Sunday, January 15, 2017

Bull Market or Just Bull

The market measured by the SPX has managed to gain a total of five points over the last month from 2278 when my Short Term Indicator joined the overall Indicator Scoreboard on December 11 pointing to an intermediate term top.  Last week I pointed that January would probably be manipulated in order to show a positive "January effect", so far so good.  One indicator that acts like the Hindenburg omen is a surge in the volume of VIX calls over 500k per day.  In 2015, there two such days in November and 5 in mid-December, the past two months saw two in December and four last week.  There is no specific timing involved, but a top is likely between options expiration and the EOM, then a significant decline to SPX 2100 or lower.  The trading range last week saw little change in sentiment except gold stocks.

The overall Indicator Scoreboard saw a very small uptick in bearish sentiment, but no change in overall posture.

The Short Term Indicator (VXX $ volume and Smart Beta P/C) is in a similar trending up, but bearish position.

Price and sentiment are relatively unchanged for bonds (TNX).

Sentiment for the gold miners (HUI) has dropped to an almost bearish low extreme although still a similar pattern to the early 2015 period.

Conclusion.  Although I still think we may have the "reflation rally" that everyone has been looking for the last three years, economic patterns show a clear lag between policy inception and effectiveness.  Typically a 6 to 12 month period is necessary to develop policy then another 12 to 18 months to see the full effect.  This means a low could be see by mid 2018 and a high by 2020.  If you think the stock market sees all, just remember the housing crisis.

Weekly Trade Alert.  A significant top is likely soon.  Look for the SPX to pop to 2285-90 next week with a short at 2285 and a stop at 2300.  Updates will be posted @mrktsignals if a trade is recommended or any change in outlook is necessary.

Sunday, January 8, 2017

Twenty Thousand Leagues Under the Sea

Jules Verne saw the significance of the number 20,000 as the journey to the depths of the deepest seas, will it also turn out to be the top of the DJIA?  Admittedly the stock market is struggling at that level, failing only a fraction below at the high of last week.  I was somewhat surprised at the lack of volume which did not indicate an immediate distribution top.  Bonds and gold both saw strong moves last week in the typical early January pickup of the most beaten down sectors from the previous year.

Moving on to the indicators.  The Short Term Indicator (VXX $ volume and Smart Beta P/C) saw a slight rise in bearish sentiment due to a pickup in VXX $ Volume as shorting seems to have appeared near the 20k mark, but not enough to change the negative outlook for prices.

The overall Indicator Scoreboard remains nailed to the SELL level on longer sentiment term levels.  As I was curious to see if there were any other periods that may indicate other than a negative result for the markets, and decided to look back long term as far back as my database would allow (starting July 2010).

The only period since 2012 was late 2013 - early 2014, so I can't really say it is impossible, but it is improbable.

Comparing the above to the long term indicator for the SPX using the ETFs SDS/SSO shows that the SDS/SSO was a better long term indicator, remaining bullish until just before the late 2014 pullbacks.  We are now at the lowest bearish sentiment level in the last four years using this measure.

Looking at some of the other ETFs.  The sharp run up in gold mining stocks saw an equally sharp drop in bearish sentiment.  Apparently the gold bugs are looking for a repeat of the start to 2016, but sentiment indicates that a repeat of the start to 2015 is more likely where similar levels for prices and sentiment led to disappointing results.

For bonds, an equally sharp drop in rates (TNX) was not met by much change in sentiment.  This combined with the disappointing retail sales results announced last week has me rethinking rapidity of the expected rise in rates.  Although the result (negative) is the same for stocks (SPX), this could indicate a less robust economy with weak earnings growth combined with rates high enough to discourage stock buybacks,

Conclusion.  Based on a variety of observations, including a lack of volume and some pickup in shorting, I expect next week to be mildly positive with a dance around the DJIA 20K area.  Ideally, a close above 20K Friday could result in a high volume top the following Monday.  Earnings results with begin after the close that Monday.  

