Saturday, September 29, 2018

Small Correction Ahead

There was an interesting question/comment last week regarding my longer term views which I usually don't address.  One thing that I see now is that the majority of traders are looking for the SPX to go to 3000+ to either sell long positions or short, but usually the consensus is incorrect.  So the most likely outcome is a final rally that falters like Nov-Dec 2015, or a stronger advance thru SPX 3000 that I can only see justified by higher int rates driving bondholders into stocks.  More recently I have been focusing on shorter/INT term using sentiment as a guideline.  This week I noticed that several indicators are in positions the same as early Aug 2017 that may mean a pickup in downside volatility in the next few weeks, but unlike Aug 2017 the VIX Call Indicator is still hovering around the mean so don't expect a large decline.  For the indicators this week the period covered is June 2017 thru current period.

I. Sentiment Indicators

The overall Indicator Scoreboard (INT term, outlook two to four months) similar to Aug 2017 bearish sentiment reached the SELL level a couple weeks before the SPX price downturn and was trending up before.


The INT view of the Short Term Indicator (VXX $ volume and Smart Beta P/C, outlook two to four months) was also declining sharply for the two weeks before the Aug 2017 volatility with the current sentiment lows the same.


Bond sentiment (TNX) is hovering near neutral so there is no sentiment bias for a directional move.  The somewhat hawkish Fed outlook at the recent FOMC meeting may have caused a pause in higher rates, but any signs of continued economic strength are likely to lead to higher rates while a slowdown may cause rates to fall.


For the INT outlook with LT still negative, the gold miners (HUI) bearish sentiment is again nearing the SELL level.  Without the dollar weakness seen in mid-2017, a sustained rally is unlikely.


II. Dumb Money/Smart Money Indicators

The Risk Aversion/Risk Preference Indicator (SPX 2x ETF sentiment/NDX ETF sentiment, outlook 2 to 4 days/hours) as a ST/INT indicator remains near the bottom of its TL.  The TL lows match the mid-2017 lows, reversing the strong uptrend in sentiment thru the Jan highs.


The option-based Dumb Money/Smart Money Indicator as short/INT term (outlook 2 to 4 days/weeks) has moved off its recent sentiment lows and may be moving up to a larger BUY as seen after the Aug 2017 decline.


The INT term SPX Long Term/Short Term ETFs (outlook two to four weeks) bearish sentiment is near a SELL similar to right before the beginning of the Aug 2017 decline.


Long term neutral, the INT term NDX Long Term/Short Term ETF Indicator (outlook two to four weeks) has declined to about the same level as the last 4% decline in early Sept.  Since May the NDX pullbacks have been limited by the 50 SMA (7464), a break of that level may be an early indication of bigger problems.


III. Options Open Interest / Other

Using Thurs close, remember that further out time frames are more likely to change over time.  This week I will look out thru Oct 12.

With Fri close at SPX 2914, Mon put support up to 2925 (likely stronger with Fri) is likely to push the SPX to 2925-35 or higher.  Possible double top to Sept opt exp 2940 for Mon/Tue.  Light open int overall.


Wed is somewhat similar except that strong resistance appears at SPX 2950, but down to 2875 shows only moderate support so a downward reversal is likely.


Fri shows larger open int with significant call resistance starting at SPX 2625 with strong support at 2900.  A move down to at least 2920 seems likely.


For the following Fri, another large open int, there is significant call resistance at SPX 2905 and higher with the potential for a push down to 2880.  The next Fri, opt exp, shows strong support at 2900, so this is should be at least a temporary bottom, depending on sentiment



Conclusions.  Most of the sentiment is consistent with some type of pullback over the next two weeks following a retest of recent highs early in the week.  The low volume of VIX calls does not indicate a large pickup in volatility.  Options open int indicate that by Fri Oct 12 the SPX could reach the 2880 level or slightly lower, while the following week shows a move back over 2900 is expected.  The increase in bearish sentiment will be an important indicator of what happens next.  After the Aug 2017 pullback, I first pointed that the high sentiment was a warning of a possible melt up and it was.
 
Weekly Trade Alert.  Ideally the SPX will test the Sept 21 highs of 2940 by mid-day Tue and begin an orderly pullback for the next two weeks, but with the Trump tweets anything can happen.  A more volatile decline is more likely to lead to a stronger rally after, while an orderly pullback could lead to a Nov-Dec 2015 type top.  Updates @mrktsignals.

