Bubble Trouble Redux

When I first discussed the possibility of a melt up/bubble in stocks in June 2017, little did I know that the SPX would be 20% higher seven months later.  In August 2017, we saw extreme bearish sentiment in the ST Indicator rivaling  the 200+ pt flash crash in Aug 2015 when the SPX dropped 75 pts to retest the 2400 level and the melt up began.  Believe it or not, last week saw an NDX sentiment indicator rise to levels similar to the Aug 2015 flash crash, even as 7000 was tested.  Is the NDX about to see a redux of the melt up the second half of 1999?

I. Sentiment Indicators

The overall Indicator Scoreboard remains near recent lows with slight uptick early in the week.

The Short Term Indicator (VXX $ volume and Smart Beta P/C) is also relatively unchanged.

The NDX short term ETFs SQQQ/TQQQ sentiment continued to spike higher reaching the strong BUY level that rivals that of the Aug 2015 flash crash.  Last week I read in ZH that Soros had lost $1B shorting the "Trump rally", perhaps he has now shifted focus to the NDX.  The daily $ size of the SQQQ volume is only 10% of the VXX $ vol, so it is hard to gauge the possible price effects, but I estimate 5-10% addl upside for the NDX over the next few weeks/months.

But the longer term NDX ETFs QLD/QID is showing what appears to be a rounded bottom in sentiment similar to the first half of 2015 that may indicate we are near the terminal phase of the rally not the beginning of a long term move.

Bond sentiment (TNX) dropped slightly as rates hovered around 2.65%.

The gold miners (HUI) sentiment fell slightly as prices saw a strong start to the week on a weaker dollar, then fell back as the GDX approached the 25 resistance level of the options OI.

II. Options Open Interest

For the past several weeks options OI as not been effective for SPY guidelines as small pickups in regular bearish sentiment measures have acted like sparks during late fall in the California wooded areas easily starting huge wildfires.  For next week for the SPY (close 286.6, SPX 2873) on Wed Jan 31,  SPY 287 looks like a comfort zone with higher call levels on either side, so Mon/Tue may be relatively calm.  If resistance at 288-9 is over come, there is clear sailing to higher levels.  "Most likely" is 282.5.

For Fri Feb 2, "most likely" is SPY 282 and as long as prices hold over 285, a move to 295 or higher is possible.

III. Technical Indicators

Over the last two weeks, I have noticed a sharp drop in the SKEW and looked back over several years and noticed a pattern that seems to be repeating from the lead up to the 2007 market top.  Namely, a pattern of rising tops and bottoms in the SKEW for most of the bull market as bearish sentiment increases with higher prices, followed by a sharp decline as the bears go into hibernation at the top.  We still have a little ways to go before reaching 2008 levels.

Conclusions.  Pullbacks are getting smaller and smaller as prices go parabolic, so buy the dip is quickly becoming chase the rip.  Higher prices are likely next week, but there may be some hesitation Mon/Tue ahead of the FOMC as some are warning of a "surprise" rate hike.  I doubt the new Fed head is anything like Paul Volcker (broke 1970s inflation), and a dovish outcome could push the SPX towards 3000 latter in the week.  The NDX should be especially strong with large cap tech earnings coming out combined with the bullish SQQQ/TQQQ sentiment.  A move to SPX 2970-90 will likely be followed by a 3-5% pullback into mid-late Feb (target SPX 2850ish), but should be followed by one more push higher of 5-10% targeting SPX 3100-200.

Weekly Trade Alert.  Waiting for a pullback is becoming frustrating, so a flattish start to the week is likely going to be followed a strong second half.  Use your own discretion.  Updates @mrktsignals.

Investment Diary, update 2017.10.28, Indicator Primer
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© 2017 SentimentSignals.blogspot.com

Was Last Week a Warning?

Two weeks ago, I was looking for a pullback into mid-Jan then up to the EOM, but last week began to look for higher prices into monthly options expiration, and the market delivered a little of both with what looked like a consolidation for the SPX in what EW analysts call a 4th wave triangle.  The sharp selloff from SPX 2808 Tue increased bearish sentiment (Avi calling a top again) to the point where higher prices are likely short term, but also show signs of a larger decline ahead.

I. Sentiment Indicators

The overall Indicator Scoreboard continues to show extremely low levels of bearishness.

While the Short Term Indicator (VXX $ volume and Smart Beta P/C) had a very small uptick in bearishness due to divergences in the two components.

The VXX $ volume saw a sharp uptick comparable to the Jul 2017 SPX 50 pt decline, supporting higher prices short term.

The Smart Beta P/C (Equity Calls/ETF Puts), however,  saw a sharp drop as individuals seemed to be piling into Equity Calls, which is usually a sign of excess frothiness.  So overall, higher prices are likely but with higher risk.

The SPX short term ETFs SPXU/UPRO also saw a sharp run up in bearish sentiment, matching the early Dec pullback of SPX 40 pts that was followed by a rally of 180 pts.

