Entering the Doldrums?

Last week was somewhat weaker than expected as the SPX ignored options OI support levels and did make a successful retest of the lows the prior week before closing over Fri support level of 4150.  As seen in the Tech/Other section this may be due to the rapidly declining bearish options sentiment for the SPX indicated by the std var put-call spread and caused by rising SPX options volumes.  In fact both the SPX 2X ETF and put-call spread both indicate that bulls are mostly out of gas, while a new volatility indicator shows that a period of cooling off of volatility is likely.  Are we about to enter the summer doldrums?

A new overall INT indicator (3-6 mns) is introduced this week as a possible replacement for the overall Composite.  This leaves me with a gap in the 1-2 mn period as a ST/INT indicator and I am watching several alternatives.

There seems to be less chatter about the melt up/melt down scenario, while my 2015 rounded top scenario is looking more likely.  One week left for Avi's SPX 4400 target in May which is now looking very doubtful.

I. Sentiment Indicators

The overall Indicator Scoreboard (INT term, outlook two to four months) bearish sentiment seems to have peaked at similar levels to the Jan and Feb-Mar pullbacks, but below that of Jan 2020.  A marginal ATH is possible.

This week I am introducing the leading contender for a replacement of the overall INT term indicator using the data mining components. There are three separate components. First is the SPX and ETF put-call indicators (30%), second the SPX 2X ETF ratio (40%), and third a volatility indicator (30%) which combines the ratio of the ST SPX options volatility (VIX) to the ST VIX options volatility (VVIX) with the VXX $ volume. A complete description is shown in Tech/Other.

What I like most about the new INT composite (3 to 6+ months) is that less extreme sentiment is shown during ST pullbacks (< 10%), therefore highlighting major turns.  The fit to future returns (Tech/Other) is also much higher.  This chart also seems to highlight my preferred alternation pattern with crashes following the extreme low sentiment of early 2018 and 2020, While current sentiment seems to be more similar to mid & late 2018, pointing to a more complex correction although likely stronger and longer than late 2018.

The NYSE volume ratio indicators (NYDNV/NYUPV & NYDNV/NYDEC) is a very ST (1-4 week) indicator including the VXX $ Vol as a possible replacement for the above ST Indicator. Weights are 80%/20%.  Currently, sentiment is near neutral, supporting more sideways action.

Bonds (TNX).  Bearish sentiment in bonds surprisingly saw a strong move higher and in agreement with the options OI for TLT supports more consolidation or lower rates.

For the INT outlook with LT still negative, the gold miners (HUI) bearish sentiment is presented in a new format using the data mining software to add the inverse TNX rate to the ETF ratio.  The large divergence with prices and sentiment is likely to cause a price reversal soon.

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 saw a strong move up over the last two weeks and should support a move to ATHs in June.

And the sister options Hedge Ratio bearish sentiment remains low, however, indicating continued volatility is likely.

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 May 28. Also, this week includes a look at the GDX and TLT for June exp. 

With Fri close at SPX 4156, options OI for Mon is light but indicates call resistance at 4200+ and moderate put support at 4150 and below.

Wed has somewhat smaller OI where SPX again shows put support at 4150.

For Fri EOM with Mon a holiday, 4200+ has strong call resistance with put support starting at 4165 and a strangle at 4175.

Using the GDX as a gold miner proxy closing at 39.3, a month ago with GDX at 36, I pointed out the only call resistance was 6K OI at 37 for May, but now for June we have 40K call OI resistance at 40 with very minor support until 35.  This is a complete reversal and should see prices fall.

Currently the TLT is 137.7 with the TNX at 1.63%, overall P/C has risen from 250% to 380% and is likely to pressure prices higher and rates lower, even with higher inflation. 

IV. Technical / Other

The potential replacement for the overall INT indicator is shown below by components.

The table below shows the correlations with future returns compared to the old CompositeWTD.  Correlations are over twice as high and in the 3-6 month periods near 70%.

Looking at the SPX and ETF options component, the sharp decline in bearish sentiment for the SPX may be contributing to the weakness compared to the options OI.  We are now at or below levels seen at the Sept-Oct 2018 top, but well above the pre-crash levels of early 2018 and 2020.

Comparing the SPX put-spread shown above to the SMA options data with the "normal" ratio shown on the third axis shows the weakness of the normal ratios.  P/C ratios rose with rising volume prior to the late 2018 and early 2020 tops, while this is captured as declining bearish sentiment with the std var put-call indicators.  One possible reason is that as rallies mature options investors switch from undervalued sectors to general market exposure.

Looking at the SPX 2X ETF ratio as EMAs, we see an extreme level of complacency for INT investors comparable to that seen in early 2020.

The final component as an INT volatility component saw sentiment drop to levels comparable to late 2018, but not early 2020.  Current levels are comparable to July 2018.

Conclusions.   Overall sentiment remains consistent with another ATH.  SPX appears to be forming a triangle as a daily pattern that would target about SPX 4275 mid-June if an apex is formed near 4125.  This would be an ideal location for the ATH of a rounded top, but may still require several months before significant downside is seen.  Impetus for continued rally in stocks and bonds with weakness in PMs may become evident with next months inflation surprise release.  Sentiment seems to be most consistent with some evidence of a "cooling off" period for inflation.

Weekly Trade Alert.  Expecting to see more consolidation next week between SPX 4125-75.  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

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