Sunday, March 19, 2017

Is the High Skew a Warning Sign?

This week I am going to do something a little different since there has been little change in most of the indicators.  The $SKEW, however, has been accelerating higher the last two weeks reaching both a daily and moving average high since my database began in July 2010.  Thanks to the faithful viewers as my pageviews passed 100K last week.

This week will start with a special report on the Skew, a measure of out of the money option premiums. Typically, the Skew is considered to be a bearish indicator when it spikes because it means that option buyers are willing to pay large premiums for out of the money puts, but what I found going back to 2011 was that markets go up as often as down when the Skew spikes, but the moves are typically larger than normal. The conclusion I reached was that the direction of the price move depends on whether the premiums are set by dumb money (put buyers or speculators who by puts after a significant decline) or smart money (option writers who demand extra premium when they see high risk of large declines).

To measure this effect, I looked at the period from July 2014 to the present, overlaying the Indicator Scoreboard (wtd composite) with the Skew.  Here, I identified five periods where large price moves followed spikes in the Skew.  The Indicator Scoreboard is the top chart and the Skew is the bottom chart.  The two red bars (SELL and high Skew) were followed by declines and occurred in Sept 2014 before the Oct crash and Nov 2015 before the Jan 2016 crash.  Interestingly the last three green bars (BUY and high Skew) occurred in 2016 and were each followed by large rallies, including the Jan low, the BREXIT low, and the US election low. The recent red bar for the current period represents both the strongest SELL signal since 2011 as well as the highest Skew.

Overall this lends a lot of credibility of one possible scenario presented for the stock market in a rising interest rate environment, that is the 1987 scenario, where a six month rally saw a decline of twice as much the following six months.  This implies a possible retrace in the SPX to the low 1800s by the end of Oct.

Regular Analysis

The overall Indicator Scoreboard remains little changed.

The Short Term Indicator (VXX $ volume and Smart Beta P/C) is continuing its slow descent towards the SELL region, although it is so close that it may not matter.

Bond sentiment (TNX) has fallen back to the neutral zone.

Bearish sentiment for gold stocks (HUI) has fallen back below neutral leaving little support for further gains.

Conclusion.  The action of the $SKEW over the last two weeks has somewhat clarified the expected outcome of the Trump mania blow off, but does little to identify a top either in price or time.  Due to the influx of IRA money up to the Federal tax due date of April 15, we may see one more push higher.  Some cycles I have seen show maximum risk starting early May, six months from the US election.

Weekly Trade Alert.  Last weeks call for a top on FOMC Wed around SPX 2390 proved correct, but before the open I cancelled the SHORT on Twitter due to the Mon-Tue price action.  Lack of distribution diminishes the likelihood of even a short term pullback to SPX 2350.  On hold for now.  Updates @mrktsignals.

Sunday, March 12, 2017

So Close

An interesting thing happened last week after the SPX briefly exceeded the upside target of 2390 two weeks ago, reaching 2401.  Last week bearish sentiment actually went down as the SPX gradually fell to 2354 as the prevailing sentiment was "buy the dip".  As you see in the following sentiment charts, the same type of behavior occurred in July of 2015, before the August crash.  If the same behavior repeats, the markets may shrug off a rate hike by the FOMC next week since a decline then may be too obvious.  However, new highs may be marginal or non-existent before talks of additional hikes start pressuring markets lower by mid-May.  One key to watch is if the TNX exceeds the 2.8% level, last week jumping back to the 2.6% level.

Moving on to the sentiment charts, the overall Indicator Scoreboard continues to hug the low bearish SELL region.

The Short Term Indicator (VXX $ volume and Smart Beta P/C) briefly dropped to the lowest levels of the last six months, but still refuses to show total capitulation by falling to the SELL level.

Bond sentiment (TNX) raced higher as rates jumped back to the 2.6% level, but are considerably lower than was seen before the recent consolidation.  The 2.8% level is likely before the next pause.

Bearish sentiment for gold stocks (HUI) increased rapidly last week as prices fell towards the recent lows.  It is hard to predict, but I would expect some period of consolidation before the lows on the HUI at 160 are taken out.  This may coincide with the larger move down in the SPX as last week showed positive correlation between the two sectors.

