Nobody Likes A Contrarian

Last week was one of my best ever as the SPX ping-ponged between the gaps at 2428 and 2468, first reaching the lower range of 2420-30 after N. Korea fired a missile over Japan Tues, then moving to the upper range of 2475-85 by Friday.  Unfortunately, the views that seem to get the most attention are those predicting a market crash after every 1-2% correction, while as a contrarian my role is to constantly tell the majority that they are probably wrong.  This week's comments will probably disappoint both the bulls and the bears.

I. Sentiment Indicators

This week I want to go back to show 2015, but with normal EMAs because the mid-2015 top with alternation seems to be the most likely outcome.  The overall Indicator Scoreboard rose more strongly in the recent SPX 70 pt decline than it did in the July 2015 90 pt decline, but has now declined to neutral.  From the sentiment lows in late Apr, however, we are still missing a two to three month consolidation period compared to 2015 that I will get back to later.

The Short Term Indicator (VXX $ volume and Smart Beta P/C) remains highly elevated even after last weeks strong rally, indicating that traders (EW followers) still view this as a b-wave correction in a 4th wave decline. The extreme sentiment rivals that of late Aug 2015 after the SPX 200+ pt flash crash.  If we do see a retest of the lows it is likely to be at a higher level like Sept 2015 (now 2430-40), rather than the lower level like Feb 2016 (now 2400).

Sentiment extremes are limited to traders, however, as the SPXU/UPRO ETF ratio has dropped to levels near those seen at recent tops for the SPX.

Even the NDX leveraged ETF ratio SQQQ/TQQQ shows a sharp drop in bearish sentiment.  Although this one is somewhat more interesting because prices rose for a whole year starting in July 2016 with very low bearish sentiment, while now sentiment remains at elevated levels that may not be as bullish as it seems.

With bonds (TNX) sentiment moved back to neutral even as rates declined slightly.

For the gold miners (HUI), sentiment actually reached a short term buy early in the week, and has since pulled back.

II. Options Open Interest

In case you missed it, I did post on Twitter an update Thur AM, showing a possible target for the SPY at 248. Looking ahead to next week, for Wed the large block of calls at 247 is likely to push prices modestly lower, possibly to 246.

For Fri, the large put position at 245 should keep prices in the 246-8 range, and a move over 248 could rise to 250 with delta hedging.

For options exp, the larger size for calls could push prices down to the 244 level, but delta hedging over 247 could push prices to 249.

Looking ahead to Oct, the number of calls over 248 has increased with the latest rally, making 247-8 the most likely range.

Conclusions.  Overall sentiment is the most unusual I have ever seen with very high bearish sentiment concentrated in volatility (VXX) products and ETF puts (smart beta p/c).  Since other sentiment for the SPX is neutral at best, the most likely scenario is the alternation of the consolidation period for 2015 which implies a range for the next two to three months of 2450-2500 with possible spikes lower to 2430 or higher to 2520. SPY options open int indicates that a slight pullback to 246-7 may occur with an end of week rally that could go to 248 or higher.  Options exp is likely to see a higher retest of the lows at 244, but positive news (debt ceiling?) could cause delta hedging up to 249.  Oct shows additional signs of consolidation in the SPX 2450-2500 area.

Weekly Trade Alert.  After last week, I am retiring - just kidding.  The last two gaps were at SPX 2458 and 2472, so unless SPY 250 is reached next Fri (SELL), I see nothing interesting.  Time for football or family. Updates @mrktsignals.

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