Welcome to Never-Never Land

The stock market is beginning to look like a magical kingdom of fairies and pixie dust where stocks never-never go down.  There were several interesting reads at ZH last week, this one discusses the global investing euphoria over the last 5 mns (since first stimulus check) where equity inflows equaled the previous 12 years, while another, points out the probable letdown in the 2nd half of 2021 as the effects of stimulus wear off.  As shown in the main section, this is showing up in sentiment as bears are being forced into hibernation.

Last weeks price guidelines were easily exceeded as stable int rates were followed by a 5% rise in the NDX pulling the SPX over 4100, but most of the gain occurred the first two hours Mon and the last two hours Fri.  This weeks SPX coverage is over a somewhat shorter timeframe, starting 1/2/2019 rather than 1/2/2018.

This sentiment measures are nearing dangerous levels and seem to setting up for the "sell in May" event discussed over the couple of weeks.  A likely downside target is SPX 3800-50 or about 300 pts.  The Tech/Other section includes coverage of the VIX Call indicator that shows similar levels prior to the 7-8% declines of Sept-Oct 2020, an update of the CPCRev composite put-call indicator, and a LT look at the volume indicator, $NYUPV/$NYDNV, that seems to line up with an INT top in June.

I. Sentiment Indicators

The overall Indicator Scoreboard (INT term, outlook two to four months) bearish sentiment saw a sharp ST decline and remains at dangerous levels compared to before the pandemic.

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 also showed a sharp downturn, now about the same as the highs of Jan, Sept and Oct of 2020.

CITI Surprise Inflation Index for Apr (Mar data) shows a slight decline for the US and EU which probably helped bonds, but a pickup in China and Emerging likely means higher import costs down the road.

Bonds (TNX).  Bearish sentiment in bonds saw a slight uptick.

For the INT outlook with LT still negative, the gold miners (HUI) bearish sentiment surprisingly increased and may mean higher inflation numbers ahead that may help the miners, but pressure bonds and stocks into May.  Last weeks PPI certainly supports this idea.

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 decline, now lower than Jan 2020 and closing in on the post-pandemic lows of Sept & Oct 2020.

And the sister options Hedge Ratio bearish sentiment has also started to sharply decline, nearing the Jan 2020 lows, but still above Sept & Oct 2020.

The INT term SPX Long Term (2x/DM) ETFs (outlook two to four weeks) bearish sentiment has been falling more slowly nearing a double bottom from Dec 2020 with several double bottoms seen prior to downturns, including early Jan and late Feb 2020 and May and Sept 2020.

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 Apr 16 and EOM.  No change for GDX or TLT.

With Fri close at SPX 4129, options OI for Mon are small with the strongest call resistance around the 4150 area and substantial put support at 4085.

Wed has very small OI where SPX has strongest call resistance at 4085 and very little put support until 4000.

For Fri call resistance is moderate and strongest between SPX 4100 and 4150 that may lead to weakness later in the week.  Over 4150 there is little resistance and below 4100 no support is seen until below 4050, so a break either way is possible.

For EOM, last months call resistance proved futile, but declining overall bearish sentiment will impede prices at some point, likely when rates begin to rise again.  Here, a move below SPX 4050 shows as likely with support at 4050 and 3950.

IV. Technical / Other

One of the biggest risks indicated ST (1-4 wks) is the VIX Call volume shown below with the 10 day SMA.  Last week saw a sharp increase in volume with the SMA jumping from 180K to over 300K for only the 3rd time since Jul 2020, the previous being the Sept 2020 and Feb 2021 tops.  The sharp increase is similar to that prior to the Oct 2020 and Jan 2021 tops.  Increases during rising prices are usually smart money expecting a reversal, while increases during declining prices are dumb money expecting a trend continuation.

For the INT term, the combined put-call indicator CPCRev (Equity+ETF+SPX) continued to decline sharply last week, now reaching the level of the Jan top.

For the LT, my favorite volume indicator, $NYUPV/$NYDNV, has been dropping sharply and now reached a level similar to early Jan 2020.  Although less precise than the Rydex Fund Bear/Bull ratio shown last week (which made a lower low), a decline to 1.5 is usually seen before an INT top with a lead time of 1-2 months before a major downturn as in Sept 2018 and Jan 2020.  The lead time before the Jan 2018 top was 9 mns, however, due to Trumps tax cuts.  If like Sept 2018 and Jan 2020, this indicates a probable June top.

Conclusions.   Over the past two weeks, I have been discussing the possibility of a ST top around mid-Apr following the latest stimulus payouts with a likely "sell in May" to follow.  Sentiment is now agreeing with many now focusing on a continued rally to SPX 4800-900 as "stocks never-never go down".  Whether it's disappointing earnings or a pickup in inflation pressuring bonds is hard to tell, but a negative surprise is increasingly likely.  As additional warning, the ST VIX call indicator is now flashing red with a typical lead time of 1-2 weeks before a sharp downturn.  NYSE volume does not, however, support this as an INT top and that may not occur until June.

