A Summer of Discontent

Last weeks potential for a ST spike in volatility turned out to be a dud as the SPX spiked 100 pts higher from 2950 to 3050.  The general outlook advocated by the 2014 Bradley Turn chart still seems like the most likely outcome with the May top occurring two weeks later on May 29, then a consolidation with slightly lower prices into Aug before a final blow off.  SPX options OI indicate lower prices to the mid 2900s are likely into the end of June.

A combination of unemployment and economic uncertainty with racial tension have turned the US headlines into a repeat of last summer's headlines about the rioting in HK,  Trump has already shown that he is all bark and no bite with respect to the new "national security" law in China regarding the HK dissenters and China is likely to continue its political aggression prior to the US elections.


I. Sentiment Indicators

The overall Indicator Scoreboard (INT term, outlook two to four months) bearish sentiment continues to fall, albeit at a slow pace.  Current sentiment is in between the areas where retests of previous declines began and pullbacks of larger rallies occurred.

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 is nearing the SELL area.

Bonds (TNX).  Interest rates and sentiment continue to move sideways.

For the INT outlook with LT still negative, the gold miners (HUI) bearish sentiment has started to rise as the HUI as fallen 10%.

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 reached levels corresponding to major tops over the last two years, but lack of support of other indicators may indicate more of a sideways movement in SPX.

And the sister options Hedge Ratio sentiment is still showing a significant amount of hedging and is supportive of prices near current levels with limited downside expected.

Another put/call ratio that I don't report very often is the combined P/C or CPC Revised (less VIX puts and calls).  The CPC Revised is probably the most accurate indicator as to the overall market risk and is currently at lower levels than any the last two years, except Jan-Feb 2020.  Remaining at these levels or lower for a few weeks is a likely indicator of a retest of the Mar 2020 lows.

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 Jun 5. Also, This week includes a look at the GDX for Jun exp.

With Fri close at SPX 3044, options OI for Mon are small with call resistance at 3050 and put support at 2900.  Some downward pressure is present toward the 3000-30 level.

Wed has also has small OI where SPX has call resistance at 3030 and little put support.  A drop to the 2975-3000 level is possible.

For Fri, larger OI may influence weekly behavior, but also shows strong call resistance at 3030 and a downward bias below 3000, and the straddles between 2900 and 3000 give downward bias toward 2950-3000.

Looking further out to the end of June, a move over 3050 could push to the 3075 put support level, but below 3000, prices are likely to fall between the put support at 2900 and call resistance at 2950.

Using the GDX as a gold miner proxy closing at 34.3, two weeks ago at 36.5, I indicated that the move into call resistance could see a whipsaw lower and since then prices have fallen to the first level of minor support.  Additional price pressure toward the 30 level or lower is likely. 

Currently the TLT is 163.6 with the TNX at 0.65%. 

IV. Technical / Other

One simple chart for LT volume analysis.  The NYUPV/DNV continues to rise similar to late 2015, indicating the increased potential of a longer term bull market, but does not rule out a retest similar to Jan/Feb 2016.  In each of bottoms off major corrections since 2016, the strength of the rallies followed strength of the NYUPV/DNV.

Conclusions.  Plenty of potential exists for political and economic upheavals over the next few months prior to the Nov elections.  It is likely that China will continue it's aggressive political posture, forcing Trump to "put up or shut up" with likely negative consequences for US stock markets.  For several months, I have indicated expectations for the retest of the Mar lows in the Fall with potential highs in the SPX 3100-300 prior to a correction/retest and still concur.

Weekly Trade Alert.  A pullback lasting several weeks may begin next week, but it is likely to be disappointing to the bears with limited downside, probably the 50 SMA (currently 2770, but rising).  Updates @mrktsignals.

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A Short Term Volatility Spike is Possible

Last week appeared to be the b-wave high that I had been looking for two weeks ago in the range of SPX 2950-75 with last week's high at 2980.   Sentiment is now indicating a continuation of the vacillations with the potential for a drop of 200+ points in the SPX over the next two to three weeks.  The likely cause will be increased tension with China over next weeks vote on their "national security law" which would be aimed at Hong Kong's dissidents bypassing the HK legal system.

