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
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