What Happened to All the Rosy Predictions?

January has pretty much followed the outlines posted with an early trading range expected between 3700 and 3800, but the Dem victory for the Georgia Senator seats set up the possibility for stronger stimulus, pushing my upside target to 3860 (act 3870) with weakness coming late in the month, likely to test the SPX 50 day SMA (right at Fri close 3714). Feb is much more uncertain with some indicators showing a Sept 2020 setup of a 7-8% decline (low ETF hedging) while others are still pointing to a Jan 2020 type decline with one more ST high (SPX 3850-90) before a 10%+ decline. My view still favors one more rally but only a 60/40% probability. A larger decline now increases the prob of SPX 4000k later, while a smaller decline favors the rounded top.

Much of what happens will depend on the GOP support for a larger stimulus package ($1.5T+), less that $1T is likely to disappoint. If the Trumpster was still stockbroker in chief, he would likely rally GOP congressmen, but with Dem Biden, less interest in market reactions and less support from the GOP is likely.

I have been making good progress on setting up a new Composite P/C using the std var format, but the CBOE data was not as useful as expected although it did show that Equity contracts are much smaller in $ and therefore should be weighted lower. So I decided to use the future returns model used to construct the Overall Composite in 2016 (more in Tech/Other).

I. Sentiment Indicators

The overall Indicator Scoreboard (INT term, outlook two to four months) bearish sentiment has risen sharply but is still near neutral.  Any rally is likely to stay within Jan trading range.

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 less strongly as Equity call buying remains strong.

The VXX $ Vol rose sharply, and close to the level seen at the Jan 2020 pullback.

Bonds (TNX).  Bearish sentiment in bonds is little changes as rates stayed between 1.0-1.1%.

For the INT outlook with LT still negative, the gold miners (HUI) bearish sentiment rose slightly as prices tested recent lows.

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 risen sharply now slightly higher than at the Jan 2020 lows with the overall pattern similar late 2019 - early 2020.

And the sister options Hedge Ratio bearish sentiment has only seen a modest rise as hedging remains weak and could mean more volatility.

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 Feb 5. Also, this week includes a look at both the GDX and TLT for the Feb exp. 

With Fri close at SPX 3714, options OI for Mon show fairly strong put support from 3675 to 3725 and a close at or above 3725 seems likely.  Note, however, very light OI but likely Fri decline bolstered put support.

Wed has smaller OI where SPX has put support up to 3750.

For Fri (Jan jobs data), SPX OI shows fairly strong put support up to 3750 and call resisance at 3800, in between straddles provide little direction bias.

For Feb EOM, OI is to low to be conclusive, but now indicates SPX 3650-700 possible.

Using the GDX as a gold miner proxy closing at 34.5, virtually unchanged for the week as is OI sentiment with a continued tight trading range likely.  Both puts & calls up about 50%.

Currently the TLT is 151.8 with the TNX at 1.09%, very little change here with tight range likely.

IV. Technical / Other

Starting with the Equity P/C using the EMA output it's easy to see the extremely low bearush sentiment that has everyone so worried.

Comparing the EMA format to the std var put/call spread, the biggest difference is seen when there sharp declines in SPX price since both put and call volume decline together.

While the addition of the inverse function for the puts correctly adjusts for the decline in option volume when SPX prices fall.

Finally, a regression is used to compare the current put/call measure to the difference between the current SPX price and the future price in 5 trading day increments (ie, starting Jan 2, 2018 price diff between closing SPX now and Jan 7, etc).  For the base case, I used the P/C 10 day SMA for last weeks SPX and this weeks Equity P/C.  For the SPX the changes are dramatic with a 4-5X improvement (but less than the 10X I thought last week), while for the Equity P/C the improvement averages about 2X.  The Equity P/C seems to be better INT at calling bottoms (followed by long rallies), while the SPX and ETF (next week) are better ST at calling tops (short but sharp declines).

Conclusions.   Bearish sentiment is up somewhat, but not likely enough for new ATHs.  PX options indicates a rally is likely next week to the 3750-3800 area.  Everything else is riding on the coat tails of the next stimulus package.