Investment DiaryIndicator Primer,  update 2018.03.28  Dumb Money/Smart Money Indicators
Article Index 2018 by Topic
Article Index 2017 by Topic
Article Index 2016 by Topic
Long term forecasts

© 2018 SentimentSignals.blogspot.com

Saturday, September 22, 2018

An Alternate Reality

I had been looking for a setup for a downside Oct surprise if supported by sentiment,but several things happened the past week which surprised me and opened the possibility of more bullish options for the stock market, at least for the short term.  This outlook considers a rally that continues into the election and possibly several month beyond.

The first was the DJIA breaking out to new highs. As I mentioned several weeks ago the lagging behavior of the DJIA with the NDX already topping is like a Sirens Song meant to lure the public into the top since the public looks mainly at the DJIA.  A continued rally at this point would probably mean a larger degree correction later.

The second was that the TNX broke above 3.0% in the face of strong bearish sentiment which may indicate the the Smart Money is bearish on bonds. The last time this happened was at the end of 2017 and the result was a large move by bond investors into stocks at the Jan top. An Apr-May rise in rates was due to Russia's selling of US bonds in response to Trumps sactions, perhaps China with 10x the amount of US bonds will follow the Russian example. If so, the result could be a push in the TNX towards 4.0% that may cause a short term rush into equities by bond holders, but for the longer term could spell disaster for the faltering housing market and force the Fed to pursue a more aggressive longer term stance. The Fed does not usually quit until the yield curve inverts which could extend the tightening cycle into mid-2020 to 4.5% funds rate.

Finally, significant bearish sentiment never appeared and the VIX Call Indicator 10 day SMA which signaled the Jan 2018 top and the Sept 2014 top only rose by +36% of the avg to just above the mean.

I. Sentiment Indicators

The overall Indicator Scoreboard (INT term, outlook two to four months) has now dropped down to the level comparable to the SPX 50 pt pullback in mid-Aug, but I want to point out the much lower levels in mid-Dec 2017 that resulted only in a two week consolidation when TNX rates were rising strongly.


The INT view of the Short Term Indicator (VXX $ volume and Smart Beta P/C, outlook two to four months) is in the strong warning area, but again similar to mid-Dec 2017.


Bond sentiment (TNX) fell sharply at the end of the week in the face of a spike in earlier bearish sentiment.  As mentioned in the introduction, we saw something similar in mid-Dec 2017 that was a prelude to a sharp rise in rates that could be positioning by smart money.  Two factors that may be pressuring rates higher are the unexpectedly strong deficits (growth is not increasing tax revenues) and possible selling by China.


For the INT outlook with LT still negative, the gold miners (HUI) bearish sentiment has also declined sharply with the recent rally roughly being the 10-15% I was looking for.  Not too long ago I saw a chart that showed the Chinese as the largest public holders of gold and the slowdown in their economy is not a positive for gold.


II. Dumb Money/Smart Money Indicators

The Risk Aversion/Risk Preference Indicator (SPX 2x ETF sentiment/NDX ETF sentiment, outlook 2 to 4 days/hours) as a very ST indicator is starting to improve relative to its TL as the recent weakness in techs has removed some of the frothiness from the NDX sentiment relative to the SPX.  Conclusion, NDX more likely to consolidate than selloff.


The option-based Dumb Money/Smart Money Indicator as short/INT term (outlook 2 to 4 days/weeks) saw a sharp reversal from the near SELL levels early in the week and is likely to reach a BUY with a 1-2% pullback.  Notice the much lower levels seen last Dec and Jan before a bigger top.


The INT term SPX Long Term/Short Term ETFs (outlook two to four weeks) bearish sentiment has moved back to neutral and is also in a similar position as seen in mid-Dec 2017.


Long term neutral, the INT term NDX Long Term/Short Term ETF Indicator (outlook two to four weeks) with a closeup of the Jun-Sep period below showing that very short term is more indicative of a consolidation until sentiment breaks either way.


III. Options Open Interest / Other

Using Thurs close, remember that further out time frames are more likely to change over time.  This week I will look out thru Sept 28.  Fridays bearish outlook may have increased put support.

With Fri close at SPX 2930, the SPX is at the top of put support with 2900-30 largely overlapped providing little resistance either way, but a slight downward bias.  Light open int overall.


Wed is somewhat similar with the most likely range SPX 2900-25.


Fri shows larger open int with strong call resistance starting at SPX 2925, and the very strong put support at 2850.  Support at 2900 is likely to increase with any early pullback so may hold for the weeks low.


Conclusions.   The overall Indicator Scoreboard indicates that some type of short term pullback is likely, but overall sentiment indicated that a pullback of 1-2% or a two week consolidation may be all.  It may be my imagination but I am getting the feeling that the next surprise may be a breakdown in bonds (higher TNX rates) that could push more bondholders out of bonds and into stocks.  There has always be a widely held belief that stocks run into trouble when the index dividend rate hits 50% of the TNX rate.  With the SPX div rate at 1.7%, this is at TNX 3.4%.  This happened in the summer of 1987.
 
