Onward and Upward

Not a lot to discuss this week.  As expected, int rates stabilized and a result the NDX rallied, missing the lower retracement target of 13.2k by less than 100 pts.  With the techs and industrials rallying, the SPX was pushed to new ATHs by +10 pts at 3960 before backing off.  The May 2015 analog remains in play with last weeks ATH possibly corresponding to the late Apr ATH.  If so, a two week pullback of about 3% should follow into the EOM and starting after Fri optn exp.

The only sentiment change of significance is a decline in the Hedge Ratio from higher levels that have supported recent rallies.  In the Tech/Other section, I discuss two indicators that seem to point to a Sept-Oct 2018 type top, where we saw a high volume (distribution) top on Sept triple witching optn exp followed by a small pullback and a slightly higher high the next month.  Next week, I will look at the new data mining options indicators that still support the rounded top with a sharp decline unlikely for a number of weeks.

I. Sentiment Indicators

The overall Indicator Scoreboard (INT term, outlook two to four months) bearish sentiment has retreated sharply from the recent spike, but still result in a rally similar to that off the Jan lows.

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 also declined sharply and continues to put in what appears to be a rounded bottom similar to late 2019.

Bonds (TNX).  Bearish sentiment in bonds finally saw a decent spike with the Mon sharp selloff and te pause in rates between 1.5 to 1.75 % is similar to Jan-Feb 2020 and may be preparing for a push to 2%.

For the INT outlook with LT still negative, the gold miners (HUI) bearish sentiment actually rose last week as bulls seem to be recognizing the threat of higher rates, but the rise in bearish sentiment may extend the rally as seen in Dec 2020.

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 continues to reflect the "no fear" attitude of the Robinhood traders and continues to move in a narrow range of low sentiment.

And the sister options Hedge Ratio bearish sentiment continues to be one of the more accurate indicators of ST market moves as near SELLs have preceded pullbacks while neutral readings have been enough to support bounces.

This week I wanted to look at the INT term BKX 3x ETFs (outlook two to four months) bearish sentiment. You have probably noticed the outperformance of the DJIA on days that int rates rise. Much of that is due to the gain in money center banks who profit from borrowing ST and lending LT and with the FED keeping ST rates near zero, higher LT rates increase profits. As a result,  from a low in Mar 2020 near 55 to a recent high over 120, the BKX has now outperformed the NDX and sentiment has reached the SELL level.

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 Mar 19 and EOM for SPX only.

With Fri close at SPX 3943, options OI for Mon is very small and is showing the potential for whipsaw movement between 3950 and 3900 with a slight bias to below 3925.

Wed has somewhat larger OI where SPX has very small OI between 3850 and 3950 with a small bias to the 3900-25 area.

For Fri PM, SPX has moderate put support up to 3900 and fairly large call resistance at 3950 and above that should contain any rallies.

For Mar 31 EOM, there is a very large strangle at SPX 3500 and 3900 where someone is betting on SPX being locked in that range.  It is very likely that there will be a pullback below 3900 by the EOM.

Using the GDX as a gold miner proxy closing at 33.1 is now up about 8% from its low at 30.5, nearing the 10% expected rally.

 
Currently the TLT is 136.1 with the TNX at 1.62%, where a steepening yield curve has pushed LT rates higher and bond prices lower.

IV. Technical / Other

This week I want to start off with a look at the Equity Puts & Calls, then complete the NDX ETFs with a look at the 3x ETFs.

The Equity Puts & Calls have both dropped sharply with the pullback in the NDX.  It's interesting to compare the three INT tops from Jan and Sept-Oct 2018 and Mar 2020.  Both Jan 2018 and Mar 2020 corrections started with high levels of speculation in both puts & calls and the result was a crash, while Sept-Oct started after a sharp decline in speculation as seen today, and the result was a more complex correction lasting several months.  Personally, I am expecting something more drawn out like late 2018.

As shown in the update for Mon, I cancelled the Buy for the NDX based on the 2x ETF indicator after noticing that they were only 5% of total $ volume and not enough to drive the market.  As shown below, the growth of the 3x ETFs has been huge the last three years.

The 3x ETF bearish sentiment also appears to show a Buy at the recent lows, but the upward slope had me concerned that part of sentiment trend was due to growth in volume, so I decided to use an NDX volume adjustment to replace the SPX adjustment (mostly to adjust for holiday volume and half days).

The result after the NDX volume adjustment looks more reasonable having normalized the ETF $ volume with the recent rise in bearish sentiment matching that of the Sept 2020 pullback of about the same %.  One thing that stands out is that the SQQQ/TQQQ ratio rose on much lower volume in the ETFs and looks more like May and Sept-Oct 2018 than Sept 2020.

Conclusions.   Last weeks ATH blew up the EW ending diagonals that most were looking for, forcing many to flip from bearish to bullish (again).  Many fail to realize that Eliot's work was developed in the 1920s and 30s as a way of estimating sentiment with the only technical requirement being the ability to draw a straight line and count to five.  However, with todays technology and database access you have to expect some short comings in the old ways.

 
Weekly Trade Alert.  There could be a small pullback toward SPX 3900 Mon-Tue as a setup for a rally into options exp Fri, but Fri should at least see a retest of the 3950 area with a 3% pullback to the mid-3800s the next two weeks.  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
Article Index 2017 by Topic
Article Index 2016 by Topic

Long term forecasts

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