Trump's Trade War Trumps Sentiment

Last week's price targets were spot on with a projected low of SPX 2550-70 (act 2554) and projected high of 2650-70 (act 2672), but the timing was off with the lows earlier than expected with Xi's retaliatory tariffs.  Next week may see the lower low I have been looking for with NDX testing 200 SMA (6290ish).  I also want to clarify my "melt up" possibility from last week.  With the NDX bullish out performance likely over, the SPX could trade between 2550-2700 for the next two months then go up 100-150 pts June-July to a higher recovery high (2820-30), but unlikely a new ATH.

This week I am going to change my indicator format slightly using the Indicator Scoreboard, TNX, HUI, and SPX Long/Short Term ETFs as intermediate indicators (2017/07/01-pres with 1x EMAs), and the other indicators as short term (2018/01/01-pres and 0.5 EMAs).  I think this will make comparisons more easy.  If anyone agrees/disagrees feel free to comment.

I. Sentiment Indicators

The overall Indicator Scoreboard remains at very high bearish levels indicating that a multi month rally should begin soon.

The Short Term Indicator (VXX $ volume and Smart Beta P/C) had briefly fallen to neutral at the highs last week and does not seem supportive of more than a very short term rally, so lower lows are expected next week.

One indicator which did give more warning of possible problems late last week is the ETF put/call ratio.  It had fallen to levels of the mid-Feb and mid-Mar tops and remains at low levels.

Bearish bond sentiment (TNX) remains elevated so that the risk of higher rates in the near to medium term seems minimal.

The gold miners (HUI) bearish sentiment has declined much sharper than expected compared to the rise in prices, and now seems to be in a similar pattern as Jan.  This seems to imply limited gains with higher risk if stocks recover.

II. Dumb Money/Smart Money Indicators

I'm going to start with the int term SPX Long/Short Term ETFs.  I had mentioned a couple of weeks ago that this indicator seemed to be pointing to a more positive resolution due to stair-step progress similar to that following Aug 2017, but this has now broken down.  If sentiment continues to stay near or below the mean, it will be repeating a pattern seen in Sep-Dec of 2015 which was warning of complacency by the longer term investors and was followed by the Jan-Feb 2016 decline. (See Investment Diary for hist charts.)

The normal Dumb Money/Smart Money Indicator gave another SELL at the close Tue that resulted in an SPX 40 pt gap down at the open Wed that was quickly reversed as expected due to strong cyclicality (below).  The mildly positive Thur appears to be like the early Feb reading where the market continued lower to create a stronger BUY.

The cyclicality component remains strongly positive and supports the Indicator Scoreboard.

The NDX Long Term/Short Term ETF Indicator continues to mimic the DM/SM Indicator moving from mildly negative Tue to mildly positive Thur, so it appears the Smart Money was fooled this week.

III. Technical Indicators

Just a quick note on the SKEW for the last five years. The EMAs have now fallen to same levels as the Jan 2018 highs, the only times it has been this low when bearish sentiment was this high were at the Oct 2014 and Feb 2016 lows.

IV. Options Open Interest

Everything was looking pretty good last week until Fri, as the SPX seemed to following the SPX guidelines although earlier than expected, so consider all of my guidelines as "or sooner".  Now that the SPX has fallen below most of the current calls, only put negative delta hedging should be important.  For Mon the only thing that seems important is the strong support at SPX 2575, so an inside range day is likely with a theoretical high possible of 2670 (not likely).

For Wed, strong support falls to SPX 2525 so Tue/Wed is more likely to see a retest of the Feb lows.

Fri has much larger size positions and is likely to have more impact on prices.  Very large put positions at SPX 2600 and 2630 may provide resistance from below, but are more likely to act as magnets to pull the SPX toward a close at 2640 if a retest of the lows is seen earlier in the week.

Conclusions.  The outlook for next week is much the same as last week, only with slightly lower targets.  We now have both the SPX and DJIA with tests of their 200 SMA and only the NDX (200 SMA 6,290) of the big three I watch remains.  Previous similar bottoms (SKEW) were followed by rapid advances off oversold conditions that leveled off, but my preference remains a moderate advance first then acceleration later.  If the SPX ETF indicator follows the 2015 pattern, this would imply a larger (15%) decline later in the Fall (Aug-Oct).

Weekly Trade Alert.  Part of the sharp drop Fri was probably in anticipation of retaliatory tariffs by China next week, so the news is more likely to produce an opening gap down and reversal as we saw Wed rather than an all day affair like Mon or Fri.  That said Mon is likely to be a consolidation with a sharp decline Tue/Wed to SPX 2525-45, followed by a strong rally to 2640 by Fri close.  Updates @mrktsignals.

Investment Diary,  Indicator Primer,  update 2018.03.28  Dumb Money/Smart Money Indicators
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