Weekly Trade Alert.  Mon pre-market is likely to selloff due to China trade talk breakdown but with limited downside.   Updates @mrktsignals.

Investment DiaryIndicator Primer,  update 2018.03.28  Dumb Money/Smart Money Indicators
Article Index 2018 by Topic
Article Index 2017 by Topic
Article Index 2016 by Topic
Long term forecasts

© 2018 SentimentSignals.blogspot.com

Saturday, September 15, 2018

The Calm before the Storm

Last week was more notable for its lack of volatility than anything else with an SPX rise of 1% for the week.  Mon early decline was enough to generate a ST options Dumb/Smart Money BUY as posted on Twitter, but the week ended with many of the sentiment indicators near a SELL so further gains are likely to be limited.  Options open int is also showing limited upside potential that may indicate a Nov-Dec 2015 topping behavior (lower highs).  The VIX Call Indicator has also started to pickup with a 19% rise from recent lows (a SELL is 50%) Wed-Fri and may give a SELL next week, the last SELL was Jan 10th.

I. Sentiment Indicators

The overall Indicator Scoreboard (INT term, outlook two to four months) dropped sharply last week and seems to be bottoming in the area of the July 2017 top rather than the Jan top, so a repeat of the Jan-Feb crash is not expected.


The INT view of the Short Term Indicator (VXX $ volume and Smart Beta P/C, outlook two to four months) remains in an area that is similar to Jan, so a sizable pickup in volatility is expected soon.


Bond sentiment (TNX) showed a sharp pickup in bearish sentiment as rates rose near to the 3.0% level.  Much of the rise may be due to recent weakness in the dollar, but I still think that a stronger dollar and somewhat weaker rates are expected into the 1st half of 2019.


For the INT outlook with LT still negative (note, BUY for INT term equals neutral LT), the gold miners (HUI) bearish sentiment dropped sharply as many analysts are again calling for a bottom and new bull market, but this doesn't line up with the DUST/NUGT ETF sentiment.


II. Dumb Money/Smart Money Indicators

The Risk Aversion/Risk Preference Indicator (SPX 2x ETF sentiment/NDX ETF sentiment, outlook 2 to 4 days/hours) as a very ST indicator remains near the bottom of its TL and is a topping indicator.


The option-based Dumb Money/Smart Money Indicator as short/INT term (outlook 2 to 4 days/weeks) came close to a complete reversal from the Mon BUY and likely to generate a ST SELL next week.


The INT term SPX Long Term/Short Term ETFs (outlook two to four weeks) bearish sentiment was little changed for the week, but also appears to be forming a similar pattern to July 2017 period that saw a big jump in volatility, but not a large decline.


Long term neutral, the INT term NDX Long Term/Short Term ETF Indicator (outlook two to four weeks) again the cyclicality makes this hard to interpret, so this week I am going to add the 2x and 3x ETFs that show overall high bearishness is not similar to a major top.


The NDX 2x QID/QLD ETFs (dumb money) indicate a high level of bearishness.


While the NDX 3x SQQQ/TQQQ (smart money) show only neutral sentiment.  The conclusion is that a pullback/correction ST is not likely to be the beginning of a bear market.


III. Options Open Interest / Other

Using Thurs close, remember that further out time frames are more likely to change over time.  This week I will look out thru Sept 28.

With Fri close at SPX 2905, a hold over 2900 can cause delta hedging with light resistance up to 2950.  A break below 2900 could fall to 2875.  Light open int overall.


Wed shows call resistance increasing up to SPX 2930 with strong support at 2840.


Fri opt exp has most of the options as hedges in the AM, but is similar to the PM where there is strong resistance at SPX 2900 and above with the potential for a drop to the 2850-75 level.  For the week, a Mon/Tue rally over SPX 2920 should be reversed by EOW.


For the following Fri (EOM) has large option positions with strong call resistance at SPX 2865 and higher.  So there is likely to be some weakness toward the 2850 area by the EOM.


A couple of weeks ago, I resurrected the VIX Call Indicator, point out that the extremely low VIX call vol was similar the Jan 2017 that saw a brief decline followed by a strong rally then a correction.  We got a brief decline and the Aug rally and last week the VIX Call indicator rose by 19% of the avg with 50% (0.5) as a rise from a recent low a SELL.  Remember that there is usually a 1-3 week lead before a large decline.  I will be using a SELL as an entry signal for a VXX position that historically has returned 30-50% over the following 4-6 wks with a maximum drawdown of about 10%.



