January, A Month of Whipsaws

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

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

Is 2020 Finally Over?

Welcome to the New Year.  IMHO we are on the cusp of something not seen in a great while - a real bear make that lasts more than a year, rather than the sharp downturns lasting only a few weeks that have been prevalent the last three years.  With sentiment as extremely bullish as it is now, this is the only thing that makes sense.

The focus next week will be on the Georgia runoff elections for two Senate seats.  Polls are showing the Dems with a small lead, while betting sites favor the GOP.  I decided to take a look at the bond option bets using the TLT OI for Jan 15 and it is showing the smart money betting on a breakout for higher int rates.  Target is about 153 for the TLT from 158 or about 1.1% for the TNX and appears to support a Dem victory.  Perhaps this will rattle markets.  

This is the last week that I will be showing the SPX indicators back to Jan 2018 since the charts are becoming too busy and next week will switch to a two year period.  In the Tech/Other section, several indicators are shown including the Equity puts and call and VIX Buy/Sell indicator.

I. Sentiment Indicators

The overall Indicator Scoreboard (INT term, outlook two to four months) bearish sentiment remains in a tight range as the SPX consolidates above 3700.

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 continues to slowly decline.

Bonds (TNX).  Bearish sentiment in bonds fell slightly lasy week as prices consolidated.

For the INT outlook with LT still negative, the gold miners (HUI) bearish sentiment fell sharply although there was little price change, possibly with hopes of higher inflation with a Dem POTUS.

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 rose slightly last week, but remains near recent lows.

And the sister options Hedge Ratio bearish sentiment was mostly unchanged.

The INT term NDX Long Term (2x/DM) ETFs (outlook two to four weeks) bearish sentiment continued to 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 8. Also, this week includes a look at the GDX and TLT for Jan exp. 

With Fri close at SPX 3756, options OI for Mon shows net put support from 3700-25 and strong support at 3675 with moderate call resistance starting at 3750.

Wed has somewhat smaller OI where SPX support/resistance is similar to Mon.

For Fri w/Dec jobs report, much the same with strong put support at 3700 and weaker call resistance starting at 3750.

Using the GDX as a gold miner proxy closing at 36, the exact neutral point.  Strong call resistance starts at 38, while small put support starts at 34.

Currently the TLT is 157.7 with the TNX at 0.92%, similar to late Oct when the TNX was at .75% before rising to .97%, smart money (contrarian) is taking a very large bearish put position that is targeting 155.5 then 153, where the TNX should be about 1.1%.

IV. Technical / Other

First, a look at the Equity puts and calls (relative to SPX avg vol) were down 10% for the week, but with SPX vol down 30% showed a spike higher.  Highs for both puts and calls were seen at the Jan 2018, Sept 2018 and Feb 2020 tops.

As an update on the VIX Buy/Sell indicator with a big jump in the SKEW on Fri dropped to -1.22 and may be a couple of weeks from the -1.5 SD official Sell level.

The SPX ETF hedge ratio (SSO/ETF calls) is similar to the options Hedge Ratio and at levels simlar to Oct 2018 and Feb 2020.  My feeling is that this is more of a fundamental top similar to Oct 2018 where an initial decline will likely see a consolidation before the final crash wave as in Dec 2018, where Mar 2020 was an event driven decline.

Conclusions.   Overall sentiment is showing that a major top could occur any day, but SPX options OI is still indication that many are still expecting a ST pullback below 3600 before a final blow off rally.  A more contrarian view is a continued distribution (rounded) top, possibly into mid-Jan.  With hedging still moderate, a crash wave is unlikely, while a 10-15% decline into late Feb, would likely be followed by a consolidation for 3-6 months that may cover a wide range similar to Nov 2018, before a larger decline.  One EWer looking for a more immediate decline is OntheMoneyUK from Dec 31.

With Bitcoin going up 10% a day, you have to believe anything is possible.  Next week could be pivotal for the economic outlook as control of the Senate is up for grabs, where a GOP win means more gridlock and a Dem win means stronger spending, but with higher deficits and int rates or higher taxes or both.