Conclusion.  Since developing my sentiment model, I have found that sentiment can be as hard to predict as stock prices; but if current trends continue, the top may already be in, however, a significant decline may be weeks away.

Weekly Trade Alert.  It has been a few weeks since an opportunity for a trade consistent with sentiment was available.  This week a move up to or above the SPX 2390 level, likely on FOMC Wednesday, is a SHORT with a stop just above the recent highs at SPX 2401 and a target the recent lows around SPX 2350. Updates @mrktsignals.

Sunday, March 5, 2017

Chasing the Dream

Of the three main markets I follow, general stocks, bonds and gold stocks, gold stocks continue to be the most closely conforming to sentiment signals.  The SPX is starting to look more like bonds, sentiment wise, as bonds continued to rise (TNX fell) from Oct 2015 to Oct 2016 then fell 20% over a matter of a few weeks with sentiment still below neutral.  The only reason I am bring this up is that the Short Term Indicator refuses to show SELL spikes seen at recent tops, allowing for just enough bearishness to push prices higher absent any negative information.

The overall Indicator Scoreboard continues to hug the low bearish SELL region, but as seen in the bond chart below this may continue for a while.

The Short Term Indicator (VXX $ volume and Smart Beta P/C) remains at very low levels, but refuses to show total capitulation by falling to the SELL level.

The intermediate SPX ETFs (SDS/SSO) is also in a similar pattern to the Short Term Indicator.

The other MISC indicators, VIX P/C and TRIN, reversed the trend from last week.

Bond sentiment (TNX) remains in a range around the neutral zone as rates continue to trade in a narrow range.

Finally, sentiment for gold stocks (HUI) has started to rise as gold stocks fell over 10% over the past week following the recent SELL signal.

Conclusion.  The stock market is very extended sentiment wise but there is no definite indication of a short-term top.  One of the scenarios I discussed several weeks ago was the 1987 period, which saw a 20% run up in six months and then a 40% decline the following six months, this may be one of those times.

Weekly Trade Alert.  None for this week.  Updates @mrktsignals.

Sunday, February 26, 2017

Not There Yet

Signs are beginning to mount that an important top is nearing.  As mentioned in the January 15 post, much of the ammunition for the current rally is the anticipation of new tax and spending policies.  However, as a non-politician Trump and his believers have underestimated the time for government actions.  The latest figures are for tax reform by August and infrastructure spending by 2018. This is reflected in two of the MISC indicators (not in composite) that are mentioned later.

The overall Indicator Scoreboard is maintaining its position near the SELL range.

The Short Term Indicator (VXX $ volume and Smart Beta P/C) continues to be range bound in the moderately negative sentiment range.

The MISC indicators that I mentioned several weeks ago, as not confirming a potential top, are now moving closer to the SELL region.  The VIX P/C and TRIN charts are shown below.  The TRIN (showing net adv issues/net volume) has risen to the highest level since last Sept, indicating that supporting volume is drying up as prices advance.

Interest rates fell (TNX) even as sentiment remained mildly bearish, probably due to news of the delayed Trump stimulus.

Finally, the gold stock sentiment (HUI) remains in the SELL region as mining stocks posted a modest retreat.

Conclusion.  At least one well known EW analyst, Pretzel Logic, feels that the 5th wave may be complete. This may be so, but sentiment indicators do not indicate risk of strong downside just yet, mid-March is appearing more likely to be the point of maximum risk.

Weekly Trade Alert.  None for this week.  Updates @mrktsignals.

Sunday, February 19, 2017

A Top Could Come at Any Time

Last weeks forecast of an up week for option expiration proved correct although the forecast of SPX 2330-50 was beaten by one point.  Short term the outlook is more cloudy.  With so many convinced of SPX 2400 or 2500 immediately ahead, a turn down could occur any day, so all I can say is that a significant top should occur in the next two to four weeks.

Looking at the indicators, overall Indicator Scoreboard saw a sharp spike downward to the fourth lowest level of the last two years on the back of capitulation in the Put/Call ratios.  This may indicate a short term pullback next week before a rally to a final high in March.

Looking at the Indicator Scoreboard long term, current optimism is a near mirror image of the pessimism resulting from the January 2016 decline.

