Sunday, October 23, 2016

Taking a Siesta

With a little more than two weeks until the U.S. Presidential election, bearish sentiment seemed poised to support a further market advance starting last week, but as I warned on Twitter at the Tuesday open, the sentiment from Mondays weak decline did not support much of a rally.  For the week the SPX was up 8 points, but overall sentiment as shown by the Indicator Scoreboard fell back to neutral and continues to follow the pattern of mid-June 2015.  The result, if followed, still supports higher prices into the election, and if bearish sentiment continues to weaken would probably be followed by a sharper decline.  Most other analysts seem to be looking for near term weakness then a strong year-end/presidential cycle rally to well over SPX 2200, but how often is the majority right.

The Short Term Indicator (VXX $ Volume and Smart Beta P/C) has fallen even more sharply and is now back to neutral, indicating that any advance is likely to be fairly tepid.

The VIX P/C has started to bounce upward as expected last week and is also in a similar pattern to mid-June 2015.

Also this week I wanted to look at a couple of market sectors, i.e., tech (NDX) and small caps (RUT) to see if they were in a position to provide leadership for a possible year-end rally. 

First for the NDX, using the QID/QLD ETF$  ratio for a longer term perspective and the SQQQ/TQQQ $ ratio for shorter term, there is little support for a sizeable rally with bearish sentiment for the past several months hanging around the lowest levels for the past two years.

The results for the RUT are even more revealing.  Using the TZA/TNA $ ratio, bearish sentiment has continued to fall in a choppy pattern even as prices moved downwards - the same pattern seen at the mid-2015 top.

Conclusion.  The most likely scenario continues to be as outlined last week, with strength into the election, a sharper decline to lower levels, then a rally that everyone assumes will make new highs, but will probably disappoint.

Weekly Trade Alert.  Taking a siesta until the election.  Possible updates @mrktsignals.

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