Weekly Trade Alert.   Highly uncertain but some type of rally is likely..  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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A New Era

Last week finally made it to my earlier target of 3860 after falling short the week of the 15th.  A move down to test the SPX 50 SMA is still possible by the EOM similar to Jan 2020, but higher prices have caused the 50 SMA to rise faster than expected to 3794 and may reach 3820-30 by Fri.  Many EWers were whip sawed with the SPX moves as pointed out last week and have now switched from bearish to bullish ST.  My target is at least a break of the prior weeks low at 3748 to get everyone bearish before a final INT rally for the next round of stimulus perhaps to only 3870-90 as many are expecting 3900+ to sell/short.

Late 2017 was not friendly to BTC and the PMs and we may be setting up for a repeat as pointed out by sentiment for HUI as well as BTC with a chart in the Tech/Other section.  This may turn out to be a precursor to a 2018-like outcome for 2021.  An interesting read last week by John Mauldin on the potential risks of the new c-virus strains.

Regular sentiment measures were relatively unchanged last week, so I've spiced things up a bit by looking at the SPX and NDX ETF hedge ratios in the DM/SM section as well as starting a new way to look at P/C ratios starting with the SPX in the Tech/Other section.  I found some interesting data at CBOE poking around their site MLK day that compares notational ($) value and volume here that might be used to create a $ wtd composite P/C ratio, the only problem is that it is clearing house data by exchange and does not use the trading floor categories for Equity, SPX, ETF and VIX.

I. Sentiment Indicators

The overall Indicator Scoreboard (INT term, outlook two to four months) bearish sentiment continues to decline, slowly but steadily, but not yet to extremes.

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 continues to decline, slowly but steadily, but not yet to extremes.

Bonds (TNX).  Bearish sentiment in bonds is mostly unchanged as rates hover around 1%.

For the INT outlook with LT still negative, the gold miners (HUI) bearish sentiment continues to drop even as prices are weak and are approaching the levels seen before the Oct-Nov 2020 selloff.

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 moved up slightly.

And the sister options Hedge Ratio bearish sentiment also has moved up slightly.

The INT term data mining SPX ETF Hedge Ratio (SSO/ETF Calls) bearish sentiment has reached extremes last seen in ealy Jan 2018.

The INT term data mining NDX ETF Hedge Ratio (QLD/ETF Calls) bearish sentiment is not as extreme as the SPX, but has matched the level seen before previous pullbacks.

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 Jan 29. No charts this week GDX or TLT.

With Fri close at SPX 3841, options OI for both Mon & Wed are very small compared to Fri EOM.  Here, we see some support at 3800 and 3825 and a decline into that area is likely.

Wed has somewhat larger OI where SPX shows extremely high P/C, but puts are way OTM.  First level of support may be hit at 3755.

For Fri, call resistance exists above SPX 3825 with put support levels at 3700 and 3725.  A test of the 50 SMA around 3725-35 seems likely.

IV. Technical / Other

First, I want to take a look a Bitcoin that seems to be putting in a fractal to its Dec 2017 blow off top, wks before the SPX Jan 2018 top.  If BTC's decline continues the INT target is 18K (2017 top), does this imply a repeat of 2018 for the SPX?  It does fit my LT SPX outlook with a 10%+ decline Q1 and a mid-year rally with more weakness by EOY.

Next up is the SPX P/C ratio. Since most of my work is on the SPX, I've always wondered why its P/C ratio seems so crippled. Below is the standard EMA chart.  Note how bearish sentiment turns low well before the SPX top then rises into the top.

While this is the same ratio from the data mining software using the 10 day MA.  The 10 day SMA tracks the 20 day EMA closely, but with less volatility, due to the higher EMA weights for current data.  What is evident when including puts & calls is that volume spikes tend to occur prior to INT tops, but this is not picked up in an ordinary P/C ratio.

And finally using the inverted function for puts, the volume changes are reflected in the put/call spread, creating a put/call "ratio" that is 10X more effective.  The low volume of puts and calls since the Mar 2020 selloff actually turns out to be a bullish indicator where the low SPX P/Cs recently actually show up as neutral to positive sentiment.