On the virus front, last news out Friday indicated that Trump's favorite treatment HCQ was of no benefit treating CV and increased mortality due to heart problems in a world-wide study of 69k patients, while the Wall Street favorite Remdesivir was shown to have no statistical benefit in a published research article.


I. Sentiment Indicators

The overall Indicator Scoreboard (INT term, outlook two to four months) bearish sentiment continues to decline in a stair step fashion, indicating a ST pullback is likely.

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 decline sharply, indicating that a short, but sharp, decline is possible.  Sentiment is similar to May 2019 where a drop was seen from SPX 2945 to 2729.

Bonds (TNX).  Interest rates remain mostly unchanged as is sentiment.

For the INT outlook with LT still negative, the gold miners (HUI) bearish sentiment is somewhat less extreme with the small pullback to GDX 280.

II. Dumb Money/Smart Money Indicators

The option-based Dumb Money/Smart Money Indicator as short/INT term (outlook 2 to 4 mns/weeks) bearish sentiment comparable to the Jan and Dec 2018 tops as well as Jan 2020.  This could mean a sharp but short decline is likely, but the Overall Composite indicates it will likely be a buying oppty.

And the sister options Hedge Ratio bearish sentiment is lagging, so only a moderate increase in volatility is expected, but sentiment is comparable to May 2019 which saw a 200+ pt drop in the SPX.

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 May 29. Also, This week includes a look at the TLT for Jun exp.

With Fri close at SPX 2955, options OI for Tue (date is 26th not 25th) show little bias between put support at 2875 and 2975.  Likely range is SPX 2945-65.

Wed has similar OI size where SPX OI resembles a mirror image of last Mon which saw little call resistance until 2950 and resulted in a 100 pt rally.  Now, there is a negative bias down to 2900 and little put support until 2800, so the almost certain China passage of the "national security law" aimed at HK may cause a sharp decline toward the 2800 level.

For Fri, large OI shows strong resistance over SPX 2850, but large positions at 2800, 2850 and 2900 are offset as straddles, and relevant support seems to be the puts at 2825 and call resistance at 2880.

For next Fri (jobs report), overlapping OI indicates a wide possible range between SPX 2800 and 2950 that will likely change depending on next weeks action.

Using the GDX as a gold miner proxy closing at 35.5, remains in positive delta hedging.

Currently the TLT is 165.5 with the TNX at 0.66%, there is a slight negative bias with put support at 160 and call resistance at 165. 

IV. Technical / Other

Two of the most informative indicators from the data mining software have been the SPX hedge spread (SPX puts - ETF calls) and the Crash Indicator.  The SPX hedge spread is mildly negative, indicating that a major top is not expected, while the Crash Indicator is essentially neutral.

The conclusion is that a decline is expected similar to May 2019 that may last 1 to 3 weeks and possibly range between the 100 SMA at 2970 and 50 SMA at 2730.

Conclusions.  A temporary downturn should begin next week that will likely be attributed to increasing tensions between the US and China as China seems to be ready to move ahead with a crackdown on dissidents in Hong Kong under the guise of a national security law (not unlike the US DHS being given free reign to prosecute anyone labelled a terrorist).  If similar to May 2019, the decline will likely be an ABC with the first target around SPX 2800 which options OI indicate could happen next week.

Weekly Trade Alert.  An early week bounce to SPX 2965-75 would be a good target for a ST short targeting SPX 2800-20.  Updates @mrktsignals.

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Pullback in Progress

Last week I was looking for a test of the SPX 2950-75 area before starting a 10% pullback and Mon started strong, making it to 2945, but Powell's reticence to consider negative interest rates and Trump's threat to pursue trade war retaliations against China quickly sent the market into a tailspin, dropping to a Thur AM low at 2766.  The combination of the "re-open America" and the trade war targeting technology may also have started a rotation out of the FAAMG stocks into small caps and cyclicals.

