Saturday, January 13, 2018

When Is Enough Enough?

It is clear that the stock market is in the final stages of a melt up, but how much higher can it go?  Bitcoin did not stop until it began to go up 10% a day for an entire week to start last Dec.  At the rate the SPX is going we could  see 2850 next week and 3000 by the end of Jan.  As I mentioned on Dec 26, the consensus building of an EOY target for 2018 of SPX 3000 was more likely to see a melt up or a failure.  Sentiment is now pointing to a pullback starting by early Feb, but what happens afterwards depends on the eagerness of the bears.

I. Sentiment Indicators

The overall Indicator Scoreboard is little changed from last week as the level of bearishness is about as low as it can go.

The Short Term Indicator (VXX $ volume and Smart Beta P/C) has continued to hover at levels that marked the mid-2015 top in May and July.  Based on the behavior of its components the ultimate low equivalent of Apr 2015 may have already been seen last July.

The VXX $ volume has finally dropped back to the SELL level which we saw late Apr 2015 about a month before the top in the SPX.

The Smart Beta P/C continues to inch up as we saw in May of 2015 with the earlier bottom in Dec 2017 matching the late Apr 2015 SELL.  Overall, I am now considering the ST Indicator on a SELL even though the components are out of sync.

The NDX short term ETFs SQQQ/TQQQ  shows increased levels of bearishness even as the index has moved up 100 pts since last week.  The 7000 level is looking more likely.

Bond sentiment (TNX) reversed sharply last week, which may presage a final spurt upwards as we saw in Dec 2016 or not.  Interestingly there have been a couple of news events lately (China selling US bonds, bond guru warnings) that saw an AM spike to just below 2.6%, matched by weakness in stocks, then rallies in stocks and gold as rates fell back towards 2.55%.  A break above 2.6% may be a warning for stocks.

The gold miners (HUI) saw bearish sentiment rise as the HUI moved back to the 200 level that may allow for slightly higher prices.

II. Options Open Interest

Prices only fell below the SPY 273 level for a few minutes then delta hedging continued to push prices higher thru Fri (close SPY 277.9, SPX 2786).  Next week looks like it will be more of the same.  For Wed, a move below SPY 276 could drop to the "most likely" at 275, but over 276 delta hedging supports higher prices.

For Fri monthly optn exp, with SPY higher than 275 delta hedging supports higher prices to 280, a push over 280 has clear sailing upwards.  For Fri put support is not important.

III. Other

Last week saw a large jump in VIX call buying, larger and sharper than the early Aug 2017 period, which was followed by an SPX 74 pt plunge in two weeks.  Due to the low holiday vol, I have incorporated the same market vol adjustment used in the VXX $ vol since Jan 2016.  Mon saw 1.2M calls mostly Feb 14, Wed saw 2.2M evenly split between Jan and Feb with 300k 15s and 500k 25s each month that appeared to be a maturity spread (buy/write) so I dropped the number to 1.2M as a conservative read of the hedging potential.  Fri saw about 1.0M with 60/40 Feb and Mar.  The increase is now 78% of the avg vol.

Conclusions.  The recent run up has changed my outlook for a mid-month pullback and rally into EOM to a more imminent top.  Momentum may carry the market upward to the SPX 2850 level next week then consolidate to EOM.  Some Fed heads are talking about more forceful action to slow markets down, so Jan's FOMC (30-31) may give markets a pause EOM.  Using the VIX Call Indicator with the confirmation by the ST Indicator, my outlook is for a 3-5% pullback starting late Jan-early Feb and lasting 2-4 weeks.  Will the bears growl like they did with the Aug pullback causing another bullish romp?

Weekly Trade Alert.  No specific trades this week, last weeks call was aborted when the Tue-Wed pullback caused the VXX $ vol to double, setting up the EOW romp.  Updates @mrktsignals.

Investment Diary, update 2017.10.28, Indicator Primer
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Saturday, January 6, 2018

A Strong Start to the New Year

Two weeks ago, I began warning that the traditional Santa rally was likely to be disappointing, but a January surprise was likely.  Was it ever, with an almost 70 pt rally in the SPX in 4 days.  My logic was that January is considered an important, but often misleading, indicator of the future for the stock market.  Similar to the January 2016 decline which turned many bearish before a 50% rally, a top this year is likely to be preceded by a strong January.  Only time will tell.  The long term forecast contrasts growth and interest rate outlooks.

