Don't Be a Cheerleader

Perception bias is one of the biggest road blocks to understanding stock market trends.  In many cases the economic environment makes us believe that the stock market should go up or down and we fall into the trap of confirmation bias where we believe information that supports our views, while ignoring information that does not.  We all do it, which is why many try to develop a "system" whether it is EW or some other technical approach.  My approach is more statistical using various measures to identify sentiment that tends to swing from one extreme to the other based on market highs and lows.  Most people that read and write online blogs seem to be cheerleaders for the bears, but remember that the stock market goes up 60% of the time.

Last weeks outlook turned out to be decent guideline for the weeks action as early Mon weakness was sharply reversed by the close (higher than expected), then followed weakness into the close Fri (mostly the last few minutes).  More range bound trading is expected next week.

The Tech/Other section takes a look at two volatility measures that should be considered warnings for the bears.

I. Sentiment Indicators

The overall Indicator Scoreboard (INT term, outlook two to four months) bearish sentiment retreated from its recent high and seems to be following the pattern seen in Aug-Sep 2018 and Jan-Feb 2020 prior to INT tops.

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 also similar to the INT tops mentioned above.

Bonds (TNX).  Interest rates and sentiment remain extremely low.

For the INT outlook with LT still negative, the gold miners (HUI) bearish sentiment continues to decline as the overall price pattern still seems to be down with only a strong showing Fri preventing a close in the 250s.

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 the lows seen in Jan-Feb 2020.

And the sister options Hedge Ratio sentiment continues to slowly decline as cautious investors/hedge funds indicate that an INT top may be months away.

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 26. Also, this week includes a look at the TLT for Jun exp.

With Fri close at SPX 3097, small options OI for Mon show a very slight negative bias down to 3070 as call resistance exceeds put support with strong put support at 3000.  Some early weakness is expected.

Wed has small OI where SPX has mild put support up to the 3090s with modest call resistance at 3110 and larger at 3140.  A mid-week rebound is expected.

For Fri, large OI may influence weekly behavior and shows strong call resistance at SPX 3100 and strong put support at 3050.  A weekly close at 3075-85 seems likely.

Also, for Jun 30 EOM, put support is building at SPX 3100 and below and currently is showing a likely close at 3075-3100.

Using the GDX as a gold miner proxy closing at 33.55, prices moved lower last week as expected then rebounded sharply Fri. 

Currently the TLT is 162.4 with the TNX at 0.7%.  Two weeks ago at 156 after dropping from 165, the TLT was expected to stabilize.  For July, call resistance starts at 160 with put support at 155, so some downward pressure is expected toward 158-160.

IV. Technical / Other

Generally, I find the VIX P/C to be less valuable as a timing indicator since high ratios are less reliable, but looking over the period since Jan 2018, all of the INT declines seemed to be preceded by low P/Cs (.3 to .4) and the current level of .9 is historically very high.

Also, the VXX $ Vol has risen sharply similar to the Jan 2020 decline prior to the Feb blow off and top.

Conclusions.  Last Fri was quad-witching (incl futures) and the SPX cash close at 3097 only showed the beginning of the decline with ES closing at 3057 (low 3044) meeting the potential close low of 3050.  Overall, sentiment is not overwhelmingly bearish and a trading range between the recent gap high at 3180 and the SPX 200SMA near 3000 is likely for the next few weeks.  We not have two potential stimulus packages expected before the election with July's "Heroes Act" package expected to be $1T+ and later an infrastructure package that may be $1.5T.  This could still follow the Bradley Turn cycle with a 1 month delay with the "Heroes Ac" package testing the June high and the later stimulus testing the ATH.

Weekly Trade Alert.  Next week may be volatile, trading mostly in the lower half of the trading range of 2980-3180.  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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