Stalled Stimulus

Last week was expected to test/exceed the SPX 3300+ area by mid-week before an expected pullback no later than Fri.  The pullback materialized for the mega cap tech stocks on Fri with the "better than expected" jobs data, but a rotation into the more cyclical areas boosted the broader averages.  Surprisingly, there was little market reaction to disappointment on the lack of Congressional approval of even a $1T stimulus package and more delays expected due to signs of an improving economy.  Trump continues to push back against China as this now seems to be the only sign of progress made the last four years as trade talks seem to be falling apart.

Next week may be the start of a short but sharp pullback of up to 200 SPX pts, now possibly to the 3150 area.  For this weeks sentiment indicators, I have back tracked to mid-2017 to look at the lead in to the Jan 2018 top, but July-Sept remains the most likely analog.  The VIX term structure has remained over 1.2 for most of the last two weeks, now forming a "cluster" as seen as previous INT tops (Tech/Other update).

Although I have not done much coverage of gold/GDX, looking thru some of my archived charts I found a couple of charts from two years ago that still fit the current blow off compared to int rates.

I. Sentiment Indicators

The overall Indicator Scoreboard (INT term, outlook two to four months) bearish sentiment is now approaching the low levels seen late Dec 2019, a few weeks before the Mar crash.

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 still lagging behind due to the level of VXX $ Vol remaining relatively high.

Bonds (TNX).  Bearish sentiment remains extremely low while interest rates increased slightly late in the week.

For the INT outlook with LT still negative, the gold miners (HUI) bearish sentiment saw a modest pickup as the HUI fell from a high of 375 to 350 during the week.

The two charts which I had looked at a couple of years ago were comparing the price of gold (blk) to the inverse of TNX (red) and the price of China's stock index SSEC (red).  For much of 2017 thru 2019 gold was somewhat higher, but still strongly correlated with 1/TNX, but in 2020 have lined up closely similar to the mid-2016 top.  A "recovery" rally in int rates will likely have a similar negative effect on gold prices.

The second chart, which is not a strongly correlated, was intended to show the effect of China's economic stimulus, first effecting the stock market (SSEC), then spilling over into gold as the Chinese are strong buyers of gold.

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 has now fallen to the lowest level seen over the last three years.

And the sister options Hedge Ratio  bearish sentiment has now matched the level seen in Jan 2020.  Will an Aug pullback be a setup for a final Sept blow off similar to Feb 2020?

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 reinforcement, negative when put support is broken or positive when call resistance is exceeded.  This week I will look out thru Aug 14 and EOM for SPX. Also, this week includes a look at the GDX for Aug exp. 

With Fri close at SPX 3351, options OI for Mon show very little put support until 3250 with modest call resistance at 3350 and 3360.  The 3320 level may be touched sometime during the day, with either a strong AM to 3360 with a late fade, or an early "news related" selloff, followed by a rally to 3350-60 then fade.

Wed has somewhat smaller OI where SPX has put support at 3250 and call resistance at 3325 and above.

For Fri, larger OI may influence weekly behavior with stronger call resistance at 3300 and 3325 that could push prices down to or below 3300.  Overlapping straddles below 3300 show little net put support down to 3150 if an aggressive down move begins.

For the Aug EOM, SPX OI shows moderate call resistance down to 3275 with little put support until 3150, indicating a potential month long consolidation in the 3200s.

Using the GDX as a gold miner proxy closing at 42.7 after reaching a high above 46. As I warned the positive dela hedging can result in strong reversals, a move below 40 is likely by exp.

 
Currently the TLT is 170 with the TNX at 0.56%. 

IV. Technical / Other

The most consistent of the data mining indicators from the mid-2017 time frame are the Equity P/C indicators, so I just wanted to take a quick look.  First, the Equity P/C and SKEW spread show consistently lower readings followed by larger INT corrections since Feb 2018.

Second, the ensuing level of speculation measured by the Equity P/C to Equity Calls spread has also been related to crash potential as well as identifying INT tops.  For instance the Sept-Oct 2018 top showed less speculation than Jan 2018 or Jan-Feb 2020, while the current level of speculation is only slightly less than that seen in Jan-Feb 2020 (so far).

The VIX term structure (VXV/VIX) has continued higher, probably eliminating the ST correction analog to May & July 2019.  The current reading of 1.27 is close to the 1.27-1.28 area that resulted in choppy prices from July-Oct 2018 and Nov-Dec 2019.  Other sentiment, data mining and other seem to eliminate the late 2017 analog.

Conclusions.  There now seems to be a large contingent expecting a 10%+ correction for SPX/NDX before the election then followed by a year-end rally (Pres cycle), so I am looking for something else.  Something is possible similar to the Bradley turn chart (delayed 1 month since May 11 high was June 11) with a consolidation in Aug and a final blow off in Sept.

ST we have warnings from Raj's timing cycles for a Fri/Mon top as well as A.Gilberts EW W3 target of 3350-70.

Weekly Trade Alert.  Mon may see a possible ST top around 3360 with a likely pullback toward 3150 that could end up being a chop fest into the EOM.  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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