Dems Turn Conservative

The big news for the week was that conservative Dems sided with the GOP, effectively blocking the large $2T stimulus package paid for with an increase in corp taxes.  The counter proposal is a much smaller $750B with no new taxes.  This was cheered by the bond market as being non-inflationary and the TNX fell to a low of 1.45% from 1.65% the previous week.  The lower rates spurred a rally in tech stocks, but you wonder how this effects the broad market rally in Mar-Apr based on higher stimulus expectations.

The about face by the Dems took me off guard although I had been expecting higher prices for the SPX into mid-June.  The ST pullback due to higher inflation news failed to materialize as the lower stimulus supported the "transitory" inflation outlook.  However, one of the best economic forecasters of the past decade, Prof C. Harvey of Duke Univ has discussed in a recent paper why he thinks that annual CPI inflation will still surprise to the upside at 4-5%.

In Tech/Other this week I will discuss some volatility measures including the VIX Buy&Sell (using the SKEW) and the VXX $ vol.  Two weeks ago I mentioned the high level of the SKEW and the following week  iSPYETF did an in depth feature as a "Black Swan" warning, but this weeks conclusion is that the VIX/VXV confirmation is needed for a Sell signal.

I. Sentiment Indicators

The overall Indicator Scoreboard (INT term, outlook two to four months) bearish sentiment has fallen sharply after the rally to ATHs following the May pullback.

The ST Composite is a ST (1-4 week) indicator includes the NYSE volume ratio indicator (NYDNV/NYUPV & NYDNV/NYDEC) and the VXX $ Vol/SPX Trend. Weights are 80%/20%.  This indicator continues to bounce around neutral similar to Aug 2020 and may indicate a ST top next week.

Bonds (TNX).  The recent rise in bearish sentiment in bonds was proven correct with last weeks fall in int rates, but the reason was a surprise as conservative Dems sided with the GOP to block more liberal stimulus financed by higher corp taxes.

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.  Here, lower int rates was not enough to offset low bearish sentiment as prices fell.

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 was relatively unchanged as the SPX moved to new highs.

And the sister options Hedge Spread bearish sentiment as a ST/INT indicator (1-3 mns) continues to work its way lower and seems to be following a pattern seen before the Feb-Mar and May pullbacks.  This may indicate a pullback thru the EOM after next weeks Qtrly optn exp.

Taking a look at the ETF ratio of the INT term SPX INT (2X) ETFs (outlook two to four mns) as bearish sentiment continued to rise even as the SPX made ATHs, indicating that a pullback into the EOM would be a BTFD oppty.

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 Jun 18.

With Fri close at SPX 4247, options OI for Mon shows call resistance at 4250 is likely to limit gains with put support beginning at 4225.

Wed has smaller OI where SPX shows modest call resistance starting at 4225, but little above until 4300.  Put support starts around 4160.

For Fri PM, there is more call resistance between SPX 4200 and 4275, and a move over 4250 may result in positive delta hedging up to 4275.  There is little put support until 4150.

For EOM Jun 30, the 45k call OI at 4115 is likely to act as a magnet to pull prices down to that level by the EOM.

IV. Technical / Other

This week I want to revisit the VIX Buy & Sell indicator (VIX/VXV + SKEW).  My LT view has been for several months that we were likely to see a rounded top similar to 2015 with an outcome similar to Oct-Dec 2018, and the VIX Buy & Sell indicator certainly looks the same, although now at lower levels.  However, it took several months for a top to arrive and as shown in the next chart, this did not happen until the VIX/VXV reached the same level.

Another way of looking at the SKEW and VIX/VXV is the difference (B-A), where a higher (inverted) SKEW produces less bearish sentiment and most of the tops are "confirmed" when the VIX/VXV drops to a lower level.  The exception was the Mar 2020 top.  Current levels are similar to Aug 2018.

One of the other volatility indicators, the VXX $ Vol produced a strong Buy at the May lows and has not yet reached the Sell level but is similar to Aug 2018.

Conclusions.   The recent decline in int rates has changed my ST outlook in that lower rates will likely sustain a higher level of prices, but the lower stimulus increases the possibility of negative growth surprises by the fall.  The result may turn out to be an SPX range of 4050-4100 for the downside and 4250-4350 to the upside for the summer.

Weekly Trade Alert.  Next weeks qtrly optn exp could see a high in the 4270-80 area with the possibility of a pullback to 4100-25 by the EOM.   A similar setup several months ago saw a low a few days before the EOM, so timing is not exact.  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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