Conclusions.   The fact that we made it thru Wed without any new riots probably contributed to the SPX 50 pt surge and makes you wonder about Trumps prediction of a market crash if he lost, assuming you believed anything he said.  I was expecting a rally although not to ATHs.  Now that everyone has turned bullish again, we will have to see how next week goes, but a decline below the prior weeks low at 3748 seems likely before a stimulus fueled rally into mid-late Feb.

Weekly Trade Alert.   A decline down to the 50 SMA. possibly 3720-30, by EOM or early Feb should be a buying oppty far rally back to ATHs.  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
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© 2021 SentimentSignals.blogspot.com

January, A Month of Whipsaws

January so far has been a very unsettling month for politics, the economy, and the markets.  The month started with a leaked tape of POTUS eliciting election votes from a high ranking GA official that seemed to send the SPX into a tailspin, dropping to the 3660s then rallying sharply back to ATH above 3825.  In the mean time the US continues to be the worst hit of any country by the c-virus going from 350k deaths to over 400k in 2 weeks, now surpassing 3.5 years in WW2. (I found an interesting link to world CV stats here.)

Next, last week, POTUS (still insisting that he won the election by a landslide, how many football games would be called correctly if the winner were declared at halftime?) gave a stirring speech to "take back America" to his supporters before the electoral college vote that led to a ransacking of the Capitol.  However, markets were unfazed until apparently Biden's acceptance speech outlined a stimulus package that "only" increased individual support checks by $1400 rather than the $2000 Wall Street wanted.  Is the world now coming to an end?  Trader Joe apparently thinks so, as he is projecting lows below SPX 3000 in Feb.

Last weeks outlook was for a possible SPX top near 3840-60 (Update) that could start a decline down to the 3450-3600 area before another run higher, but my outlook has changed for the INT term due to the Dem victory for the GA Senate seats due to the potential for stronger stimulus.  Sentiment seems to bear this out with many options indicators showing the potential for a Jan-Feb 2020 type top where the mid-late Jan decline was only 3%.  Something similar this time may mean lows near 3700 at a rising 50 SMA, followed by marginal new highs in Feb if the new stimulus pkg is approved then a real "sell the news".

I. Sentiment Indicators

The overall Indicator Scoreboard (INT term, outlook two to four months) bearish sentiment was down modestly even with lower prices 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 only saw a slight decline as well.

Bonds (TNX).  Bearish sentiment in bonds rose sharply for the week as the TNX broke out over 1%.  Price patterns have a IH&S look with a rate target of 1.75 to 2%, an area that is likely to give stocks problems due to comparable div yields.

For the INT outlook with LT still negative, the gold miners (HUI) bearish sentiment actually fell for the week as prices declined, even as a pickup in inflation (+.4% for Dec CPI), helped push int rates higher.  Sentiment may be pointing to another sharp decline as seen last Oct-Nov.

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 picked up sharply last week, rising to a level comparable to the beginning of the mid-Jan 2020 decline.

And the sister options Hedge Ratio bearish sentiment rose even more sharply.

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 Jan 22. Also, this week includes a look at both the GDX and TLT for Feb exp.

With Fri close at SPX 3768, options OI for Tue shows mild put support starting at 3725 with very small call resistance in the 3750 and 75 areas.  Early weakness is likely.

Wed has somewhat larger OI where SPX shows sizable put support at 3750 and little call resistance until 3825.  A bounce toward the 3800 area is likely.

For Fri P/C is fairly large at 162% and a move into the SPX 3750-3800 or higher is likely.

For Fri 29 EOM is much the same as next Fri with more call resistance down to the 3750 area.  Put rollover will likely increase support with further weakness.

For Mar 31 EOQ shows a very bimodal distribution with strong put support around SPX 3550 and very strong call resistance at 3900.  This is very much in line with my call for a potential drop to 3450-3600, but as discussed will this be before or after another attempt at 3900.

Using the GDX as a gold miner proxy closing at 34.5, the Feb monthly shows declining put support down to 33 and a break below 32 could start a waterfall downward.

