Are Stocks Being Setup for a Mini Flash Crash?

As strange as it may seem there is a very unusual combination of sentiment indicators that are pointing to an sharp pickup in volatility while still remaining in an overall uptrend.  The last time we saw such an event was Aug 2017 that set the stage for the melt up into the Jan 2018 blow off high.  By mini-flash crash, I am talking about a 100+ pt drop in the SPX over a 2-3 day period.  Depending on resultant sentiment, however, this time I doubt there will be a following blow off.  One particular catalyst that comes to mind is the Dem-led House filing for Articles of Impeachment against Pres Trump around mid-Nov, others include a negative outcome for the on-again, off-again, Brexit (reminds me of the US-China trade talks) or a potential for a Lehman-like failure of Deutsche Bank as a result of the sub-prime qualities of all of the EU negative rate bonds.

Has Avi now joined the darkside? I was surprised to see that Avi's missive this week at Muck Rack is now predicting a rally to new ATH by the end of this year or early 2020 before a large decline and is even claiming to have been following a "2015-16 fractal" all along.  Compare this to his mid-Sept letter were he was proclaiming that the SPX would pinball down to the 2200 level.  I now wonder if I should start to worry that my views have become the consensus, although a glimmer of hope is offered by Mark Hulberts recent post that the recommended equity exposure by ST timers is well below that seen at recent ST tops.

Several of the data mining indicators are updated in the Tech/Other section, and below is an update of where we stand relative to 2015 that still seems to be chugging along at about a 2x time frame.

I. Sentiment Indicators

The overall Indicator Scoreboard (INT term, outlook two to four months) bearish sentiment saw a sharp drop last week that might be comparable to early Aug 2018.

The INT view of the Short Term Indicator (VXX $ volume and Smart Beta P/C [ETF Puts/Equity Calls], outlook two to four months) bearish sentiment continues to show a pattern of lower lows comparing the Jan and Oct 2018 tops to today that last for a longer period but are followed by larger declines.

Bonds (TNX).  Interest rates seem to be consolidating between 1.5% and 2.0% and may continue to do so for several months until economic uncertainties are resolved.  Low bearish sentiment indicates this could be a major bottom forming.

For the INT outlook with LT still negative, the gold miners (HUI) bearish sentiment is low, but the same uncertainties keeping int rates low may keep gold stocks elevated.

II. Dumb Money/Smart Money Indicators

The option-based Dumb Money/Smart Money Indicator as short/INT term (outlook 2 to 4 mns/weeks) really took a nosedive last week after languishing above neutral for several weeks, but LT EMAs (blue) are likely to work lower before major problems.

And the sister options Hedge Ratio sentiment is much the same, but less extreme.  Small risk of large volatility spike at the moment.

The INT term SPX Long Term (2x/DM) ETFs (outlook two to four weeks) bearish sentiment has been steadily falling.

The INT term NDX Long Term (2x/DM) ETFs (outlook two to four weeks) bearish sentiment has now reached the danger level as the NDX finally made new highs, mainly on the strength of AAPL.  AAPL's earnings come out on the 30th after the close and may produce a "sell the news" event.

III. Options Open Interest

Using Wed close, remember that further out time frames are more likely to change over time, and that closing prices are more likely to be effected.  This week I will look out thru Nov 1. Also, This week includes a look at the TLT Nov 15 opt exp.

With Fri close at SPX 3023, the SPX was able to power thru call resistance the last two weeks and now has put support over 3000.  Call OI at SPX 3025 could hinder further progress, but over 3025 and 3040 is possible with put support at 3010.

Wed is much the same with put support up ro SPX 3010 and over 3020 next call resistance is 3040-50.

For EOM Thur 31st, a "sell the news" seems likely after Wed FOMC and APPL EPS, SPX 3000 possible.

For Fri, Nov 1 jobs report, shows solid call resistance over SPX 3025 with overlapping put/calls down to 2975 that could allow for increased volatility.

Currently the TLT is 138.5 with the TNX at 1.8%.  The huge put support for Oct 18 at 139 kept prices between 138-140, having broken below the Nov 15 141 support level, next major support is 137 then 135, so prices are likely to gradually fall further.

IV. Technical / Other

First, a look at the Crash Indicator from Jan 2018 where bearish sentiment has dropped to neutral, similar to Aug 2018.

Next an update of the SKEW relative to overall sentiment (CPC Revised) saw a sharp drop indicating that even though bearish sentiment dropped sharply, the risk of a spike in volatility remains high.  A negative trend but not at dangerous levels yet.  Due ro VIX blowup in Feb 2018, data for SKEW and VIX optns starts Mar 1, 2018.

The VIX put volume relative to overall sentiment two weeks ago may be why there was little progress to the upside until volume subsided.