Weekly Trade Alert.  Last week missed DJIA 20K by 0.5 points, but it did not look like a good short.  I will be playing it by ear next week, but expect no trades. Updates will be posted @mrktsignals if a trade is recommended or any change in outlook is necessary.

Sunday, January 1, 2017

Ringing in the New Year

First let me wish everyone a happy and prosperous New Year.  

Next I want to outline what I see as the ideal scenario for the first quarter.  Sentiment has a major influence on the markets direction, and is often a result of false signals from market actions.  For instance, last January was one of the worst in many years, and based on the so called "January effect", many concluded a new bear market was beginning.  Instead, the market rallied 25% from the lows by December.  As I have pointed out earlier, sentiment is now indicating a down year for 2017, but I am expecting a positive January effect to again give a false signal.  This would require an up market the first week and at month end.  So after a positive start, a decline of 3-5% by mid-month to about SPX 2200, then a month end rally that may have one or more indexes at ATH high would be ideal.

The biggest potential problem for the first quarter will be strong job reports (~200K) and other economic reports that may cause the Fed to raise rates again in March.  The Initial Claims that usually moves inversely with jobs is hovering at the lowest level in 35 years, indicating potential for wage inflation.  If true, Feb and March will likely see a rise in bond interest rates and the SPX dropping down to retrace the post-election rally (2080) by the end of March.

Moving on to the sentiment indicators, a nice drop of about SPX 40 points followed the Short Term Indicator (VXX $ volume and Smart Beta P/C) SELL.  As a result there was a small rise in bearish sentiment, but not enough to indicate a change in direction.

The overall Indicator Scoreboard has only seen a small rise in bearish sentiment.

Bonds and gold both had a brief but strong rally last week probably due relief of tax loss selling with bond (TNX) sentiment moving back to neutral.  The gold stocks (HUI) outlook seems more ominous with short term sentiment dropping well below the mean in a pattern similar to Apr to May 2015.

The NDX remains the most bearish of the indices with sentiment hovering near the lows.

Finally, the banking index BKX with FAZ/FAS has seen a very sharp drop in bearish sentiment as the BKX has rallied 50% in the last 6 months.  However, given the long period of accumulation (BUY zone), the index is in a similar position as the HUI in May of 2016 where the initial drop to the SELL zone was meet by a lengthy period of distribution similar to the BKX from March thru July.

Conclusion. Sentiment wise, of all the indices the BKX is probably the least bad and is likely to outperform over the next few months, while the NDX and HIU are the worst.  It's hard to say at this time whether the market continues downward as sentiment indicates or presents the "false signal" I outlined above.  These two to four week selloffs, followed by 4 to six month rallies are starting to remind me of a 2014 Sci-Fi movie, Edge of Tomorrow with Tom Cruise, where time looped back every time he died.

Weekly Trade Alert.  I hope some you were able to short at SPX last week as my entry was meet, but I was too hesitant on the Monday ramp.  My New Year's resolution is to work on my trading skills.  Same as last week if strong start to year, short on the SPX on a retest of the highs next week 2270-75 with a stop at 2290. Updates @mrktsignals if necessary.

Saturday, December 31, 2016

Article Index 2016

Recently, I noticed that the number of pageviews have increased dramatically, so I am providing an index for new readers who may need a refresher.

2015.03.. Long term forecast. Are high stock prices reasonable in a low growth economy?

2015.11 #1 First use of composites to combine indicators as standardized variables.
2015.11 #2 Sell signal generated with composite at -1 SD, expecting 10+% decline in SPX.
2015.11 #3 Closer look at the VXX $ volume indicates max risk in Dec-Jan.
2015.11 #4 Possible rally into Thanksgiving, revising the CPC for VIX component.
2015.11 #5 Using short/long ETFs to develop synthetic put/call ratios.
2015.11 #6 Use of short/long ETFs for HUI indicate 50-60% rally likely for gold stocks.
2015.12 #1 A look at composites and several ETF indicators.