Currently the TLT is 151.8 with the TNX at 1.1%, the Feb monthly does not show the "smart money" posiioning shown for Jan exp, so there is a good chance the 151 support will hold with the potential for a rally at least to 155.

IV. Technical / Other

This week I introduced a new feature into the data mining program to use an inverted variable to allow for the equivalent to a put/call ratio with std variables (1/A - B or A - 1/B). Using two of the popular variables, I came up with something I call a Simple Dumb/Smart Money indicator.  Nothing is perfect, but this works better for "Buys" than the "Crash Indicator" and equally well for "Sells".  The current reading is a "Sell" but is it like Jan and Dec 2018 with an immediate move lower, or Sept 2018 and Jan 2020 where there were several weeks of lead time?  My vote is Jan 2020.  Vars are hidden to confuse the bots, but you can probably figure it out by comparing to earlier charts.

Conclusions.   The increase in bearish sentiment for the SPX last week was mainly in options which tend to be a ST indicator.  SPX options for next week indicates that early weakness toward 3725 is likely to be followed by a rally to 3775-3800 by EOW.  Two possibilities that seem most likely are a Jan 2020 pullback of about 3% to 3700  at the 50 SMA by EOM followed by a final Feb top below 3900 and a larger decline into Mar, or a continued decline into Feb to 3450-3600 that could come if the US decides to implement a 10 week lockdown in conjunction with supporting stimulus, following many of the EU countries with the outbreak of a new strain of CV.  My preference is the former.

Weekly Trade Alert.   A bounce toward SPX 3800 is likely after an early decline toward 3725.  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

Worst President Ever

US markets got off to a rocky start in 2021 with a positive open soon followed by a barrage of selling, driving the SPX fell from an opening high of 3770 to a low mid-day at 3663 before closing at 3701. The reason seemed to be a leaked tape of the "best President ever" spending an hour on the phone with the Georgia Sec of State trying to coerce him into "finding" 12k votes for Trump to reverse the Pres election results - a violation of Federal law. I am sure that Trump's loyal supporters will insist this is a hoax created by the "Commies", just like the coronavirus that at last count has killed 350k Americans or close to the 400k that died fighting in WW2. Europe had opened strongly after approval of an expanded trade agreement with "Commie" China.

Wed may have been the epitome of Trumps political career as he held a rally outside the White House to incite his supporters (er, biker thugs) to take back America that later led to a storming of the Capitol. The whole episode reminds me of the late 1920s movement of far right extremists, the "brown shirts", that eventually led to the creation of the Nazi Party. But never fear, the stock market is making new highs.

Last week I was looking for a small expansion of the trading range to about 3700-800, but the result was somewhat wider with a Mon 3663 low (close 3701) and a Fri high at 3825. It is possible that a Dem win in Georgia's Senate runoff may extend the topping process into Feb with prospects of add'l stimulus. This weeks Tech/Other Section takes a look at the latest CITI Inflation Surprise Index which shows a sharp increase in the West (US+EU+CA) but continued deflation in China and an update of Gold vs TNX for those that think higher inflation may be good for the PMs.

I. Sentiment Indicators

As mentioned last week, the regular sentiment indicators will be shown only for the last two years.  The overall Indicator Scoreboard (INT term, outlook two to four months) bearish sentiment remains in a tight range, similar to Jan 2020.  It is possible there will be a 5-10% correction Mid-Jan to mid-Feb with new highs to follow a second stimulus package.

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 with the increase in ST volatility.

Bonds (TNX).  Bearish sentiment in bonds saw a mild uptick last week as rates rose to the 1.1% level as forecast by last weeks TLT options OI following a Dem sweep in the Georgia Senate runoff.

For the INT outlook with LT still negative, the gold miners (HUI) bearish sentiment was mostly unchanged as prices rose initially on the Dem sweep, but fell back as int rates rose.

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 declined slightly last week and remains similar to Jan-Feb 2020.

And the sister options Hedge Ratio bearish sentiment also fell last week.

The INT term SPX Long Term (2x/DM) ETFs (outlook two to four weeks) bearish sentiment rose moderately and is similar to Jan 2020.

