The huge swings in the stock market from mid-Feb 2020 to mid-Apr, first down 30% then up 30%, have been truly historic, but so have been the causes and the results. An almost complete shutdown of the economy as a result of the very contagious corona virus created an atmosphere unlike anything seen in modern times, while the unprecedented response of the Fed has created a Pavlovian response of BTFD and "don't fight the Fed".
The interpretation of sentiment has also been difficult. Over the past few weeks, I've considered several different options, but am still uncomfortable with the "all clear" that seems to be the highest priority of Trump. Bearish sentiment has now dropped to the levels seen in early Dec 2018 after the Oct selloff that resulted in a drop from SPX 2800 to 2350 and we now seem to be likely to see a similar drop from SPX 2900ish to about 2450. Using comparison to the retracements does not seem appropriate in that a full retest to SPX 2200 should see sentiment comparable to a 20% decline as seen in Oct 2018.
The closest analog using this sentiment approach is that of the period from Mar-Apr 2018 where we saw both complex tops and bottoms. This could mean that after the first decline to SPX 2450-500 a double top near the 2900 area may be required before bearish sentiment has retreated enough to support an additional 20% decline to retest the Mar 2020 lows.
I. Sentiment Indicators
The overall Indicator Scoreboard (INT term, outlook two to four months) bearish sentiment has now declined to the level seen early Dec 2018 after the Nov rebound and could support a 10-15% decline to about SPX 2500.
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 now declined to the level seen early Dec 2018 after the Nov rebound and could also support a 10-15% decline to about SPX 2500.
Bonds (TNX). Interest rates continue to slip lower even with extremely low bearish sentiment.
For the INT outlook with LT still negative, the gold miners (HUI) bearish sentiment is again testing its lows as the HUI has retraced essentially all of its sharp selloff last month.
II. Dumb Money/Smart Money Indicators
The option-based Dumb Money/Smart Money Indicator as short/INT term (outlook 2 to 4 mns/weeks). The longer term EMAs have matched the Dec 2018 highs, matching the composite indicators, and also supports a 10-15% decline.
And the sister options Hedge Ratio sentiment is only slightly above the early Dec 2018 levels, but also supports a 10-15% decline..
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. This week I will look out thru Apr 24. Also, This week includes a look at the GDX for May exp.
With Fri close at SPX 2875, options OI for Mon are very light, but now showing the opposite of last week where the preponderance of puts supported higher prices, this week mostly calls offers resistance to higher prices. Early gains are likely to be capped at SPX 2900, while little support is seen until 2800.
Wed has somewhat larger OI where SPX call resistance at SPX 2800 and 2900 could start a significant move down with no put support until 2750.
For Fri, large OI is similar to Wed with strong call resistance at SPX 2800, 2850 and 2900 with no put support until 2750. A move below 2800 by the EOW is likely.
Using the GDX as a gold miner proxy closing at 29.9, the options OI is showing strong call resistance at 30, 32 and especially 36 with little put support until the mid-20s.
Currently the TLT is 167.8 with the TNX at 0.65%, last weeks call resistance at 170 did cap the optn exp price level.
IV. Technical / Other
Another reason why I think a more complex top is likely before a full retest of the lows is the Crash Indicator, which did not give a sharp SELL in Feb and that may have contributed to the strength of the following rally. Now residing at neutral, the same as mid-Nov 2018 and late Mar 2018, the behavior after the next decline and rally may determine the LT outlook as Nov 2018 indicated a SELL by moving to lower levels, while Mar 2018 indicated a BUY by moving upward.
Conclusions. Last week, I was looking for higher prices targeting the 2820-30 area, but the news of possible reopening the economy early May sent stocks spiraling upwards. It is interesting that in a world of 7.8B people that of the 2.2M cases reported of Covid-19, the US has 700K and the EU 1M where each represent only 4% of global population, but combined have 75% of cases. Much of the world does not monitor as much as the US or EU, but still? I really don't think this will be as easy to recover from as Trump hopes.
A ST/INT decline is likely to begin next week. Earnings guidance has been neglected to to economic uncertainty, so earnings are likely to be less of a factor than expected. Lots of economic data will begin to be reported with the PMIs on Wed and the picture is not going to be pretty. May 8 jobs release is still on target for at least a ST low.
Weekly Trade Alert. Mon/Tue may see a continued move up to the SPX 2900 area to fill a gap on cash SPX, but a decline is likely to start by Wed, targeting SPX 2720-30 very ST and 2450-500 longer term. 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
Article Index 2018 by Topic
Article Index 2017 by Topic
Article Index 2016 by Topic
Long term forecasts
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