2016.01 #1 Sentiment update.
2016.01 #2 Bearishh sentiment rising, a look at TBT/TLT for bond sentiment.
2016.01 #3 Bearishh sentiment nearing extreme but could go higher, ETFs for RUT and NDX,.
2016.01 #4 Use of sentiment models in bear markets, what to look for after Mar-Apr rally.
2016.02 #1 Rising bearishness and a spike in VIX P/C indicate washout ahead followed by sizable rally.
2016.02 #2 Some indicators showing strong buy while others are neutral.
2016.02 #3 Drop in bearish sentiment for HUI but too early to be negative. Students Trifecta composite.
2016.03 #1 Using Students Trifecta more rally likely but expecting summer pullback.
2016.03 #2 First attempt at Indicator Scoreboard.
2016.03 #3 Students Trifecta composite indicates a short term top is near.
2016.03 #4 Extremes of some individual indicators may support continued strength.
2016.04 #1 Indicators pointing to a pullback, but not a final top. Bonds and gold trending sideways.
2016.04 #2 Too early to be short, a look at intermediate and long term volatility measures.
2016.04 #3 A look at composites and ETFs, no immediate sell signals.
2016.04 #4 Using stastical correlations with indicators and expected returns (back tested).
2016.05 #1 Setting up an overall Indicator Scoreboard using correlations as weightings.
2016.05 #2 Expecting a short term rally then lower lows.
2016.05 #3 Nearing a bottom.
2016.05 #4 Setting up for a rally.
2016.05 #5 Topping pattern may extend four or five months.
2016.06 #1 Rangebound markets, backtesting Indicator Scoreboard for 2013-14.
2016.06 #2 Looking for expansion of trading range, strong bounce after panic low below SPX 2085.
2016.06 #3 Strong rally likely after BREXIT vote due to volatility blowout.
2016.06 #4 Sentiment unclear as strong rally lowers bearishness.
2016.07 #1 Positive bias for now with higher risk for August.
2016.07 #2 Unclear for SPX, but HUI low bearish extremes pointing to significant top.
2016.07 #3 Some but not all indicators at low extremes, expecting top by EOY. Use of Short Term Indicator.
2016.07 #4 Review of various composites.
2016.07 #5 Short term top is likely.
2016.08 #1 Low bearish sentiment continues, but risk of significant decline unlikely until after election.
2016.08 #2 Similarities to first half of 2015, but short term volatility may increase.
2016.08 #3 Still locked in tight range.
2016.08 #4 Looking for brief decline before move to SPX 2200.
2016.09 #1 More consolidation.
2016.09 #2 Sharp decline before BREXIT, indicators neutral.
2016.09 #3 Spike in bearishness for SPX likely point to new ATH, recent complaceny in HUI means lower lows.
2016.09 #4 Topping process continues.
2016.10 #1 Short term indicator has a long way to go before a SELL.
2016.10 #2 Sentiment points to higher interest rates, lower gold stocks, but neutral for SPX.
2016.10 #3 Possible short term dip but double buy spike in ST Indicator points to strong rally.
2016.10 #4 Expecting strength before election, sharp decline then rally.
2016.10 #5 Concerns over Hillarys emails may push SPX down to 2100 before election.
2016.11 #1 Spike in bearish sentiment likely to lead to fast and furious rally post-election, still negative on gold.
2016.11 #2 Long term indicators pointing to 15-20% correction over next 12 months, but no immediate decline. Gold and bonds following sentiment patterns.
2016.11 #3 Am I the only bear? Indicator Scoreboard same as EOY 2015, but ST Indicator neutral.
2016.11 #4 Bearish sentiment continues to fall but no official SELL. Bond sentiment spikes, HUI sideways.
2016.12 #1 With sentiment so low Santa Claus rally may be over early this year.
2016.12 #2 Overall Indicator Scoreboard reaches SELL level, but STI still supportive of higher prices.
2016.12 #3 Fed rate hike crashes gold and sends rates soaring, but sentiment only yawns.
2016.12 #4 Short Term Indicator now at a SELL. A LT look at the BKX using FAZ/FAS etfs.

