The Robinhood Effect

Lasr week, I was expecting a decline towards the SPX 3100 level with a continuation to 3000 or lower later in June with higher downward pressure later in the week due to options OI.  One of the effects of the Covid bailouts has apparently been that many of the unemployed with excess cash have turned to day trading in the stock market using the commission-free Robinhood platform.  The result has been increased volatility, on the upside thru early Wed, but more violently to the downside Thur, resulting in a one-day 7% decline in the SPX.

Many EW analysts are now looking for the standard 38% retracement, or a 300-500 pt SPX decline, to about 2800, but sentiment is still favoring a prolonged topping period as seen in Jul-Oct 2018 or Jan-Feb 2020.  This is still compatible with the 2020 Bradley Turn chart from 2014, but there seems to be a lag of one month with the minor top June 11 rather than May 11 and this could mean the major top will be Sept 19 rather than Aug 19.  SPX options OI is suggesting a bottom next week in the 2950-3050 area with a turn up to 3100+ by EOM.


I. Sentiment Indicators

The overall Indicator Scoreboard (INT term, outlook two to four months) bearish sentiment took a sharp turn up last week and next week may raise levels to those see at the July 2018 and Jan 2020 pullback lows.

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 briefly reached new ST lows last week, but as seen in mid 2018 vs early 2019 vs late 2019, a pattern of lower lows may mean a larger INT decline will follow.

Bonds (TNX).  Interest rates fell from 0.9% to 0.65 before rebounding Fri as sentiment remains at extreme lows.  As I have mentioned before, rates may remain low until after the election, but a win by the Dems is likely to send rates soaring.

For the INT outlook with LT still negative, the gold miners (HUI) bearish sentiment remained positive for almost a year and a half until mid-2019, so LT prices may stay elevated even though sentiment has reversed, possibly thru the EOY.

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 stubbornly low and actually seems to be in a LT down trend.  Overall, still similar to the rounded bottom seen in July 2018 and Jan 2020.

And the sister options Hedge Ratio sentiment saw a sharp spike lower Wed, showing hedgers are finally reducing positions, but have not reached extremes that have preceded other serious downturns.

The overall options indicator CPC Revised (less VIX options) did see a very extreme last week with extreme equity call buying, but other extremes as July 2018 and Jan 2020 preceded serious declines by several months.

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

With Fri close at SPX 3041, options OI for Mon is moderate with support at 2990 and 3040.  Calls at 3000 and 3025 may cause early weakness, but prices should close unchanged to higher.

Wed has smaller OI where SPX put support may push prices toward the 3100 area if 3040 holds early in the week.

For Fri, large OI may influence weekly behavior and shows strong call resistance at 3100 and higher with at likely close at 3050 or lower.  A weak market below 3050 could see call resistance push prices back to 3000 or lower with strong put support at 2950.

This is what Fri exp OI looked like a week ago and definitely showed the potential for a drop to SPX 3000, but I was expecting more put support to be added during the week.

For SPX Jun 30 EOM, much stronger put support is evident up to 3100 as most options players are expecting a rally into opt exp then a selloff, while the contrary view is weakness next week then up to EOM.

Using the GDX as a gold miner proxy closing at 32.64. GDX has been dropping about $1 a week since hitting 36+ a month ago even though gold has remained around 1700+.  High calls are expected to continue downward pressure

Currently the TLT is 162.3 with the TNX at 0.7%.  Two weeks ago at 156, TLT had reached put support and was expected to stabilize and put support helped push prices to 160+.

IV. Technical / Other - N/A


Conclusions.  Summer doldrums may be upon the markets for the next few weeks.  Surprising rises in Covid-19 cases in the warmer states of CA, AZ, TX and FL bring into question POTUS views that warmer weather will solve the virus crisis, what happens in the winter?  The markets may remain on pause until the end of July when the current bailout package is expected to be replaced (likely last until after election), "more free money" may be the impetus for a final move higher.  We may see something similar to Q4 of 2018 with highs in Sept and Oct then down to EOY.

Weekly Trade Alert.  Not a lot of fireworks are expected next week, but a move down to the SPX 2950-3000 area (esp Fri close) may be a BTFD for a rally at least to EOM targeting 3100.  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

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