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