Is Bad News Finally Becoming Bad?

On Friday, I was watching intently to see the stock markets reaction to the March jobs data as that may be a key indicator as to how the market reacts to the "depression like" economic data expected to be released over the next few weeks.  The first two hours after the release were unsure before the markets finally decided to head south.  For may years now, bad news was considered "good news" because it meant that the Fed would increase liquidity, but the Fed is now running very low on gas after the March 1.5% cut in the Fed funds rate and announcing QE-finity, and more bad news may not have any effect on Fed actions.  If the latter is true then I expect the SPX to grind lower into to the Apr jobs release in early May that may be truly historic (bad).   In 2009, I predicted that the March lows would occur with the jobs release early March, and again feel that this may mark a significant low (SPX 2050-2150).  Barring a "miracle cure" for Covid-19, how significant will depend on sentiment.  Several LT indicators discussed in Tech/Other indicate not that significant.

For the next few weeks, if the markets do grind lower, I expect this to be a much less volatile decline, ie, down days of SPX 30-50 pts with intermittent rallies rather that a series of 100-200 pt down days as we saw in March.  The VIX will probably fall to the mid-30's during the decline, and if there is a full 50% retrace for a "summer rally" to the mid-, upper-teens.

Going forward I will start the charting period from July 2018 rather than Jan because the charts are becoming difficult to read.


I. Sentiment Indicators

The overall Indicator Scoreboard (INT term, outlook two to four months) bearish sentiment remains high and should fall toward neutral similar to Nov 2018 before a final move down.  Potential exists for distortion due to included extreme ETF sentiment, more in Tech/Other.

The INT view of the Short Term Indicator (VXX $ volume and Smart Beta P/C [ETF Puts/Equity Calls], outlook two to four months, no SPX volume adj) bearish sentiment has fallen sharply and much like the Indicator Scoreboard is expected to reach neutral before a final move down (w5 of A).

Bonds (TNX).  Interest rates continue to move lower even as sentiment follows.

For the INT outlook with LT still negative, the gold miners (HUI) bearish sentiment is again moving lower as "helicopter money" has the gold bugs looking for higher inflation.  Direxion has announced that DUST & NUGT will be converted to 2X in May due to extreme volatility recently with both now down about 90% from highs over the last year.

II. Dumb Money/Smart Money Indicators

The option-based Dumb Money/Smart Money Indicator as short/INT term (outlook 2 to 4 mns/weeks) has moved down sharply but not yet reaching the levels seen before the Dec 2018 downturn.

And the sister options Hedge Ratio sentiment remains near neutral, indicating only moderate expected volatility.

The INT term SPX Long Term/Short Term ETFs (outlook two to four wks/mns) bearish sentiment (2x DM/3x SM) has moved to the SELL level as DM is showing more bullishness than SM.

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 17 end of week only. Also, This week includes a look at the GDX for Apr exp.

With Fri close at SPX 2489, options OI for Thur is light with modest put support at 2450 and a likely close for the week over 2500.

For Fri 17 PM, large OI over SPX 2500 could result in a sharp rally, but below 2500 there is little put support to prevent a large decline.  Hard to call.

Using the GDX as a gold miner proxy closing at 25, overlapping puts and calls indicate a wide potential range possible between 23 and 30, with a bias to 26-28. 

Currently the TLT is 168.5 with the TNX at 0.59%. 

IV. Technical / Other

For the very ST, the past couple days have seen the SPX compressed between 2550 and 2450 using the 4hr SMAs (23, 46, 69) and a sustained break either way will probably indicate the next trend.

From an INT perspective, the McClellan Summation Index was shown two weeks ago with the SPX at 2305 to indicate a probable ST bounce, but since readings of < -1000 are crash warnings, the weak bounce indicates trouble ahead.

Even with the strong bounce of the SPX off the Mar lows of 20%, the NYSE AD Line has only seen a very weak bounce, much like the Nov 2018 bounce from the Oct lows compared to the strong bounce off the Feb 2018 lows.

My LT favorite volume indicator, the NYUPV/NYDNV has reached a level comparable to the Aug 2015 "flash crash" lows, but has failed to rally further as the market has rebounded.  The very strong rally in 2015 for the indicator to well over 2.0 for both LT SMAs was followed by an almost 100% gain for the SPX from 1800 to 3400 over the next few years.  For those expecting the same from the 2020 selloff are likely to be disappointed without a dramatic improvement in the indicator.  The weak indicator showing after the Feb 2018 lows was only followed by a brief return to the ATH before an even larger decline, and the rally off the Dec 2018 lows resulted in stronger indicator readings and stronger move to ATH.  It;s too early to see where this will end up in 2020, but so far looks very weak.

Finally a look at the Rydex Bear/Bull ETF ratio that may indicate why the high bearishness currently for the SPX and NDX is not as bullish as it seems.  First, the current readings look very bullish (high bearish sentiment) for the last three years.

However, when for the LT, the rounded bottom in very low sentiment is much like that seen in 2000 which many consider to be the first in a series of Fed-induced liquidity bubbles.  The first was Greenspan after the 1998 LTCM crisis, leading to the "dot-com" bubble, next we had Bernanke with the 2008-09 financial crisis following the housing bubble, and now J. Powell and the "everything bubble".  Comparing 2001 to 2020 the current spike in bearish sentiment resembles that of the first leg down from mid-2000 to early 2001 and may indicate that only 40% of the bear market is over.

Conclusions.  Last week I indicated an expected retest/lower lows on SPX mid-Apr partially due to the expected return to work date proposed by Trump, but that has been put off to the end of Apr.  Now with the Covid-19 crisis stronger than expected, the most likely bottom seems to be early May with the Apr jobs data.  The target remains SPX 2050-2190 before a summer rally and with more downside expected thereafter.

Weekly Trade Alert.  ST remains hard to call and some EW analysts are calling this a W4 expanded flat that whipsaw between a wide range before a final move, usually a continuation move (down).  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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