Weekly Trade Alert.  Higher prices are still expected into next week, but possible hiccups may occur with the release of CPI on Tue and earnings throughout the week.  A downside target of SPX 3800-50 is possible by mid- late-May after highs in the 4150-200 area.  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

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Who Said You Can't Buy Love

No I'm not referring to certain FL congressmen, but to investors who have fallen in love with gov't handouts, both from the Fed and Congress. Last weeks romp over SPX 4000 was in response to additional trillions in stimulus promised by Biden's new infrastructure plan (shades of FDR), while muted response by the bond market was followed by an explosion upwards by tech stocks.

So far it's hard to tell if this the beginning of the "crash up, crash down" scenario as we've seen repeated since 2018, the beginning of the mythical third wave tp SPX 5-6K as some EW analysts are calling for, or something else. With bearish sentiment as low as it is both INT and LT, it's hard to envision the third wave continuation, but the other options are possible.

In the DM/SM section is a review of the SPX and NDX ETF ratio indicators that show the potential for more ST rally in the NDX, but more of a warning for the SPX. In the Tech/Other section, shows the Tech Indicator composite following a 6-week cycle in 2021 with a ST top due mid-Apr and a rare SELL by the INT Rydex Fund Bear/Bull ratio that has preceded each INT top since Jan 2018.

I. Sentiment Indicators

The overall Indicator Scoreboard (INT term, outlook two to four months) bearish sentiment remains at very low levels with very little change 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 also remains at low levels with only a slight decline for the week.

Bonds (TNX).  Bearish sentiment in bonds has also declined modestly as rates have stabilized in the expected range of 1.6-1.5%.

For the INT outlook with LT still negative, the gold miners (HUI) bearish sentiment fell sharply as prices fell early in the week then rallied Wed-Thur, but lower sentiment is expected before a resumption of the decline.

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 continued to fall, inching closer to the record levels seen at the Sept & Oct 2020 tops.

And the sister options Hedge Ratio bearish sentiment continues to hover in the mid-range of the past few months with no immediate direction bias.

The INT term SPX Long Term (2x/DM) ETFs (outlook two to four months) bearish sentiment (using the data mining software as a test) did see a sharp downturn with the last few months (since Dec 2020) in a similar pattern to what was seen in May-Oct 2018.

The ST term NDX Short Term (3x) ETFs (outlook two to four weeks) bearish sentiment may help explain the recent strength in the NDX along with stable rates as some are expecting a retest of the highs that could carry the SPX to 4200-300.

The INT term NDX Long Term (3x) ETFs (outlook two to four months) bearish sentiment is somewhat less bullish, however, as the increase in bearish sentiment from the Jan lows is about the same as that to the Sept 2020 top that may indicate a ST top is near.

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 Apr 9.  No charts for GDX or TLT.

With Fri close at SPX 4020, options OI for Mon are very light except for the strong put support at 3900, but there is moderate call resistance near the Fri futures indicated level at 4040 with a slight downward bias toward 3975.

Wed has smaller OI where SPX is showing moderate call resistance at 4050 and put support at 3900.

For Fri, we see the largest OI for the week where there is a clear downward bias from call resistance from 4000 to 3950 with put support appearing in the 3900-50 range.

IV. Technical / Other

From a ST perspective the Tech Indicator composite (NYMO+TRIN+NYAD+NYUD) has down a good job in weakly trending markets as seen this year where about a 6 week cycle could indicate a ST top mid-Apr.  Early sentiment spikes at the beginning of a up/down trend as in Jun & Nov 2020, similar to the VIX $ Vol, tend to be misleading.

(from Thur update) One of the more reliable (100%) indicators of an INT top (10%+ correction) for the SPX since Jan 2018 is the Rydex Fund Bear/Bull ratio. This week it reached the SELL level of 3.5%. Previous lead times have varied from 1 week in Jan 2018, 1 month in Oct 2018 & 2 months Dec 2019.  One interesting aspect is that the increasing lead times have been followed by increasingly large declines.  This may fit into the scenario of an Apr top followed by a 6-7% "sell in May decline" with another rally into the June optn exp to test/best ATH before a possible 40% decline that could extend into 2022.

Conclusions.   Little change in the primary sentiment indicators last week allow for continuation of the current trend (up).  SPX options Oi are relatively small M-W, but stronger on F with an indication of an early week range of 4000-50 and likely 3950-4000 by Fri.  A pullback this week is likely a setup for at least a ST top optn exp Fri Apr 16, but with FOMC on Apr 27-28 more strength can be seen into EOM.  Following the 1929 stock market crash with record unemployment and decline in growth, strong monetary and fiscal stimulus led to a complete economic recovery by 1937, but an increase in inflation to the 5-6% range resulted in a bond market crash and an ensuing stock market decline of 50%.  1937 also included the famous Hindenburg crash.

