Going Viral

Last weeks warning of a possible supply shock due to China's manufacturing halts went viral after Apple's lower guidance release on Monday and seemed to be the reason for the late week stock swoon.  The Thur pre-open warning of a tech pullback was followed by a micro crash a couple of hours later, while my estimate of a 2% pullback over the next week ended up being a 3% pullback in two days.


I. Sentiment Indicators

The overall Indicator Scoreboard (INT term, outlook two to four months) bearish sentiment the two day pullback of 2% has ot made much of a change of sentiment.  Lower lows are still possible, while a strong rally is unlikely.

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 reached a warning level Wed.

Bonds (TNX).  My longer term view of stocks, bonds and gold are probably summarized by BofA's M.Harnett assessment of the "everything bubble".  Interest rates made a new low along with sentiment.

For the INT outlook with LT still negative, the gold miners (HUI) bearish sentiment remains extremely low.  The breakout in bonds carried gold/stocks higher.

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 very low, while more time and/or lower prices are likely before a serious rally attempt.

And the sister options Hedge Ratio bearish sentiment saw a sharp downturn Wed.

The INT term SPX Long Term (2x/DM) ETFs (outlook two to four weeks) bearish sentiment fell sharply below neutral on the SPX move to 3380+ and is now back at neutral.

The INT term NDX ST Term (3x/DM) ETFs (outlook two to four weeks) bearish sentiment may be the key to the markets movement and now seems to be following the Oct 2018 pattern.  One of the reasons for looking at the QQQ options OI in Thur update was to see if the high bearish sentiment was smart or dumb money.  The lack of put support indicated the likelihood of smart money (sentiment reversed) hence the call of lower prices.

III. Options Open Interest

Using Thur closing OI, remember that further out time frames are more likely to change over time, and that closing prices are more likely to be effected. Delta hedging may occur as negative reinforcement when put support is broken or call resistance is exceeded. The SPX hedge spread (SPX puts - ETF calls) is neutral, indicating that call resistance/put support may hold. This week I will look out thru Feb 28. Also, This week includes a look at the GDX for Feb EOM.

With Fri close at SPX 3338, moderate options OI for Mon shows little put support until 3315 with strong support at 3275 and strong call resistance at 3395 and 3415.  Lower prices are likely early in the day.  Fri decline has likely increased put support for the week.

Wed has larger OI at the SPX 3350 level where SPX could see a strong mid-week turnaround to 3350 or higher.

For Fri EOM where large OI may influence weekly behavior, depending on put support added during the week the SPX is likely to close below 3350, possibly as low as 3300.

This week and possibly going forward, I will start looking at the QQQ ETF/NDX proxy since tech stocks have been a large component of the markets volatility.  The QQQ ETF is a proxy for the NDX at 1 QQQ pt to 41 NDX pts.  As shown in the Thur update there was little put support from the high at 237/NDX 9720 until 233 then 230.  The close was at 230.

For next week, there is large put support at 230 that may contain closing prices by EOM.  There is some potential for a move to 235 as well as a drop to 227.  A weekly close below 230 could target much lower support at 220 or 4% lower.

Using the GDX as a gold miner proxy closing at 30.65, the GDX finally made it over the large resistance at 30 and may see delta hedging push prices higher, but much as was seen with the QQQ, delta hedging can result in sharp reversals.

IV. Technical / Other - N/A


Conclusions.  Long term sentiment indicators are at a point where an INT top can occur at any time, but key ST indicators have not reached a SELL.  It is possible that an external shock, such as the coronavirus, could drive prices down without sentiment support.  One key area to watch is the tech sector/NDX as it has been the primary source of recent gains and more recently, losses last week.  Options OI for the QQQ indicate that a key level of support for the QQQ is 230/NDX 9430 and a lower close for more than a day or two increases the risk of a move to the next level of support at 220/NDX 9020 or 4% lower.

Currently China's factory production is expected to restart the 2nd week of March, so the SPX is expect to remain in the lower half of a trading range of about 3300-400.  If things do not improve by that time, a lower trading range is likely.

Weekly Trade Alert.  Next week, Mon is expected to show some weakness with options OI showing support at 3315 and a mid-week rally to 3350 is possible.  Currently, some weakness at the end of the week is expected.  Updates @mrktsignals.

Investment Diary,  Indicator Primer,
 update 2020.02.07 Data Mining Indicators,
 update 2019.04.27 Stock Buybacks,
 update 2018.03.28 Dumb Money/Smart Money Indicators

Article Index 2019 by Topic, completed thru EOY 2020.02.04
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