I. Sentiment Indicators

The overall Indicator Scoreboard retreated back to the SELL area after a brief increase in bearishness the prior week.

The Short Term Indicator (VXX $ volume and Smart Beta P/C) declined slightly, but remained above recent lows.

The components of the ST Indicator are starting to show a divergence as the VXX $ volume is starting to fall sharply similar to late Apr 2015 before a pickup in volatility.

While the Smart Beta P/C has been inching up as was seen in early May of 2015.  With the major ETF sectors of SPY, QQQ and IWM, this may be due to continued hedging in the NDX/QQQ as seen in the following chart.

The NDX short term ETFs SQQQ/TQQQ still show relatively high levels of bearishness even as the targeted 6700 area is approached, indicating that higher levels, possibly 7000 are likely.

Bond sentiment (TNX) continued to fall, indicating strong movement into TLT based on signs of moderate growth with little inflation.  Still too early to tell what the effects of unwinding QE will be.

The gold miners (HUI) seem to be running out of gas as the targeted HUI level of 200 is reached.

II. Options Open Interest

Options OI was probably the best indicator of the runaway breakout in the SPY/SPX last week as the Opricot Fri chart by Wed showed a large buildup of puts supporting a rise to SPY 271.5 with little call resistance up to 274 (close SPY 273.4/SPX 2743).

Looking forward to the next two weeks, it looks like there could be a small pullback into mid month (SPX 2700 ish), but an EOM rally is likely.  For Wed's SPY a move below 273 finds strong put support at 271 and a "most likely" at 272, but delta hedging provides support above 273.

For Fri, strong put support moves down to 270 and  "most likely" at 271, but delta hedging provides support above 272.

For the monthly expiration, "most likely" is SPY 269 (SPX 2700) with puts and calls offsetting (hedged) at lower levels and at higher levels a move over 270 could push to 274.  Could be a recipe for some volatility, especially if VXX $ Vol continues to drop.

Conclusions.  The explosive rally seen last week has failed to move the ST Indicator to a SELL so more upside is possible but a pullback over the next two weeks to the SPX 2700 level is seen likely using options OI.  More upside during earnings season seems likely, however, particularly in the tech/NDX sector

Weekly Trade Alert.  I hope some of you have better trading success than I have lately.  The Dec 29th selloff was simply a ploy to "shake out the weak hands" and resulted in my getting stopped out at BE, while the "gap and go" opens of the past week gave no apparent good entries.  Last weeks possible Short was cancelled via Twitter when SPY rose over 270 Wed due to possible delta hedging.  No specific trades this week, but a move to SPX 2750 may provide the opportunity for a small short if the VXX vol continues to decline thru Wed.  Updates @mrktsignals.

Investment Diary, update 2017.10.28, Indicator Primer
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Saturday, December 30, 2017

Did the Grinch Steal Santa?

Last week's outlook for Santa to take a vacation this year certainly proved accurate, but Friday's action brought into question the early 2018 move over 2700 before a correction.  Bearish sentiment began to tumble by several measures during the week prior to Friday leaving more questions than answers about the immediate outcome.

I. Sentiment Indicators

The overall Indicator Scoreboard rose moderately from extremely low levels, but remain nowhere near supportive of higher prices.

The Short Term Indicator (VXX $ volume and Smart Beta P/C) also bounced, but has still not reached the levels of significant tops, so a continued decline is more likely to be a buying opportunity.

The SPX related ETFs are more ominous with the longer term SDS/SSO at levels where moderate pullbacks were seen over the last 6-8 months and much more extreme than before the 2015 corrections. SPXU/UPRO ratios are comparable.

Even the NDX bearish sentiment fell sharply last week prior to Friday, reaching the lowest levels since July, but I am still expecting a low comparable to Nov 2015 before a large pullback.

Bond sentiment (TNX) fell sharply as interest rates pulled back sharply toward the 2.4% level.  Combined with weakness in the dollar, global investors seem to believe that the GOP tax cuts are nothing more than a transfer of funds from the middle class to corporations and will do little to stimulate growth or inflation.

The reaction of the gold miners (HUI) was very muted, even as gold rallied strongly with weakness in the dollar and supported the view that tax cuts will not be inflationary.  The sharp drop in bearish sentiment is, however, likely to limit upside in prices.

