Sunday, December 4, 2016

Watching the Grass Grow

... is how I feel at this stage of every rally.  The bulls call it a pause to refresh when sideline cash is building up for the next rally phase, while the bears look at it as a period when smart money that loaded up on shares during the panic before the rally sell to the dumb money that buys after the rally based some mythical belief in Goldilocks and the fairies, this time the ethereal Santa Clause rally.  Yes, the rally was impressive up over 5% in one month, but we have seen this many times over the last two years, and in fact the November 2014 high was at SPX 2080, the same as the start of this rally, so the SPX is up a little over 5% in two years.  Does this really mean the market will rally 15-20% in the next twelve months?.
This is why I find sentiment so refreshing compared to straight line predictions or straight line with wiggles predictions, when everyone is in, you get a top and when everyone is out, you get a bottom.  The only question is how to measure investor commitment, and the weakness of course is that areas in the middle are not clearly defined. 

So enough philosophy, but since there is little change in sentiment outside of bonds, I needed something to fill up the space.  The overall sentiment Indicator Scoreboard has now reached a level close to an official SELL over the last two years, so it's doubtful that we see much of Santa this year.

The Short Term Indicator  (VXX $ volume and Smart Beta P/C) is still moving down at a leisurely pace and may see further decline before risk is high of a significant stock market downturn.  One other factor still missing is a swelling in the VIX call buying as smart money prepares for an increase in volatility.  December 2015 saw several days at twice normal volume starting mid-month.

The SPX ETF measure SPXU/UPRO remains at levels consistent with a SELL, while the NDX measure SQQQ/TQQQ shows only a minimal bounce with the recent sharp decline.  The gold bugs HUI measure DUST/NUGT is showing a slight drop in bearishness.

The bond/interest rate sentiment measure for the TNX using TBT/TLT is probably the most interesting change for the week.  After increasing 1.0% over the last four months and 0.7% after the election, a modest decline from 2.49% to 2.39% was met by a flood money into TLT as volume more than doubled while TBT volume was only up 50%.  This resulted in bearish sentiment dropping to almost neutral and is likely to see the eager BTFD buyers being neutered.  I stand by my S/T target (1-2 months) of 2.8% as a break of 2.5% seems more likely to create enough bearish sentiment for a S/T top in rates.

Conclusion.   If Trump was wearing a red suit and had a beard, I would say we just finished the Santa Clause rally early this year, just like the last two years.  More consolidation likely. 

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

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