The NDX short term ETFs SQQQ/TQQQ sentiment has also spiked higher reaching the BUY level.  It is very possible that a topping process similar to mid 2015 forms where the SPX traded in a 5% range for several months (2000-2100), even as the NDX continued higher into Jul due to the higher level of bearishness.

Bond sentiment (TNX) was virtually unchanged even as rates broke above the 2.6% area with 2.7-2.8% seen as the first area that could be a drag on the SPX.

The gold miners (HUI) seem to have run into strong resistance at HUI 200 and GDX 24 with little support from sentiment which is also unchanged.  Target updates in the options OI section.

II. Options Open Interest

This week I will take a look at Feb's monthly options for VIX and GDX as well as weekly and monthly for SPY (close 280.4, SPX 2810).  Looking at the SPY for Wed, we a "most likely" at 278.5, but delta hedging over 280 can push prices higher with strong support at 276.

For Fri, SPY "most likely" drops to 277.5 with delta hedging over 280 and strong resistance at 284-85.

For EOM Jan, the most noticeable feature is huge support at SPY 273-74, beyond that we also have delta hedging from 278 to 281, and "most likely" at 277.

Looking at Feb monthly for SPY, over 280 then next resistance is 286, below 280 could pust down to the "most likely" at 277 and the relatively large number of calls below 277 could push down to 273.

For the Feb VIX, strong put support at 12 and call resistance at 15 is likely to keep the VIX in s tight range with a "most likely" at 12.5.  A move over 15 could run up to 21 with delta hedging.  Last week started at 10.4, ran up to 12.8, then fell back to 11.3, so this implies more volatility than seen recently.

For Feb GDX, we have support at 23 and resistance at 25, "most Likely" is 23.5.  The most noticeable feature is lack of support/resistance outside this range that could mean a large move is possible in either direction.

Conclusions.  Last Tue's sharp reversal and 40 pt SPX drop from a high at 2808 was apparently viewed as an important top by many as shown by sentiment using VXX $Vol, SPXU/UPRO, and SQQQ/TQQQ that indicate a short term rally is likely to EOM Jan.  Likely targets are SPX 2840-50.  SmartBeta PC, VIX Call Indicator (last week), and VIX options OI point to a possible volatile period ahead (EOM with FOMC?) thru Feb.  Note: chart on BA last 18 mns looks like Bitcoin at top.

Weekly Trade Alert.  Sentiment has now reached a level supporting a short term long with a target of SPX 2840-50 by EOM, but I would like to see a pullback early in the week to TL support at DJIA 25900 and SPX 2800.  Updates @mrktsignals.

Investment Diary, update 2017.10.28, Indicator Primer
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© 2017 SentimentSignals.blogspot.com

When Is Enough Enough?

It is clear that the stock market is in the final stages of a melt up, but how much higher can it go?  Bitcoin did not stop until it began to go up 10% a day for an entire week to start last Dec.  At the rate the SPX is going we could  see 2850 next week and 3000 by the end of Jan.  As I mentioned on Dec 26, the consensus building of an EOY target for 2018 of SPX 3000 was more likely to see a melt up or a failure.  Sentiment is now pointing to a pullback starting by early Feb, but what happens afterwards depends on the eagerness of the bears.

I. Sentiment Indicators

The overall Indicator Scoreboard is little changed from last week as the level of bearishness is about as low as it can go.

The Short Term Indicator (VXX $ volume and Smart Beta P/C) has continued to hover at levels that marked the mid-2015 top in May and July.  Based on the behavior of its components the ultimate low equivalent of Apr 2015 may have already been seen last July.

The VXX $ volume has finally dropped back to the SELL level which we saw late Apr 2015 about a month before the top in the SPX.

The Smart Beta P/C continues to inch up as we saw in May of 2015 with the earlier bottom in Dec 2017 matching the late Apr 2015 SELL.  Overall, I am now considering the ST Indicator on a SELL even though the components are out of sync.

The NDX short term ETFs SQQQ/TQQQ  shows increased levels of bearishness even as the index has moved up 100 pts since last week.  The 7000 level is looking more likely.

Bond sentiment (TNX) reversed sharply last week, which may presage a final spurt upwards as we saw in Dec 2016 or not.  Interestingly there have been a couple of news events lately (China selling US bonds, bond guru warnings) that saw an AM spike to just below 2.6%, matched by weakness in stocks, then rallies in stocks and gold as rates fell back towards 2.55%.  A break above 2.6% may be a warning for stocks.

The gold miners (HUI) saw bearish sentiment rise as the HUI moved back to the 200 level that may allow for slightly higher prices.

II. Options Open Interest

Prices only fell below the SPY 273 level for a few minutes then delta hedging continued to push prices higher thru Fri (close SPY 277.9, SPX 2786).  Next week looks like it will be more of the same.  For Wed, a move below SPY 276 could drop to the "most likely" at 275, but over 276 delta hedging supports higher prices.