The data mining SPX ETF term structure (SSO vs CPCRev Calls) bearish sentiment reached the Sell level before the Jan and Oct 2018, Jan 2020 and Sept & Oct 2020 tops and has now reached the Sept 2020 level.  The Dec 2020 signal was a non-event.

The data mining SPX ETF hedge ratio (SSO vs ETF Calls) bearish sentiment was stuck below neutral for several weeks similar to Sept-Oct 2018 and Dec-Feb 2020, but last week dropped to the Dec 2018 level.  Noticeably no Jan and Dec 2018 saw double dips before a final top, indicating a possible dip followed by a new ATH before a larger decline.

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 Jan 15. Also, no charts this week for TLT or GDX as both were covered last week.

With Fri close at SPX 3825, options OI for Mon are very small except for puts at 3600 and 3650.  Above 3825 there is little call resistance.

Wed has very small OI where SPX also shows declining resistance above 3825.

For Fri options OI are moderate and ma influence weekly behavior.  Again there is small call resistance above 3825, but call positions between 3750-3800 may result in a decline to that level, depending on the rollover of puts during the week.

Using the GDX as a gold miner proxy closing at 36.5, rose initially into the 38-39 strong call resistance based on the prospect of more stimulus from a Dem victory in GA then declined back to neutral as rates rose (see Tech/Other).

Currently the TLT is 151.3 with the TNX at 1.10%, last week showed large put OI between 151-155.5 as contrarian "smart money" expecting a Dem win in GA and as a result the TLT fell 4%+ from 157.7 and the TNX rose from .92%.  TLT Jan 153 puts rose from $.6 Mon to a high over $2.


IV. Technical / Other

The data mining Equity P/C to Put spread has been shown to be a measure of "smart money" hedging with Sells several weeks before the Oct 2018 and Feb 2020 INT tops, and more recently shortly before the Sept & Oct 2020 pullbacks.  Late Nov 2020 only saw a two week trading range early Dec, however.  Currently, it is at the same level as Feb 2020.

CITI Surprise Inflation Index for Jan shows a flat. but positive infl for the US with EU and CA showing a strong rebound.  China is somewhat of a surprise, but one possible explanation is that the recent crackdown on debt at 250% of GDP vs the US at 150% was in anticipation of a Trump loss with higher rates from the Dems.

The price of gold (blk) has shown a strong correlation with the inverse TNX (red) over the past few years and may be a warning to gold bugs that sharply rising rates with likely offset a moderate inflation pickup as far as helping the PM sector.

Conclusions. A whirlwind of a week with a wider trading range that expected, mostly due to Trump's leaked attempt to undermine the GA Pres election results, but the resulting bearishness helped to push stocks higher in the end.  This week I am in agreement with OntheMoneyUK , where a sizeable pullback is likely to start as early as the middle of next week with a possible upside of about 1%, followed by a decline into mid-Feb.   Part of the reason for the decline (encouraged by Wall Street) will be to rally wavering support for more stimulus (aka WVA Senator) that could happen by late Feb.  You may also want to chck out Trader Joe for Fri & Sat, who makes an EW analysis pointing to SPX 3850-65 as a temporary top needing more time to complete.

My INT outlook has changed somewhat due to the Dem victory in GA.  There is now a possibility for the next decline to be like 2020 June, Sept & Oct declines, ie short with a new ATH to follow, but overall my outlook is tempered by rising rates.  This could be similar to 1987 where economic pickup early in the year led to strong stock prices and rising int rates.  When rates rose to match the yield on stocks, however, a swift eallocation into bonds occurred.  In 1987, it was the TNX rising to the ~6% level the same as the DJIA yield.  This time the SPX is llikely to be more important with a yield of 1.5% vs the DJIA at 1.8% (and the yield will be lower if prices rise).  The last 5 months rates have risen from 0.5% to 1.1% so it may not take long.


Weekly Trade Alert.   A high is likely next week, possibly around SPX 3860, with a decline likely into mid-Feb to 3450-3600.  Outlook for further stimulus and int rates will determine following outlook.  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