Weekly Trade Alert.  A modest pullback is expected next week to SPX 3950-4000 before a move up to or beyond the ATH by Apr 16..  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

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Strangle Broken

Last week the SPX followed followed my guidelines almost perfectly - until the last hour of trading on Fri.  Last week's SPX option OI showed the potential for a strong rally Mon with large put support at 3940 and the day started out strongly with a rise into mid-aft to 3955 before closing at support at 3941.   With an expected range for the next two weeks of 3850-3950 based on the large EOM call OI at 3900, the SPX began to pullback, falling to a low Thur AM at 3854 and began to rally.  Reaching 3945 by mid-Fri. a pullback began to 3915 before an explosive rally began, up 40 SPX pts the last hour.

What happened?  I remembered reading earlier in the week about a potential gamma-related short squeeze due to falling VIX discussed by Nomura's C.McElligott at ZH.  It's a little bit over my head, so don't be surprised if you don't understand all of it.  Then again late Fri, they came out with another report predicting a large rally on Mon 29th targeting the SPX 4000 area, and likely what we saw was front-running and/or short covering by their clients before it was released to the public on ZH premium.  In case you haven't noticed, both ZH and MW have starting using "premium" releases, but a quick google of the title will show links to free versions.  The second part of their forecast is the "crash up, crash down" similar to their mid-Feb forecast.  I am willing to move my range up to SPX 3900-4000, but I still think it is still too early for a "crash".

This week in Tech/Other see an update of the aa mining composite put-call indicator and a possible volatity indicator.

I. Sentiment Indicators

The overall Indicator Scoreboard (INT term, outlook two to four months) bearish sentiment increased slightly last week, but remains near its 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 also increased slightly last week, but remains near its lows.

Bonds (TNX).  Bearish sentiment in bonds has fallen significantly even though rates remain near recent highs, indicating that the highs are not likely to hold INT.

For the INT outlook with LT still negative, the gold miners (HUI) bearish sentiment was relatively unchanged.

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 fell sharply last week as options call speculators look at every dip in prices as a BTFD oppty.  Not good LT.

And the sister options Hedge Ratio bearish sentiment fell slightly last week providing weak support for the market.

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 Apr 1, markets are closed for Good Fri Apr 2. Also, this week includes a look at the GDX for Apr exp. 

With Fri close at SPX 3975, options OI for Mon is mixed with moderate put support at 3900 and call resistance at 4k.  Put support at 3950 may allow a move to 4k, but a break below could fall to 3925.

Wed EOM has somewhat larger OI where SPX strangle collar at 3900 appears broken and call resistance at 4K is likely to provide strong resistance.   SPX 3950 or lower is possible.

With SPX somewhat ambiguous for Wed, I decided to take a look at the SPY ETF OI where SPY at 396 (1/10 SPX less div payout diff) has large call resistance at 395 that will likely put downward pressure on prices.

For Thur there is only light OI, but it is indicating lower prices for the SPX toward 3925-50.

For Mon Apr 5, my biggest argument against a "crash" following Fri jobs report as speculated by Nomura is the higher put support at SPX 3900, although a pullback below 3975 looks likely.

For EOM Apr 30, it's too early to draw strong conclusions, but the most obvious symptom is that unlike prior months which showed OTM put support, now we see a switch to OTM call resistance (a likely cause of VIX dropping) as call option buyers are becoming overconfident.

Using the GDX as a gold miner proxy closing at 32.7, put support at 31.5 and 32.5 may provide a slight upward bias with call resistance at 33.6 and 34.5.

Currently the TLT is 136.7 with the TNX at 1.66%, as forecasted rates seem to be consolidating between 1.6 and 1.75%.


IV. Technical / Other

This week I want to take a look at a couple of the data mining indicators - the Composite Put-Call indicator (Equity+ETF+SPX) and a volatility indicator.  First the Composite Put-Call indicator, I'm sure that many doubted the positive implications when I first showed this several weeks ago, nut so far it has proven accurate and has only now dropped to neutral, several weeks away from a Sell.

This is the equivalent using the composite with EMAs.

This is the ST composite with EMAs.  We appear to be at the same level as late Dec 2020, 1 month before the Jan top.

This is a volatility indicator using the VIX Buy & Sell (SKEW + VXV/VIX) and VIX Put/Call.

This is the ST volatility indicator with EMAs.  Here, we are the same level as the Jan top, but not close to the level before the larger declines in Sept and Oct 2020.

Conclusions.   Bearish sentiment continues to nosedive in the options marketbut enough hedging seems to exist to support the markets ST.  The overall outlook of a rounded top that may stretch over several more months still seems more likely than the melt up-melt down scenario, but identifying an exact top remains elusive.  