The Short Term Indicator (VXX $ volume and Smart Beta P/C) is little changed showing lack of strong downward pressure.

Bearish sentiment for bonds (TNX) continued to drop longer term, even as rates consolidated in the middle of the recent trading range.

Finally, the gold stock sentiment (HUI) remains firmly in the SELL region as the HUI seems to be consolidating lower.

Conclusion.  As I mentioned a couple of weeks ago, a move toward SPX 2400 is possible, but sentiment has reached such an extreme that I would not be surprised by a premature failure.

Weekly Trade Alert.  None for this week.  Updates @mrktsignals.

Sunday, February 12, 2017

Trumpmania Continues

Sometimes sentiment does not seem to matter, at least until it does, and now seems to be one of those times.  On Thurs @mrktsignals, I indicated that the rally was expected to continue into next week with the next target SPX 2320 and 2319 was hit Friday.  Since I see no sign of an imminent intermediate decline, I can only point to the SPX rising wedge in the SPX since early 2016 with a top at 2050 and a low at 1810.  In EW terms wave 1 was 300 SPX pts and with the current wave 5 starting at the pre-election low of SPX 2084, then a top may be 2390 meeting the rising channel around April.

The overall Indicator Scoreboard remains near an intermediate term SELL level which tells me that the top will be followed by a significant decline.

The Short Term Indicator (VXX $ volume and Smart Beta P/C) remains at a very low level, but as yet has not seen the spike low to the SELL level that was seen preceding recent significant declines.

There was not a lot of change to either the VIX P/C or TRIN charts that were shown for the past couple of weeks.  SPX and NDX ETF bearish sentiment remains at lows of the past two years.

Bearish sentiment rose slightly last week for bonds (TNX) as interest rates rose slightly.

Finally, for gold stocks (HUI), the prices have now exceeded the Jan 2015 highs, but sentiment has moved firmly into the sell level.  I have noticed that almost on a daily level that gold prices have been moving inversely to interest rates and will probably remain the driver of any short term price movement.

Conclusion.  The big news story is Trump's announcement of a significant tax plan over the next one to two weeks.  This is likely to be a "sell the news event" for a short term pullback.  We could see SPX 2330-50 when announced.  Can the significance of Trump and Putin both being billionaires be more than a coincidence? Several years ago Russia started a 15% flat tax rate, but it did little to stimulate markets or the economy.

Weekly Trade Alert.  No specific shorting targets, last weeks update on Twitter cancelled previous trade guideline.  Updates @mrktsignals.

Sunday, February 5, 2017

Meandering Along

Last week I indicated that at least a short term pullback was likely in the SPX as the overall Indicator Scoreboard reached the SELL level, but that I was becoming less bearish for a strong pullback immediately. For the week, the SPX dropped from 2300 to 2267, then closed at 2297.  More upside is likely early in the week, probably SPX 2305-20, before a stronger pullback targeting 2230.  Using the same indicators as last week, the current topping pattern is becoming more like the Apr-June 2015 period and appears to be extending into March of 2017.

The overall Indicator Scoreboard spiked somewhat higher on the basis of higher put/call ratios, not unlike the first half of 2015.

The Short Term Indicator (VXX $ volume and Smart Beta P/C), however, moved lower similar to the May 2015 high, leading credence to a stronger pullback than last week from next week's high.

The TRIN (as a measure of net adv issues to net volume) continues to move higher with lower supporting volume and is also in a similar position as the May 2015 top.

The VIX P/C saw a fairly sharp spike lower during the week before moving higher at the end of the week, again not unlike the period immediately preceding the May 2015 top.

Interest rates (TNX) continue to consolidate in a narrow range around the 2.5% breakout zone while bearish sentiment remains at fairly low levels.

The gold stocks (HUI) did make a slightly higher high last week, but both the 5 and 10 day EMAs dropped down to the SELL level.

Conclusion. I was expecting more immediate downside as a result of the positive "January effect", but both the pullback early in the week and the consolidation period in bonds indicates a more lengthy topping process.

Weekly Trade Alert.  It's becoming more difficult to come up with specific targets, but I will be looking for SPX 2305-10 as a shorting zone with stops above 2320.  Updates @mrktsignals.