Sentiment is unclear at the moment as to whether further downside is imminent or more rally is likely.  Currently, options Oi indicates at least a retest of the SPX 2750 area by EOM.


I. Sentiment Indicators

The overall Indicator Scoreboard (INT term, outlook two to four months) bearish sentiment has gone from a very weak SELL a week ago to neutral that may mean some strength ahead before further weakness, while a continued decline would generate a weak BUY.

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 remains well below neutral indicating that continued volatility should be expected.

Bonds (TNX).  Bond sentiment remains at extreme lows, while some, including GS, are warning that the $3T bailout package could pressure interest rates when bonds are sold to finance the bailout if the Fed does not go full MMT to monetize the debt.

For the INT outlook with LT still negative, the gold miners (HUI) bearish sentiment remains near extreme lows as record bailout has convinced gold bugs that hyper-inflation is on the way..

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 near recent lows indicating the recent rally has likely run out of steam.

And the sister options Hedge Ratio sentiment has moved toward neutral, and that may be enough to cause a pause in the current downtrend.

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 May 29. Also, This week includes a look at the GDX for Jun exp.

With Fri close at SPX 2864, options OI for Mon shows modest put support at SPX 2750 and call resistance at 2960 with little in between.  The small call resistance starting at 2850 may mean a negative start to the week.

Wed has somewhat larger OI where SPX put support moves up to 2850 with minimal call resistance up to 2900 and may result in a continuation of the rally off of last weeks lows.

For Fri, large OI may influence weekly behavior and shows strong put support at SPX 2825 and below and the key is what happens at 2875.  If early weakness during the week increases put support, a move over 2875 has only small call resistance up to 2940 then 2975.

For May 29 EOM, other than the large straddles at SPX 2800, 2850 and 2900 there is little put support until 2750 with small call resistance at 2875 and over 2900.  A wide range of prices is possible, although OI is likely to change over the next week or two.

Using the GDX as a gold miner proxy closing at 36.57, Fri jump over the strong call resistance at 35 has opened up the potential of positive dynamic hedging pushing price toward 40, but dynamic hedging can also result in strong whipsaws by exp. 

Currently the TLT is 166.7 with the TNX at 0.64% and the strong call resistance at 170 has held. 


IV. Technical / Other

One of the reason I have a hard time being too bearish at the moment is the Crash Indicator that remains modestly positive.  Although not as strong or as timely as I would have liked, the Jan SELL did finally prove prescient and a decline to -1.0 is likely before a larger decline.

Also, reviewing some of my archived charts, I ran across a Bradly Turn Chart from 2014 (the last year they were published), and surprisingly It seems to fit well for what sentiment seems to be saying to expect for 2020.

Conclusions.  Recent progress in the antibody approach to treating Covid-19 seems to be very promising, although largely ignored by the markets.  The biggest hurdle to returning the US economy to normal after a near complete shutdown is that the cost and time to do so are likely to be greater than any one expects, and Trumps "everything is great" speech at the SOTU is not going to go very well at the Nov election.  Now Trump seems to be using China as the bogeyman to deflect blame from himself, but can also prove longer term problematic for the markets.  Particularly, using the near monopoly of advanced computer chips by the US and Taiwan, the threat of cutting off sale of chips to China may force China to use a more aggressive approach to integrate Taiwan with the mainland.

Weekly Trade Alert.  Lower prices to SPX 2750 are likely by EOM, but it is difficult to tell if more rally is likely first.  Breakdown from the bear flag shown last week could see  a retest of the lower TL near 2940 Fri before lower prices.  Updates @mrktsignals.

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Are Negative Rates on the Horizon?

Last weeks outlook went much as expected thru Wed with Mon drop to SPX to the 2800 support level followed by a strong bounce and fade. The bounce was stronger than expected reaching 2898 Tue and the fade thru O/N Wed hit the low target of 2820-40, but Thur bond futures began predicting negative rates by EOY 2020 that caused a surge in stocks and gold with the SPX continuing higher thru Fri even as bond futures reversed.  Apparently stock investors were expecting both a V-economic recovery and negative rates.  Unless there is no recovery, negative rates are highly unlikely and stocks are likely to see a repeat of Mar decline without a strong recovery.