For Fri monthly optn exp, with SPY higher than 275 delta hedging supports higher prices to 280, a push over 280 has clear sailing upwards.  For Fri put support is not important.

III. Other

Last week saw a large jump in VIX call buying, larger and sharper than the early Aug 2017 period, which was followed by an SPX 74 pt plunge in two weeks.  Due to the low holiday vol, I have incorporated the same market vol adjustment used in the VXX $ vol since Jan 2016.  Mon saw 1.2M calls mostly Feb 14, Wed saw 2.2M evenly split between Jan and Feb with 300k 15s and 500k 25s each month that appeared to be a maturity spread (buy/write) so I dropped the number to 1.2M as a conservative read of the hedging potential.  Fri saw about 1.0M with 60/40 Feb and Mar.  The increase is now 78% of the avg vol.

Conclusions.  The recent run up has changed my outlook for a mid-month pullback and rally into EOM to a more imminent top.  Momentum may carry the market upward to the SPX 2850 level next week then consolidate to EOM.  Some Fed heads are talking about more forceful action to slow markets down, so Jan's FOMC (30-31) may give markets a pause EOM.  Using the VIX Call Indicator with the confirmation by the ST Indicator, my outlook is for a 3-5% pullback starting late Jan-early Feb and lasting 2-4 weeks.  Will the bears growl like they did with the Aug pullback causing another bullish romp?

Weekly Trade Alert.  No specific trades this week, last weeks call was aborted when the Tue-Wed pullback caused the VXX $ vol to double, setting up the EOW romp.  Updates @mrktsignals.

Investment Diary, update 2017.10.28, Indicator Primer
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© 2017 SentimentSignals.blogspot.com

A Strong Start to the New Year

Two weeks ago, I began warning that the traditional Santa rally was likely to be disappointing, but a January surprise was likely.  Was it ever, with an almost 70 pt rally in the SPX in 4 days.  My logic was that January is considered an important, but often misleading, indicator of the future for the stock market.  Similar to the January 2016 decline which turned many bearish before a 50% rally, a top this year is likely to be preceded by a strong January.  Only time will tell.  The long term forecast contrasts growth and interest rate outlooks.

I. Sentiment Indicators

The overall Indicator Scoreboard retreated back to the SELL area after a brief increase in bearishness the prior week.

The Short Term Indicator (VXX $ volume and Smart Beta P/C) declined slightly, but remained above recent lows.

The components of the ST Indicator are starting to show a divergence as the VXX $ volume is starting to fall sharply similar to late Apr 2015 before a pickup in volatility.

While the Smart Beta P/C has been inching up as was seen in early May of 2015.  With the major ETF sectors of SPY, QQQ and IWM, this may be due to continued hedging in the NDX/QQQ as seen in the following chart.

The NDX short term ETFs SQQQ/TQQQ still show relatively high levels of bearishness even as the targeted 6700 area is approached, indicating that higher levels, possibly 7000 are likely.

Bond sentiment (TNX) continued to fall, indicating strong movement into TLT based on signs of moderate growth with little inflation.  Still too early to tell what the effects of unwinding QE will be.

The gold miners (HUI) seem to be running out of gas as the targeted HUI level of 200 is reached.

II. Options Open Interest

Options OI was probably the best indicator of the runaway breakout in the SPY/SPX last week as the Opricot Fri chart by Wed showed a large buildup of puts supporting a rise to SPY 271.5 with little call resistance up to 274 (close SPY 273.4/SPX 2743).

Looking forward to the next two weeks, it looks like there could be a small pullback into mid month (SPX 2700 ish), but an EOM rally is likely.  For Wed's SPY a move below 273 finds strong put support at 271 and a "most likely" at 272, but delta hedging provides support above 273.

For Fri, strong put support moves down to 270 and  "most likely" at 271, but delta hedging provides support above 272.

For the monthly expiration, "most likely" is SPY 269 (SPX 2700) with puts and calls offsetting (hedged) at lower levels and at higher levels a move over 270 could push to 274.  Could be a recipe for some volatility, especially if VXX $ Vol continues to drop.

Conclusions.  The explosive rally seen last week has failed to move the ST Indicator to a SELL so more upside is possible but a pullback over the next two weeks to the SPX 2700 level is seen likely using options OI.  More upside during earnings season seems likely, however, particularly in the tech/NDX sector

Weekly Trade Alert.  I hope some of you have better trading success than I have lately.  The Dec 29th selloff was simply a ploy to "shake out the weak hands" and resulted in my getting stopped out at BE, while the "gap and go" opens of the past week gave no apparent good entries.  Last weeks possible Short was cancelled via Twitter when SPY rose over 270 Wed due to possible delta hedging.  No specific trades this week, but a move to SPX 2750 may provide the opportunity for a small short if the VXX vol continues to decline thru Wed.  Updates @mrktsignals.

Investment Diary, update 2017.10.28, Indicator Primer
Article Index 2017 by Topic
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© 2017 SentimentSignals.blogspot.com