While VIX call volume has remained weak relative to sentiment and has provided support for higher SPX prices even though VIX puts provided a negative influence.  No meaningful downside is expected while VIX call buying is this low.  Dec 2018 was an exception, but was made up for by the Crash Indicator.

Conclusions.  Options OI indicate that a very ST top may occur Wed with a high of SPX 3060-50 possible, but a pullback. is likely to be limited to 3000.  Other indicators are pointing to a more meaningful decline possible the second half of Nov.  The SPX may even reach 3070-80 first, but we should see a spike in the VIX call volume before a possible test of the mid-Oct SPX gap at 2940.

Weekly Trade Alert.  With FOMC and APPL EPS after the close scheduled for Wed, watch for a possible "sell the news" reaction of a 1-2% pullback.  Updates @mrktsignals.

Investment Diary,  Indicator Primer,  update 2019.04.27 Stock Buybacks, update 2018.03.28  Dumb Money/Smart Money Indicators
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A Short Term Top is Approaching

Last week was more positive than expected, although a Fri drop closed near last weeks OI support of SPX 2980.  Dismal news included early week news from China that trade talks would not be settled until tariffs were dropped, an earnings bombshell from IBM, and Fri news of design flaw coverups by Boeing.  The stock market, however, seemed to have found a "permanent plateau" at DJIA 27k and SPX 3k until late Fri.

Bullish sentiment mirrored the buoyancy of the stock market as the bears ran for cover, giving an initial indication of a potential setup for a 3-5% pullback in the SPX.  For EW lovers Trader Joe probably has the closest outlook to what sentiment is saying.  He is looking for a ST pullback to SPX 2940-50 before a final leg up to 3070-80 as a B-wave top from the 2018 Dec lows as an INT top.  I disagree with the degree as I still see a longer topping period as likely.

This week will have an expanded Technical/Other section with a discussion of recent data changes at the CBOE, the introduction of two new "data mining" indicators, and how the Smart Beta and Crash Indicators are lining up for a likely pullback.  I may have to cut back somewhere to allow sufficient time for coverage.

I. Sentiment Indicators

The overall Indicator Scoreboard (INT term, outlook two to four months) bearish sentiment saw a sharp drop last week, but with the longer EMA (blue) near neutral, the risk of a pullback is low.

The INT view of the Short Term Indicator (VXX $ volume and Smart Beta P/C [ETF Puts/Equity Calls], outlook two to four months) bearish sentiment has dropped to the level of Jul 2018 that may mean a pickup in volatility.

The following chart shows the Smart Beta P/C back to 2017.  The recent spike lows seems to part of a bigger pattern that has preceded the Feb 2018 and Oct-Dec 2018 corrections, namely consistently lower lows in sentiment that indicated increasingly larger corrections as well as a pattern that stretched out over a longer time period.  An even larger correction is ahead, but may be several months away.

Bonds (TNX).  Interest rates remain in a tight range while bearish sentiment is falling to even greater extremes.

For the INT outlook with LT still negative, the gold miners (HUI) bearish sentiment is rising in a mirror image to prices that continue to follow a pattern of lower lows and lower highs, briefly breaking the 200 level last week.

II. Dumb Money/Smart Money Indicators

For this week, I am going to omit the DM/SM ETF indicators due to an expanded Tech/Other section.

The option-based Dumb Money/Smart Money Indicator as short/INT term (outlook 2 to 4 mns/weeks) fell sharply last week, but remains in a pattern similar to Jul-Oct 2018.  Recent changes in CBOE data may effect this series as discussed in Tech/Other.

And the sister options Hedge Ratio sentiment is similar and well short of the high risk area.

The INT term SPX Long Term (2x/DM) ETFs (outlook two to four weeks) bearish sentiment remains at a fairly high level compared to mid-2018, likely indicating that an INT top is several months away.

The INT term NDX Long Term (2x/DM) ETFs (outlook two to four weeks) bearish sentiment remains low relative to the SPX and although new highs are likely more volatity is expected compared to the SPX.

III. Options Open Interest

Using Wed close, remember that further out time frames are more likely to change over time, and that closing prices are more likely to be effected.  This week I will look out thru Oct 28. Also, This week includes a look at the GDX for Nov 15.

With Fri close at SPX 2986, Mon shows a possible range for the SPX from 2965 to 3025 with small OI positions in between.  More likely is a range of 2980 to 3000.

Wed although small for Wed and large for Fri, the OI is in agreement with Trader Joes target of SPX 2940-50 before a new ATH.  Wed call resistance shows a likely drop below 2975.

For Fri, overlapping puts and calls leave little net put support until 2950, so the SPX may continue to drop to that level.

Looking to the EOM with large OI, Oct 31 post FOMC, a move back toward the SPX 3000 level seems likely although there is a lot overlap down to 2900 that may mean more volatility.