II. Options Open Interest

I'm only going to look at the Wed/Fri pair this week.  For Wed, compared to last week about 35k of "new calls" were added late in the week.  Typically, this represents "smart money" and means the SPY should reach 270 by Wed, but last Fri close at 266.9 makes it less likely.

For Fri, the "most likely" here is SPY 266 which is just below current levels with good put support at 265.  A move back over 267 would begin delta hedging and support higher prices.

III Others

One other indicator that is more bearish is the VIX Call Indicator which rose by 55% of the mean in mid-Dec matching the levels seen in late Feb and early June of 2017.  This does seem to be less effective if not confirmed by the ST Indicator.

Conclusions.  The late week selloff has tempered my short term upside outlook, but I have noticed several times in the past that pullbacks that exceed well recognized support zones (SPX 2670, Avi Gilbert) in panic mode will often reverse.  In the case of a move back toward the SPX 2700 area that would be a SELL short term.  Overall sentiment says the market is at or near an INT top, but ST indicators say not quite yet.

Weekly Trade Alert.  My long from SPX 2680 was stopped out via post on Twitter at BE.  Outlook for next week is fairly uncertain, but a pop next week to SPX 2700+ thru Wed is a SELL with a target of 2660 (SPY 265+).  Updates @mrktsignals.

Investment Diary, update 2017.10.28, Indicator Primer
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Saturday, December 23, 2017

No Santa, How about a January Surprise?

Since late Nov, it seems like every week starts strong then fades as the week progresses.  The strong rally on high volume for Dec opt exp is reminiscent of the Oct 2014 top, and generally indicates distribution. Higher prices are likely to start the new year, but Jan is likely to be a rocky month.  Thanks to loyal readers as page views passed 200k last month.  Happy Holidays and a prosperous New Year to all.

I. Sentiment Indicators

Bearish sentiment continued to retreat last week, as the overall Indicator Scoreboard was pushed lower by very low put/call ratios.

Even the Short Term Indicator (VXX $ volume and Smart Beta P/C) has pulled back to the area of recent lows, but still has a ways to go to match the lows of larger tops in 2015.

The NDX sentiment seem to be lagging other indicators which leads me to believe that after a weak first half to Jan, techs will likely power the market back up when earnings season is in full swing late Jan.

Bond sentiment (TNX) proved itself as a smart money indicator last week as rates rose from 2.36% to almost 2.5%.  The same behavior with a rounded bottom in sentiment was seen after the Nov election that resulted in much higher rates.  It's hard to tell what the effects will be of the reversal of QE, but I expect to see rates of 2.7-2.8% the first quarter and eventually 4%+ the next three years.  It has been over 40 years since we have seen a bear market in bonds, but a move to 4% is about a 30% drop in price from the highs for 20 year bonds (TLT).

For the gold miners (HUI), the recent rally has pushed sentiment back to its recent lows so I doubt that prices will push much higher than the 200 level (+ 4-5%).

II. Options Open Interest

We did not get the pickup in volatility suggested by the VIX options last week as the SPX only rose to 2695 then fell to 2676.  This week I want to focus on the SPY, looking at possible turns thru the Jan 19th opt exp (current SPY 267.5, SPX 2683).

The Fri Dec 29 SPY large call open int at 267 may continue to act as support with positive delta hedging with 270 the next resistance level, so probably a small positive bias thru EOY.

Things start to look interesting in Jan, with the Wed put support rising to an important level not seen in a while.  It is doubtful that this is smart money as the popular bet is a tax-related selloff to start the year, but is more likely to push the SPY over 270 thru Wed.  One popular EW analyst has an ED target of SPX 2720-30, DJIA 25,200+.

By Fri, however, call resistance is likely to push prices lower.  As long as 267 holds, delta hedging may prop up prices, otherwise support drops down to 265+.

For Fri Jan 12, there is a modestly positive bias from put support with a "most likely" range of 267-69.

For the monthly opt exp, down is the most likely direction with modest support at 266 and then lower at 262.  So the overall outlook is a 4-5% pullback thru Jan opt exp.

Conclusions.  The outlook based on the opt open int and supported by sentiment is that Santa may be limping along thru year end, but that the new year is likely to start with a bang, followed by a fairly sharp reversal.