Weekly Trade Alert.  Prices may continue higher on Mon, but a breakout over SPX 4k seems unlikely.  Fri late rally could be due to Nomura's forecast of a ST gamma squeeze that targets SPX 4k, but a pullback toward 3900 may follow. 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
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Fed-a-Palooza

I have to start paying more attention to FOMC meetings.  As an economist, I ignored all the hype about "yield curve control" without realizing that it was just a bull trap.  As a result Wed saw the SPX hit my INT/LT target of 3980-90 and then reversed sharply with the rise in TNX over 1.75% and the late selloff in the NDX.  The Sell for the BKX was timely since it ended down 1.5% for the week even with higher int rates.  The subsequent decline to SPX 3886 probably means a trading range for the rest of the month between 3850 and 3950.

Unfortunately, we did get the high vol day Fri, but with prices on the downside, it was hard to tell if it was accumulation or distribution.  One possibility is a retest of the highs in Apr, a 6-7% decline in May, then a rally back over SPX 3950 in June before a larger downturn.  The June TLT options OI seems to indicate a potential int rate consolidation that could support the SPX thru June.

In the Tech/Other section this week I look at some ST indicators using the EMA averages recently added to the data mining software.  The new options put-call indicators were little changed and should be covered next week.

I. Sentiment Indicators

The overall Indicator Scoreboard (INT term, outlook two to four months) bearish sentiment surprisingly fell last week, although the swiftness of the post-FOMC may have caught bears off guard.

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 was down much less for the week.

Bonds (TNX).  Bearish sentiment in bonds surprisingly dropped even as rates rose to new highs for the year, possibly due to stock volatility, hitting the 1.75% target mentioned previously.

For the INT outlook with LT still negative, the gold miners (HUI) bearish sentiment fell sharply as prices rose modestly as expected.

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 also fell sharply. now at the level seen prior to the Jan pullback.

However, the sister options Hedge Ratio bearish sentiment fell early in the week but did bounce back on the late week selloff.  See Tech/Other for a ST close up.

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 26. Also, this week includes a special look at the TLT for Apr and Jun exp.

With Fri close at SPX 3913, options OI for Mon shows moderate put support at 3900 and 3940 and seems to indicate a strong bounce to start the week up to the SPX 3940 level.

Wed has smaller OI where SPX has call resistance at 3950 and put support at 3850, in between are mostly hedged positions with a slightly positive bias up to 3900. A move back down toward 3900 is possible.

For Fri there is a very large straddle at SPX 3900 with a net put (positive) bias of 5000 that should keep prices above that level. SPX 3900-50 is mostly straddles with only a slight positive bias and call resistance above 3950.

For the EOM, the large strangle at SPX 3550 and 3900 is still likely to push prices below 3900.

Currently the TLT is 134.7 with the TNX at 1.73%, at this point it is difficult to tell if the large put position at 125 & 130 are smart or dumb money, now that the investing community has recognized the trend of rising rates.

To try to clarify, I decided to look at the EOQ for June since the EOQ seemed to be the "smart money" from previous quarters.  Here, we see a large range of high put positions extending from 125 up to 145 with almost no call resistance.  My take on this is that the puts are likely to provide support in the 130 to 135 range, or stabilize near current levels.

IV. Technical / Other

This week I want to look at a new feature added to the data mining software, the ability to use ST EMAs as a move one step closer to replacing the original program. This includes "close ups" of the DM/SM options indicator and hedge ratio, and the ST composite indicators Smart Beta P/C and VXX $ vol.  The following is to show compatibility with the regular DM/SM indicator.

The ST DM/SM options indicator from July 2020, shows a downward trend similar to July 2020 and Jan 2021 that may indicate several more weeks before a sharper downturn.

The ST hedge ratio remains near neutral and is likely to see lower levels before a sharp downturn.

The ST Smart Beta P/C is even more positive and suggests more of a rally, possibly to retest ATHs before a sharp decline.

The ST VXX $ Vol is in a moderately rising trend, but seems to be a better indicator of bottoms than tops and even then shows spikes on the first leg down about half the time.

Conclusions.   My oulook last week was topsy-turvy as the market's direction followed the exact opposite of int rates, but the expectation of a rally over SPX 3950 before a move below 3900 was correct.  I see little contradicting the outlook for a rounded top, but with last week's high of 3984 within the 3980-90 target range, the INT top may be in, although a challenge of that high is likely in Apr.  Otherwise, the remainder of Mar is expected to pivot around 3900, roughly in a range of 3850-3950.

Weekly Trade Alert.  A rally back to SPX 3950 is possible early next week with a decline expected to about 3850 by EOM.  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

© 2021 SentimentSignals.blogspot.com