Using the GDX as a gold miner proxy.  For Nov 15 exp, currently at 27.12, the GDX is likely to trade in a range between 26 and 28+ with very large call resistance at 28.5 and 30 and strong put support is all the way down at 23.

IV. Technical / Other

A.  As of Oct 7, the CBOE changed their daily report format, omitting 80-90% of the data, and moving the old format to an archive.  Two data series that I had been following, the SPXW (weekly and EOM PM options) and SPY ETF have been ommitted.  The new series for SPX combines the monthly AM (SPX opt exp) and SPXW, I had been using only the SPXW in the DM/SM options indicator so there may be some distortions in that indicator going forward.  The SPX monthlies are about 30% of total

B.  Last week I noticed that the SKEW and VIX put volume both saw sharp increases.  Over the last several years, I have discussed how the result be interpreted differently depending on the overall sentiment backdrop, but never came up with a way to show it graphically.  This time I decided to use the "data mining" software with the combined put/call ratio (CPC), revised (less VIX puts & calls) as an overall sentiment measure.  This way the "spread" between std vars is the sentiment as shown below.

The SKEW is a longer INT indicator and the spread with the CPC Revised has done an excellent job of identifying INT tops and bottoms over the last two years.  Most notable compared to the period before the Oct 2018 top is a pattern of rising bottoms and is probably the strongest sentiment indicator supporting a longer term topping formation.

Applying the same procedure to the VIX put volume shows similar results only for ST timing.  The most recent lows are most like the period of July 2018 which saw a choppy but upward trending market.

C.  Next, a followup on the Smart Beta P/C components where last week saw a sharp rise in equity call volume as well as a sharp drop in ETF put volume.  The first chart shows the sharp rise in equity calls as well as the sharp drop in the ETF puts, while the second shows the spread that may indicator a topping pattern with lower lows indicating a larger drop than Oct-Dec 2018 that may be months away.

Finally, a look at the Crash Indicator that shows increasing bearish sentiment much like that seen in mid-2018, also indicating an INT top may be months away.

Conclusions.  The big question is whether a smaller correction has begun from SPX 3010 that may go down to fill Fri 11th gap at 2940 before a larger seasonal rally or not.  This is what is indicated by Trader Joe's outlook as well as the SPX options OI.  However, I am 50/50 between that outlook and a continuation rally to SPX 3040-50 by the EOM, followed by a sharper decline to SPX 2940ish to setup stronger bearish sentiment by mid-Nov before a year-end rally.  Much may depend on earnings which did not seem to have much effect last week.  This weekend China news network confirmed Trumps positive outlook on the trade talks and this may have a positive effect.

Weekly Trade Alert.  A toss up between a SPX 2940 gap fill sooner or later.  Overall sentiment seems too positive for the moment, but really a mixed bag.  More positive though for the INT.  Updates @mrktsignals.

Investment Diary,  Indicator Primer,  update 2019.04.27 Stock Buybacks, update 2018.03.28  Dumb Money/Smart Money Indicators
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Did the Swine Flu Just Give Trump a Win?

A little followed story this year is the African swine flu that has decimated the Chinese pig population.  Who cares, you say?  Surprisingly half the pig population in the world is in China where pork is a staple of everyone's diet, much like beef is in the US.  The fallout has seen an official estimate of a loss of 33% of the pig population and could be as high as 50%.  While everyone is talking about soybeans, China has just agreed to purchase 125,000 tons of pork from the US to help make up for the loss after pork prices have risen by 70%.  We would probably have riots in the street in the US if the price of Big Macs went up 70% in one year.

I should have gone with my first instinct for my outlook for the SPX last week, as it was for a range of 2900-3000, but the put support at 2925 caused me to raise my targets.  After Trumps tirade on Mon, threatening to block more tech purchases from the US by China and Tue news of additional measures to block the flow of US capital into China (their stock market is up 27% this year vs 16% for the US, so Trump has to do something about that), the net result was a weak start with the SPX, falling to 2985 before a 100 pt rally thru Fri that did close in the options OI target range of 2950-75.  Overall, China trade negotiations came out exactly as expected with more of a detente/partial deal with negotiations to continue.  As discussed by the HumbleStudent an HK native, the next flareup with China may be after the Hong Kong elections in Jan 2020 as China is unlikely to take military action as long as it hopes for favorable election results.

Not a lot of change in bearish sentiment for the week and the INT outlook remains slightly positive with a possible top for the SPX mid-2020 about 3100-50.  The Tech/Other section will take a look at several of the data mining indicators this week.  I am several months behind in indexing old posts and will try to catch up the next few weeks.

I. Sentiment Indicators

The overall Indicator Scoreboard (INT term, outlook two to four months) bearish sentiment has backed off its peak a week ago at levels between July 2018 and May 2019.