The SPX does seem to be approaching a more important top with next week expected to reach the target of 2950-75 with a double top for the ES at 2970-80.  The last decline was 5% and this time I expect a full 10% to 2600-50, possibly followed by another b-wave higher.  Timing-wise, Raj at Times&Cycles is projecting a flash crash cycle for late May and M.Armstrong has a panic cycle scheduled for the week of May 25th.

Many are expecting SPX 2450, but a series of b-waves are possible with higher highs and lower lows to confuse and frustrate the bears.  Currently the futures are following a bear flag that points to SPX 2600-50 upon breakdown.

There is also a setup for negative RSI divergence.

I. Sentiment Indicators

The overall Indicator Scoreboard (INT term, outlook two to four months) bearish sentiment has dropped much lower than Mar & Nov of 2018 before retest or lower lows and is a sign of strength.  Higher highs are likely in the months ahead, but larger problems are likely in the Fall.

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 fallen very sharply and may generate a SELL in the next week or two.

Bonds (TNX).  Interest rates may have bottomed in the 0.50-0.75% range.  As discussed by Nomura's C.McElligott, this may be a sign of bear steepening as supply due to the expanding deficit outstrips demand.

For the INT outlook with LT still negative, the gold miners (HUI) bearish sentiment remains extremely low as easy money fuels the demand for safe havens.

II. Dumb Money/Smart Money Indicators

The option-based Dumb Money/Smart Money Indicator as short/INT term (outlook 2 to 4 mns/weeks) is warning of extreme complacency by options speculators similar to early 2020.

And the sister options Hedge Ratio sentiment is finally showing the sharper reduction in hedging that precedes most significant declines.

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 May 15. Also, This week includes a look at the TLT for May exp.

With Fri close at SPX 2930, options OI for Mon is somewhat light, but the SPX has risen over put support and the 2920-40 area is the likely range.

Wed has very small OI where SPX has some put support up to 2910 and very little call resistance up to 2980.  With Fed chair Powell scheduled to speak this may be an opportunity to spike up to the 2950-75 area.

For Fri, moderate OI is composed mostly of straddles.  The largest straddle is at SPX 2950 and may be a point of attraction if there is no news event, otherwise volatility could reign as calls provide a negative bias down to 2800.

Currently the TLT is 164 with the TNX at 0.68%.  Two weeks ago with the TLT near 170, I pointed out the strong call resistance and a lack of put support and prices have fallen about 3% since then.  The announcement that the Treasury will be financing "the covid related bailouts" by issuing 20 yr bonds will likely continue to pressure LT bonds.

IV. Technical / Other

One of the LT indicators that continues to worry me is the daily NYSE McClellan Summation Index.  Comparing the current reading of 160 to other rallies off of bear market bottoms as some are claiming this is, such as Mar 2009, Feb 2016 and Dec 2018, the Summ Index reached +1000 quickly, while this rally looks more like 2008.  This may be due to concentration in FAAMG leadership as "work at home" places increased dependence on tech, but raises questions as to the strength of the economy.

Conclusions.  The unusually strong response by the Fed to support the markets coupled with large stimulus from Congress has resulted in a very strong bounce in the markets, but I continue to feel that markets are not as healthy as they appear.  The Summ Index is a good example of underlying weakness, and as a measure of Adv/Dec issues and volume, it shows that there is no broad based rally that is usually seen at the end of bear markets.

That being said, markets can continue to rally until the bears run out of money and I expect an 80-90% retracement to SPX 3100-300 similar to Dec 2015 before the next major plunge.  The road to the top could be very winding, however.  There are timing cycles that point to a 10-15% correction starting the next two weeks that will probably be followed bu another strong rally to at least 3000.  Depending on sentiment that may be where a larger retest begins to 2250-450.

Weekly Trade Alert.  The next week or so should provide a top before at least a 10% decline.  My target for a top is SPX 2950-75 and for a bottom is 2600-50.  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

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