One of the more interesting news items last week was that much of the fervor in the mega-cap tech sector was huge call spread buying by a Japanese hedge fund, Softbank. The estimated investment was about $7 billion and netted about a $4 billion profit. but the effects on the tech sector proved to be overwhelming as the size of the trades and continuity created a feedback loop where options writers were forced to cover by buying the underlying shares (delta hedging), and the buying was picked by the Robinhood momentum traders. At least until it stopped two weeks ago. The call buying also increased option premiums, driving up the VIX even as prices rose, which convinced the bears that similarities to Jan 2018 meant another volmagedon was likely, but as call spreads were unwound last week so was the cause of an inflated VIX, even as stock prices fell.
Bearish sentiment has now reached the point where the correction is likely to end, however, gains are likely to be limited to the SPX 3600-50 area. I would not be surprised to see a rounded top similar to the May 2015 highs, only this time techs may have topped first while cyclicals (DJIA) continue to rally as the economy slowly returns to normal.
The overall Indicator Scoreboard (INT term, outlook two to four months) bearish sentiment has risen somewhat less than what was seen in the Jan 2020 pullback, about the same as the June pullback of 7-8%. A strong rally is unlikely, but marginal ATHs are possible.
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 rallied more strongly (due to VXX $ Vol below).
The VXX $ Vol rose sharply, matching the levels last seen during the first leg down of Mar 2020 with much less price declines in SPX. Again, long vol players were likely fooled as much by the recent runup in VIX as the Robinhood crowd was on the momenum in certain tech stocks.
Bonds (TNX). Bearish sentiment in bonds remains subdued as interest rates remain stable, but a significant change seems likely after the election.
For the INT outlook with LT still negative, the gold miners (HUI) bearish sentiment remains mostly unchanged as are prices. Surprisingly last week gold was weak even as news came out of higher than expected inflation (CPI, PPI).
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 saw only a very modest rise about the same increment as seen in June's pullback.
And the sister options Hedge Ratio bearish sentiment saw a stronger move, reaching the level of the June pullback, supporting the idea of a ST low.
The INT term SPX Long Term (2x/DM) ETFs (outlook two to four weeks) bearish sentiment
also saw a strong increase, rivaling that of the VXX $ Vol, that may be
indicating more than a ST bottom.
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 Sept 18. Also, this week includes a look at the TLT for Sept exp.
With Fri close at SPX 3339, options OI for Mon has small OI with put support up to 3350 and virtually no call resistance until 3400. Mon may see a strong move up to 3400.
Wed has somewhat larger OI where SPX shows small OI where 3400 is hedged (straddle), but put support extends up to 3440 and the first level of call support is 3480. Anywhere in the 3400 to 3480 area is possible.
For Fri PM, modest OI shows put support at SPX 3350 and 3460 with call resistance at 3500, but lower calls below 3460 may impede price gains. A move toward 3500 seems likely.
For the QQQ (NDX/41) this week's close is 270.5 (11,090) with strong put support up to 275. a move up to 280 (11,500) is likely and 288 (11,900) is possible.
Using the GDX as a gold miner proxy closing at 41.16 remains over 40 put resistance.
Currently the TLT is 164.5 with the TNX at 0.67%, rates were expected to rise with put support up to 164 and may remain in the range of 164-7.
IV. Technical / Other
The LT monthly SPX bollinger bands have extended over the upper band three times the last 5 years, Jan 2018, Dec 2019-Feb 2020, and Aug-Sept 2020. The LT results have not been promising with a trip down to the lower BB or lower over the next year. MACD showing negative divergence at ATHs.
The SPX ST, 1-hrly, is showing a potential bottom at low Fri with lower prices and higher MACD setting up a positive divergence. Closing MACD crossover same as Tue before Wed gap up and go.
Looking at the SPX 4-hr ES chart shows higher lows and MACD with MA resistance at 3420 and 3450 if 3360 is surpassed.
Conclusions. Overall sentiment is supportive of a decent rally with the potential to crush VIX and vol products. SPX options OI is about as bullish as I have ever seen, showing the potential for an optn exp week rally to the 3450-500 area, and for the NDX (QQQ) to 11,500-900. The strong bearish sentiment for the ETFs (SPX, NDX) may be indicating more of a rounded top. Watch out for the Sept-Oct 2018 effect as a high at Sept optn exp on high volume and a retest early Oct was followed by a multi-month decline.
Weekly Trade Alert. Next week is likely to be strongly positive with the potential for an SPX rally to 3450-500. 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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