Weekly Trade Alert.  The next two weeks are likely to remain range bound between SPX 3700-800 into the Jan 15 optn exp with a breakout in TNX above 1% likely.  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

Something has to Change

Wishing everyone a happy and covid-free holiday season and a prosperous new year.  This weeks report will be somewhat shorter than normal as well as the time frames, looking only at the past year as the year draws to a close.

The first thing that jumps out when looking at the SPX is that prices seem to be following the rounded top scenario, similar to mid-2015, as mentioned as a possibility several weeks ago.  Many are looking at this as an ending diagonal with an imminent breakdown, likely targeting the 3500 area.  Springheel Jack discusses this option from an EW view.  SPX options OI still shows this as a possibility by Dec 31, but time is running out.

The Tech/Other section takes a look at the Tech Indicator Composite and the VIX Buy/Sell Indicator, now approaching an INT VIX Buy/SPX Sell.

I. Sentiment Indicators

The overall Indicator Scoreboard (INT term, outlook two to four months) bearish sentiment over the past six months looks like an elongated version of of the Jan-Feb topping process, inching higher last 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 may have bottomed early Dec similar to Jan.

Bonds (TNX).  Bearish sentiment in bonds from a ST perspective have been following the moves in rates closely.

For the INT outlook with LT still negative, the gold miners (HUI) bearish sentiment is somewhat more confusing as the peak was at price lows in Mar but at price highs in Aug.  Current levels are close to neutral.

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 for both option indicators also look like a longer version of the Jan-Feb topping period, last week dropping down to the level seen prior to the mid-Dec drop down to the SPX 3630s.
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And the sister options Hedge Ratio bearish sentiment is also hovering at levels seen at the Feb highs.

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 Dec 31. Also, this week includes a look at the TLT for Jan exp. 

Mon SPX drop of 100 pts at the open was probably a strong factor, but there have been a lot of ST puts added with Thur P/C going from 102% a week ago to 202% This w/ about 40k calls and 130k puts added during the week. As a result, this weeks P/C may be understated. I will try to update during the week.

With Fri close at SPX 3703, options OI for Mon shows moderate call resistance at 3725 and 3750 with put support starting at 3665.  Possible downside bias.

Wed has similar OI where SPX put support starts at 3650 and call resistance at 3700 and 3725.

For Thur EOM, now showing large put support at SPX 3500 and smaller between 3600-50 (likely will change during week) with call resistance at 3675 and 3700.  The potential still exist for a sharp drop to the low 3500s due to negative delta hedging.

Using the GDX as a gold miner proxy closing at 36 is down slightly for the week from 36.5 after dropping to 35.

Currently the TLT is 157.3 with the TNX at 0.93%, and is unchanged for the week after dropping to 155.5 and may be pushed up to 158 with positive delta hedging.

IV. Technical / Other

The technical indicator Composite (NYMO+TRIN+NYAD+NYUD) is somewhat interesting, for one we have now reached the neutral level after an extreme low similar to Jan (see Nov 21 for LT), and two the last four lows have alternated between marking the exact top for June and Oct, while leading by about a month with lows in mid-Aug and early Dec.  Does this mean a decline starting mid-Jan?

The VIX Buy/Sell Indicator (VXV/VIX & SKEW) is more of an INT indicator, specifically to forecast a rise in the VIX, and at -1 SD is at the same level as Jan and May 2018, although -1.5 is considered an official Sell.  The last Sell in Aug, prior to the Sept & Oct declines only resulted in an 8% decline in the SPX. but the VIX did reach 40, the same level as in Dec 2018.

Conclusions.   A significant top is approaching, the only question is when.  The last three years (prior posts) have shown megaphone patterns in both sentiment and prices where sharp declines have resulted in extreme high bearish sentiment, only to be followed by more extreme rallies and extreme low bearish sentiment.  This must end some time, perhaps this was just the result of Trump's policy of creative destruction where his policy of creating havoc forced the Fed to be more active.

Next year, I see a significant change with a more stable administration, but likely the beginning of a 1.5 to 2 year bear market with increasing risk in the second half of 2021, possibly due to higher taxes and more regulation, especially for large techs.

Weekly Trade Alert.  Time appears to be running out for EOM options gamma event to test the low SPX 3500s, but the VIX Buy/Sell indicator is telling us that this is more of pay me now or pay me more later situation.  Also, the rounded top implies limited upside and downside, probably inuo mid-Jan.  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