The INT view of the Short Term Indicator (VXX $ volume and Smart Beta P/C [ETF Puts/Equity Calls], outlook two to four months) bearish sentiment has remained below the levels of July 2018 and May 2019 indicating that higher volatility than seen off the two mentioned lows is expected.

Bonds (TNX) bearish sentiment took a nosedive last week to the lowest levels yet on mention of the Fed's QE-lite program.  This time the purchases are to be from short term securities only that provide little support to longer term bonds.  Purchase of a 6 month bond will also turn into QT 6 months later when the bond matures, so LT results are uncertain.

For the INT outlook with LT still negative, the gold miners (HUI) bearish sentiment is gradually increasing as prices fall, but the H&S still looks most likely.

II. Dumb Money/Smart Money Indicators

The option-based Dumb Money/Smart Money Indicator as short/INT term (outlook 2 to 4 mns/weeks) remains at fairly high levels and is starting to resemble the Mar 2018 period which supports a possible 6-8 month rally.

And the sister options Hedge Ratio sentiment is hovering near neutral that indicates higher levels of volatility are likely continue.

The Risk Aversion/Risk Preference Indicator (SPX 2x ETF sentiment/NDX ETF sentiment, outlook 2 to 4 mns/wks) as a INT indicator (pref to less risky SPX is bullish), has risen to levels consistent with INT lows for the SPX.

The INT term SPX Long Term/Short Term ETFs (outlook two to four wks/mns) bearish sentiment (2x DM/3x SM) has also risen sharply to levels similar to Mar 2018, also indicative of a multi-month (6-8 mos) rally.

The INT term SPX Long Term (2x/DM) ETFs (outlook two to four weeks) bearish sentiment is higher than at July 2018, but lower than May 2019 that may indicate a somewhat weaker rally pt-wise than seen off the Mar 2018 lows.

The INT term NDX Long Term (2x/DM) ETFs (outlook two to four weeks) bearish sentiment is also weak, indicating limited upside.

III. Options Open Interest

Using Wed close, remember that further out time frames are more likely to change over time, and that closing prices are more likely to be effected.  This week I will look out thru Oct 16. Also, This week includes a look at the TLT for Oct.

With Fri close at SPX 2970, SPX put support is very light above 2910 with call resistance starting at 2975 and more significantly at 2990.  There may be some follow thru buying by the public early to SPX 2990+, but will likely fade later during the day.

Wed shows very little put support until SPX 2885 with call resistance at 2050, 2975 and 3000.  Likely there will be some lingering "sell the news" effects after Mon euphoria wears off. Light OI overall.

For Fri PMs, puts and calls overlap at 2925, 50 and 75, so that early week weaknees will likely increase support at these levels that will push prices back to the 2950-75 level.  Otherwise major support and resistance at 2900 and 3000.

Currently the TLT is 140.4 with the TNX at 1.75%.  Positions are largely the same as two weeks ago when I said that put support would likely keep the TLT above 140 and it did.  The trade news could be a game changer as a move below 139 could setup negative delta hedging (put writer selling) and could drive prices down to the 136-7 area or lower.

IV. Technical / Other

The first data mining variable I want to look at is the Smart Beta P/C spread.  Although several "false" positives were seen, the spread neared -2 SD before each sharp drop since 2018.  More noticeable is that a series of lower lows and highs were seen before the Oct 2018 top, while now we are seeing a series of higher lows and higher highs.  Currently at neutral, there is no directional bias.

The options DM/SM and Hedge Ratio spread is showing a pattern of lower lows that may act as a LT indicator (purple line), thus indicating that an even larger decline than seen in Oct-Dec may be ahead due to low levels of hedging, but could be several months away.

Finally, the Crash Indicator Spread, where BUYs and SELLs are at +1 and -1 SD, and Crash signals are <= -2 SDs, is slightly positive at +.5 SD with a slight positive bias.

Conclusions.  Overall, sentiment indicators show that a multi-month advance is likely, but a higher level of volatility and a smaller advance, point-wise, is to be expected.  This is consistent with a a top mid-2020 in the range of SPX 3100-50.  We may even see a repeat of the May top in 2015.

Weekly Trade Alert.  SPX options OI indicates that early Mon may see a retest of the Fir highs at 2990+, but a pullback below 2950, possibly 2925 is likely by mid-week.  EPS season begins next week with many of the large banks reporting early in the week.  Low int rates have usually not been a positive, just look at Deutsche Bank AG's 75% drop since 2015, so banks may pull the SPX down.  By Fri, however, a recovery to the 2950-75 level is expected.  Updates @mrktsignals.

Investment Diary,  Indicator Primer,  update 2019.04.27 Stock Buybacks, update 2018.03.28  Dumb Money/Smart Money Indicators
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Article Index 2018 by Topic
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