In this weeks Tech/Other section I will take an in depth look at the Equity P/C as a sentiment indicator using the data mining software.
I. Sentiment Indicators
The overall Indicator Scoreboard (INT term, outlook two to four months) bearish sentiment fell sharply last week and is about the same level of June 2018, four mns before the Oct top .
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 even more sharply, reaching the levels of Oct 2019, four mns before the Feb 2020 top. A sentiment pattern bottoming similar to late 2019 may mean an equally sharp selloff to that seen in Mar 2020.
Bonds (TNX). Interest rates may have bottomed and could continue to rise to the bottom of a multi-year channel between 3 and 1.5%. Sentiment has not budged from its extreme lows and a move over 1.5% may mean a crash is in progress targeting 3%.
One ETF sector that still seems to have plenty of room to run based on sentiment is the BKX. Banks profits come from borrowing ST and lending LT, and a rising LT rate environment with ST rates fixed by the FED is an optimal environment for BKX.
For the INT outlook with LT still negative, the gold miners (HUI) bearish sentiment remains extremely low after a 10%+ correction. Surprisingly the main argument of the gold bugs was that bailouts would crash the $US and cause a surge in gold, but a 4% drop in the $US in May saw a selloff in gold as both seem to be acting as "safe haven" assets.
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 extremely low similar to late 2019 that may be an early warning of trouble ahead.
And the sister options Hedge Ratio sentiment is still showing too much hedging by conservative investors for a strong selloff and is similar to the Jun-July period of 2018 and may mean several months of continued advance before an INT top.
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 June 12. Also, This week includes a look at the TLT for June exp.
With Fri close at SPX 3194, options OI for Mon show very little put support until 3000 with only calls over 3150. There may be a slight negative bias.
Wed has similar OI where SPX may be negatively biased toward the 3150 level of highest calls.
For Fri, large OI may influence weekly behavior where moderate call resistance is at the 3200 level and 3150-3200 is a likely weekly range and a drop below 3150 may cause negative delta hedging pressuring prices toward 3100.
Using the GDX as a gold miner proxy closing at 32.4 after bottoming at 31.2, last week at 34 OI showed a negative bias toward 30 for June exp.
Currently the TLT is 156 with the TNX at 0.90%. Two weeks ago at 165 the TLT was expected to have a negative bias toward 160 and last weeks job data pushed prices down to 153 before rebounding over put support at 155. Rate may stabilize for the next two weeks.
IV. Technical / Other
The Equity P/C Std Var is approaching the low levels last seen in Jan, but overall since early 2018 has not been a consistent sentiment indicator. In Feb, I tried using a comparison to the Composite P/C, but that did not adequately warn of the Mar 2020 decline.
Looking at other comparisons, I found another option related indicator, the SKEW, as a measure of OTM premium. This indicator as a spread with the Equity P/C acts as an INT indicator and warned of the Jan and Oct 2018 tops as well as the Feb 2020 top. There is a varying lead time of 1 to 4 mns (avg 2.5) between first reaching the -2 StdDev mark and a market top. This implies a top in the late Aug/early Sept period with the avg advance in the SPX from the first SELL of close to 200 pts (blowoff).
Looking at other variations to improve the timing, the Equity P/C spread to Equity calls as a focus on extreme bullishness worked well as a ST indicator, and sharp moves below -2 SD as seen currently indicated that a ST pullback was likely over the next few weeks.
Another variation using ETF calls, seemed to work best as a late stage topping indicator as Equity call buyers seem to get in early while ETF call buyers wait until the rally is confirmed, ie, near the top. The low ETF call buying now is similar to Jun-July 2018 and may indicate an INT top is several months away.
Conclusions. Many are now convinced that a new bull market was confirmed by last weeks actions, but sentiment is starting to show warning signs. Most similar sentiment was seen in June-July 2018 and Oct 2019 which preceded important tops by several months and were followed by continued advances of about SPX 200 pts before a top was reached. An important change may be brewing in the bond market where a combination of less demand due to better economic conditions and greater supply from funding the multi-trillion $US bailouts could push rates significantly higher with TNX 1.4-1.5% the first target over the next several months.
Weekly Trade Alert. A minor pullback to SPX 3150 or lower is possible, but a major trend change is unlikely. 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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