Weekly Trade Alert.  Longs may be accumulated in the SPX 2680-90 area with a stop at recent lows (2676) and an early Jan target of SPX 2720-30.  Updates @mrktsignals.

Investment Diary, update 2017.10.28, Indicator Primer
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Saturday, December 16, 2017

A Consensus is Building

Every day I hear more and more analysts predicting a continued rally in the SPX thru 2018 with a price target  EOY of 3,000.  As a contrarian, this reminds me of Q4 2015 with the SPX at 2,100 when the consensus was an SPX target of 2,400 the first half of 2016, but after the Jan-Feb decline to the 1800's targets dropped to 1300 or lower.  More likely scenarios seem to be the melt up-melt down scenario proposed by Ed Yardeni in June, now seeing SPX 3,100 by June 2018, or my preferred scenario of the beginning of a 1970-72 type bear market.  The key, as I see it, is the reaction of the bond market to the Fed's reduction of its balance sheet, a once in a lifetime event.  More in my long term forecast, due over the next two weeks.

I. Sentiment Indicators

This week, I will only look back two years to look more closely at the Jul-Aug 2016 period which seems most like the current period.  The overall Indicator Scoreboard saw a sharp drop in bearish sentiment before a slight uptick on Friday.  Sentiment is now at similar levels to the Jul-Aug 2016 and Feb-Mar 2017 tops.

The Short Term Indicator (VXX $ volume and Smart Beta P/C) also saw a sharp drop in bearishnes, but a continued decline in the longer term EMAs is likely before a top.

The NDX sentiment also saw a sharp drop, but remains moderately bullish, and provides the strongest argument for strength in prices possibly thru early Jan.

Bond sentiment (TNX) continued its sharp rise in bearish volume in TBT vs TLT, which is surprising given the small change in TNX outside the drop on lower than expected CPI.  To me this looks like smart money positioning ahead of a trend change, rather than retail investors panicking after the fact.

For the gold miners (HUI), bearish sentiment fell sharply with the one day jump in prices with the weak CPI data.  As i have pointed out before inflation is not a friend to gold stocks at this time as it simply means higher interest rates.  Some gold bugs are now calling for a new bull market, but bearish sentiment is well below the levels of EOY 2016 and does not support a sustained advance.

II. Options Open Interest

It was no surprise that the high call levels for Dec opt exp provided little resistance to higher prices on the SPY, but the high calls for Dec 29 at 266-7 did act as smart money with a Fri high of 267.  This week I want to take a broader look at the SPY, VIX and GDX open int thru Jan 2018.

For the SPY next Wed, at the current 267, there is little put support and call resistance could push down to 265 or delta hedging could push up to 269+.

The VIX shows a very high open int level on Wed at about 50% the Jan monthly and 5-10x the other weeklies with a "most likely" of 12.5, so it's possible someone is expecting a blowoff to SPY 269+ (SPX ~2700) followed by a sharp drop on the tax plan approval.

For Fri, the SPY shows a "most likely" range of 264-5.

For Fri Dec 29, the SPY open int has dropped 50% since last week, so the smart money has covered half their position, indicating that much of the expected gains have been seen.  The  "most likely" drops to 263.

Looking out to the Jan 2018 monthlies, the SPY has very call resistance at 270 and moderate resistance down to 262 with only weak put support at 260 with a "most likely" range of 261-3.

Looking at the Jan VIX open int, the "most likely" range is 13-14 showing a moderate pickup in volatility is expected.

The GDX looks like it could get a safe haven bid if the stock market falters with a "most likely" range of 22-24.

Conclusions.  Last week did not provide any low risk entries with the SPX up 1% for the week, mostly on Fri opt exp.  With the tax proposal finalized last Fri, Senate & House approval may be next week.  I am not sure how reliable the option open int may be based on the last few weeks, but Wed may provide an important turn date around the SPX 2700 level based on the unusual VIX data.  Overall, I expect some type of short term pullback as a "sell the news" with a final rally into early Jan before a larger decline.

Weekly Trade Alert.  Next week could see a pickup in volatility if the tax plan is approved .  Short at SPX 2700 or better with a target of 2650-60.  Updates @mrktsignals.

Investment Diary, update 2017.10.28, Indicator Primer
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