Nearing the Edge of the Cliff

Several weeks ago when I pointed out the possible significance of a false timing signal from the so called "January effect", I expected somewhat more volatility that a fifty point SPX trading range for six weeks.  Now the 1% breakout last week has the bulls convinced that Nirvana is just around the corner.  This is most evident in the bonds (TNX) and gold stocks (HUI) where sentiment is nearing a SELL even though there has not even been a breakout.

For stocks (SPX), the story is much the same with low bearish sentiment remaining and no apparent reason for things not to continue so.  My reasoning remains that higher rates will be the key to bring down the house of cards for a broad range of asset classes.

Now looking at the indicators, the overall Indicator Scoreboard has now fallen back to the SELL level, indicating that at least a short term pullback is likely to start next week, but does not rule out a continuation top similar to the first half of 2015 or mid 2016.

The Short Term Indicator (VXX $ volume and Smart Beta P/C) has also turned lower but has still failed to reach the extremes seen before the Aug 2015 and Jan 2016 for the very short term.

If I seem to be somewhat more conservatively bearish, I will show two of the MISC indicators that do not seem to be indicating a short term top yet. The first is the TRIN (essentially a measure of net adv issues to net volume) which usually shows lower supporting volume or higher ratios as seen in Aug 2015 or late 2016.

The second indicator is the VIX P/C, where lower levels are typically seen before a significant selloff.

Moving on to bonds (TNX), investors seem to be flocking into the bond ETFs as rates have stabilized around 2.5%.  Interest rates have been somewhat weaker than I expected to date, but a breakout to the upside still seems more likely.

Finally, the gold stocks (HUI) shows an even sharper drop in bearish sentiment even as the HUI has stalled out around the 200 level.  Compared to bonds gold stocks seem to be betting on higher growth and more inflation, while bonds seem to be expecting lower growth and less inflation.

Conclusion.  The end of January has produced a positive result as expected, but some of the indicators are not as extreme as expected for a major top.  I will be watching bonds (TNX) very closely as a breakout over the 2.6% level may be required for a major selloff to start.

Weekly Trade Alert.  I did call off all trades last week via @mrktsignals due to pre-market levels and EOM timing considerations.  This week there are no clear shorting levels, so I will probably stand pat with any changes posted on Twitter.