2016.12.. Long term forecast. What Happens When Growth Returns?

Sunday, December 25, 2016

Alarm Bells are Starting to Go Off

Apparently Wall Street is in complete agreement with Avi Gilbert that investors only worry for 2017 is how high the market will go.  This confidence/complacency is reflected in the sentiment measures, showing that investors are now "all in". That ringing I hear in my ears is not from Santa.  This week I have a lot of charts to cover, including an introductory look at the banking index BKX using FAZ/FAS ETFs, so lets get to it.

The overall Sentiment Scoreboard for the SPX remains pinned to the SELL zone and has now done a 180 degree turn from the January market lows.  I am now starting to wonder if I am bearish enough.

The Short Term Indicator  (VXX $ volume and Smart Beta P/C) has now reached the minimum for a confirmed SELL with the 5 Dy EMA at -0.4 and the 20 Dy EMA at -0.25.

Looking more closely at the Short Term components, the VXX $ volume (adj for market volume) has the long term EMAs at the lowest level for the last two years, warning of a pickup in volatility.

The second component, the Smart Beta P/C (ETF Puts/Equity Calls), is lagging the VIX $ Vol, but the overall pattern since June resembles the first half of 2015 which also showed the same divergence in August 2015.

The money flow indicator SPXU/UPRO has now reached a new low extreme after a brief bounce continuing to trace out the same pattern as the first half of 2015 only now for about 50% longer in duration.

Looking at some of the other indices, the NDX shows similar results as the SPXU/UPRO.

The RUT has seen a sharp drop in bearishness even as the rally has run out of stream, not a good sign.

The gold miners HUI has finally seen some increase in bearishness as the index fell below the critical 180 area last week, but the long term EMA (blue) has only now reached the neutral area and is in the same position as June of 2015 when the index continued to fall to 100.

Bond sentiment (TNX)  is hovering around the same area as in April of 2015 when interest rates were only 1.9%, so the overall outlook for bonds remains bearish.

Lastly, I just completed replacing the biotech index IBB with the banking index BKX using the FAZ/FAS ETFs. This is a long term look and next week I will show the normal period.  As you can see a strong BUY was issued mid-year so the resulting rally is no surprise. The only question is how high can it go.

Conclusion.  We are now seeing the lowest levels of bearishness of the last two years.  In addition to the above, VIX call buying spiked higher on Wed and Thur roughly equal to Dec 14 & 15 of 2015, this was about a week and a half before the decline started.

Weekly Trade Alert.  My overall preference is for an extension top into the first of the year, but sentiment is so extreme that I will consider a half position short on the SPX on a retest of the highs next week 2270-75 with a stop at 2290.  Updates @mrktsignals if necessary.

Sunday, December 18, 2016

Closer Than You Think

The Fed seems to have finally noticed the rise in interest rates (TNX) by not only increasing the Federal Funds rate to .50%, but also increasing the expected hikes next year to three.  As I mentioned a couple of weeks ago the Fed's dot plot forecasts future rates with the FF rate about 2% below the TNX rate.  If I am right and the TNX rises to 3.5% or higher by the Fall, this means four rate hikes are likely for 2017  Gold stocks and bonds reacted as expected with the TNX breaking over 2.5% and the HUI and GDX dropping over 10% or about 25% of the entire decline I expect for next year.  The surprise was the big yawn shown by sentiment, indicating more downside ahead.

Looking at the overall Sentiment Scoreboard for the SPX, the 20 day EMA has now broken the SELL line, reaching the lowest level seen the last two years.  This supports my view of a more serious decline than seen recently which may be less intense in volatility, but stretching over a much longer period in time. 

