

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 took a surprising turn upwards last week as the "smart" money appears to be turning more bearish similar to mid-Feb 2020.

And the sister options Hedge Ratio bearish sentiment is also similar to Jan-Feb 2020..

Last week I showed an indicator for the NDX/QQQ usig the 2x long ETF and equity calls which I called the NDX/QQQ term structure and this week will show the equivalent for the SPX using the 2x SSO ETF and the CPCRev calls (equity +ETF +SPX calls).  This is an INT term indicator and is also similar to Jan-Feb 2020 and has just started to turn down, so risk of a serious decline is a few weeks away.

For the equivalent hedge ratio previously I tried using the SPX puts and ETF calls for a hedge spread with mixed results but compared to the SSO hedge ratio was too bullish for mid-2018 and too bearish for mid-2020.

So comparable to the QQQ/NDX hedge ratio, I tried using the SSO ETF and ETF calls that is showing the same pattern of rising tops & bottoms as Jan-Feb 2020 and is now similar to early Feb.

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

With Fri close at SPX 3585, options OI for Mon is small and shows put suppor at 3530 with call resistance beginning at 3600.  There is a slight bearish bias between support and resistance but may be offset by general sentiment.

Wed has somewhat larger OI where SPX moderate call resistance above 3550 with put support starting at 3475.

For Fri, SPX has small OI currently, where SPX has an important inflection pt at 3500 where puts may support prices up 3575, but below 3500 the next level of put support is 3450 .

For the QQQ (NDX/41, 11.9k=290), closing at 290.9, this was a volatile week after a Mon high at 299 and a drop to 280 Tue to close just over put support on Fri.  Next call resistance is 295, but sentiment measures (term structure and hedge ratio) have dropped to neutral.

Using the GDX as a gold miner proxy closing at 38, strong put support is 37.5, while strong call resistance is 41.5.  There should be a slight positive bias next week.

Currently the TLT is 158.2 with the TNX at 0.89%, and after a drop to 154.5 when the TNX jumped to 0.95% early in the week, about 40% of the puts were exercised as smart money bailed before prices rose back to lower put support.. 

IV. Technical / Other

The equity puts and calls are no longer showing the speculatve excess seen in Jan, Feb, Aug & Oct 2020 as the anouncement of a c-virus vaccine has reduced the desirability of the FAMNGS tech stocks.  Rather than risk coming from excess speculation, we could be starting a trend last seen in Sept-Nov 2018, ie, excess complaceny show by a sharp drop in both puts and calls. .

This indicator (NYMO+TRIN+NYAD+NYUD) tends to overstate bearisness off of extreme selloffs due to breath thrusts but works well in mature markets.  We are now seeing a level of complacency similar to the Aug and Oct highs.

Conclusions.  Current sentiment is showing that a ST pullback of 3-5% is likely, but an INT top is not likely just yet.  The Mon/Tue volatility increased bearish sentiment significantly and may cause a retest/beat of the highs.  I expect a high next week to retest the SPX 3646 level +/-1%, 3620-70 with a selloff the last half of Nov (break of 3500 probable, 3450 possible), likely due to dissapointing holiday retail sales.  A possible final rally could carry into the Xmas period.  On the Money UK has a thorough discussion Nov 10, 11, & 13 with a somewhat more bearish outlook possibly down to low 3300s.

Weekly Trade Alert.  The rally may carry into options exp targeting the ATH +/-1% or 3620-70 followed by a pullback to 3450-3500 by the end of Nov.  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