Conclusions.  Possible tropical storm, but no hurricane on the horizon.  I am expecting a 5-7% pullback in Oct before a possible final year end rally that may top SPX 3000.  In addition to the August tops discussed last week, there is also a mid-term election factor.  Sentiment is the over riding factor, however, and the first VIX Call Indicator SELL since Jan would strongly support the historical trends.

Weekly Trade Alert.  A top next week may not be followed by a sharp decline immediately, but I am looking for the DJIA to fill the Jan 29 gap at 26,440 before a sizable decline begins.   Options open int point to possible weakness by end of next week or EOM at the latest.  We could see something like Dec of 2015 where volatility picks up gradually, then explodes due to some external event.  Updates @mrktsignals.

Investment DiaryIndicator Primer,  update 2018.03.28  Dumb Money/Smart Money Indicators
Article Index 2018 by Topic
Article Index 2017 by Topic
Article Index 2016 by Topic
Long term forecasts

© 2018 SentimentSignals.blogspot.com

Saturday, September 8, 2018

Questionable Sentiment

Last week was somewhat weaker than expected and the SPX seems to be testing the diagonal support from early July around 2860.  As posted on Twitter Wed AM, one of the research firms took a closer look at the avg of 14 times the SPX made a new high in Aug since 1980, and the result was a weaker 1st half of Sept with a stronger 2nd half followed by a sharp decline in Oct, then a year-end rally.  Since this includes 1987, there are likely some distortions for Oct, but my expectations are for a rally to SPX 2920-40, followed by a decline to 2750-2800 in Oct.

I. Sentiment Indicators

The overall Indicator Scoreboard (INT term, outlook two to four months) was accurate with a SELL at the Aug top, and shows some improvement with last weeks action, but not enough to expect an immediate rally.


The INT view of the Short Term Indicator (VXX $ volume and Smart Beta P/C, outlook two to four months)  was little changed, again not supportive of much of a rally.


Bond sentiment (TNX) surprisingly showed a sharp drop in bearishness even as rates rose with the strong wage growth in the jobs numbers.  Bond investors seem to be discounting inflationary implications due to trade war concerns.


Looking at the LT, I have been negative on the gold miners (HUI) for most of the last two years while many have been talking about a new bull market and even with a decline of almost 50% from 2016, bearish sentiment is more indicative of the early stages of a decline.  Comparing this time to the 2015 decline, sentiment in 2015 had already reached a BUY before the last collapse from 180 to 100. so this decline may have more to go than people imagine.


II. Dumb Money/Smart Money Indicators

The Risk Aversion/Risk Preference Indicator (SPX 2x ETF sentiment/NDX ETF sentiment, outlook 2 to 4 days/hours) as a very ST indicator remains near the bottom of its TL with little change for investors appetite preferring NDX to SPX, not a good sign given the recent weakness in NDX.


The option-based Dumb Money/Smart Money Indicator as short/INT term (outlook 2 to 4 days/weeks) has started to rise and may reach a buy by the end of week.


The INT term SPX Long Term/Short Term ETFs (outlook two to four weeks) bearish sentiment continues to be one the most accurate indicators reaching a SELL at the Aug top, and last weeks lack of improvement is indicative of stronger downside ahead, the only question is whether there will a be a brief options related rally first.


Long term neutral, the INT term NDX Long Term/Short Term ETF Indicator (outlook two to four weeks) has reached the level where a short term rally occurred in the past couple of months, but the overall high levels have marked longer term tops.


III. Options Open Interest / Other

Using Thurs close, remember that further out time frames are more likely to change over time.  Given last Fri downward volatility, put support is likely stronger for the week than shown on Thur.

With Fri close at SPX 2772, Mon has some put support up to 2875 with offsetting puts and calls from 2880 to 2895.  Light open int overall with a slight upward bias.


Wed is somewhat similar but with put support moving down to SPX 2860, while there is some call resistance at 2880 but little at higher prices.


Fri shows larger open int with significant call resistance starting at SPX 2900, and the 2850 up to 2880 show a lot of overlap.  Some volatility between 2850-80 seems likely.


Conclusions.  Next week is likely to show some downward pressure, but may find support between SPX 2850-60.  Currently sentiment is not showing much support for a rally.

Weekly Trade Alert.  None.  Outlook may change by end of week.  Updates @mrktsignals.

Investment DiaryIndicator Primer,  update 2018.03.28  Dumb Money/Smart Money Indicators
Article Index 2018 by Topic
Article Index 2017 by Topic
Article Index 2016 by Topic
Long term forecasts

© 2018 SentimentSignals.blogspot.com