The Short Term Indicator  (VXX $ volume and Smart Beta P/C) has finally started to show signs of capitulation with a flat to down week even with the volatility induced by the Fed.  I remember a few (or longer) years ago when the market held up into the end of the year and began the new year with a pop and drop that lasted most of the year; we may see a repeat.

Bonds (TNX) have continued to follow my sentiment calls closely with the breakout in rates over 2.5%  last week following the sharp decline in  bearish sentiment the week prior.  The surprising aspect is that bearish sentiment only recovered half of the drop from the previous week, while rates increased by more than twice the previous drop in rates - a very bearish sign.

Gold stocks (HUI) were even more surprising than bonds.  This is the third sharp drop in gold stocks over the past several months, having retraced two-thirds of its early 2016 run-up, but bearish sentiment can not rise over the mean.  I can understand the somewhat faulty logic, "if gold is worth $1,500 with no inflation then it will be worth more when inflation rises."  There is even now a "contrarian" argument being made for bonds and gold in a recent article by Tom Mcclellan.  With the recent trend in sentiment, we may see GDX in single digits and a new low for the HUI (80s) by mid or late 2017.

Conclusion.  Bonds and gold continue to follow my sentiment guide lines for lower prices, while the SPX is lagging but is likely to start playing catch up in the next two to three weeks.

Weekly Trade Alert.  None. Updates @mrktsignals if necessary.

If you want to know why I think rising rates are bearish for stocks and gold, read my long term forecast What Happens When Growth Returns?

Sunday, December 11, 2016

Blow Off

I will be the first to admit that my call last week for further consolidation was wrong as the SPX followed European markets higher last week after the "No" vote on the Italian referendum.  The breakout over the previous high last month at SPX 2014 produced what can only be described as panic buying or a blow off.  I mentioned a couple of weeks ago a Tom DeMark prediction of the same type of market action, but it was still somewhat unexpected.  Given that the Indicator Scoreboard has reached the SELL point, but that the Short Term Indicator remains in the murky middle ground, I can only say that more gains are possible, but it is likely a terminal rally.

Before discussing this week's sentiment outlook, I want to mention that the update for my long term forecast is out, What Happens When Growth Returns?

The overall Indicator Scoreboard has reached an extremely low bearish level seen only twice the last two years, where the November 2015 high was followed by a volatile six weeks before the sharp January decline and the July 2016 high produced a rounded top with a moderate decline. 

The short term SPX ETF ratio of SPXU/UPRO continues to look more like the six months preceding the August 2015 crash where only a few brief instances were seen of more funds flowing into shorts than longs.

The Short Term Indicator  (VXX $ volume and Smart Beta P/C) shows that bears are still fighting this rally as hedging by VXX and ETF put buyers still lends a modest support for stock prices.  Compared to the August and November 2015 highs, a decline to about -.5 for the 5Dy EMA and -.4 for the 10Dy EMA is expected.

Disbelief in the stock market rally is being matched by renewed safe haven demand for bonds as fund flows into the long TLT ETF continue to exceed those into the short TBT ETF.  The argument that money is flowing out of bonds and into stocks doesn't seem to hold water.  The last drop in bearish sentiment this steep was in August 2015 as rates fell from 2.4% to 2.0%, and the fact the rates have consolidated at the highs looks very bearish for bonds.  Other measures for NDX, RUT and HUI have shown little change in sentiment.

Conclusion.  The last two years I was expecting a December rally that would last into the first of January, so maybe this is the year.  Although sentiment points to much higher interest rates over the next year, until a break and hold over 2.5% on the TNX is seen, the outcome is unclear.  The only time I can remember when stocks rallied with rates rising strongly was 1987.  In 1987, the DJIA rallied 20% the first six months until the dividend yield approached 50% of the TNX yield, then the second half of the year stocks fell 40%.

Weekly Trade Alert.  None. Updates @mrktsignals if necessary.