High on Fedphoria

Last week the SPX moved about 1% higher than originally expected, although the Thur AM OI update indicated that there was strong put support and little call resistance up to 3700.  At some point there is little reason for higher prices and we seem to be near that level.  There have been several notable tops around the quarterly options exp, including Sept 2018 and more recently June 2020.  This month we have the electoral college vote for POTUS on the 14th, the FOMC on 14th&15th, and options exp on the 18th, so a good chance for some fireworks and/or a high vol distribution top.  In June, the SPX dropped 200 pts the last two weeks of the month and with the high SPX call OI for Dec 31 just above 3500, we may see a repeat.

The Tech/Other section takes a look at the Rydex Bear/Bear ETF indicator which nailed the last three INT tops and the data mining Equity P/C indicators showing comparable extremes seen at the recent Sept and Oct tops.

I. Sentiment Indicators

The overall Indicator Scoreboard (INT term, outlook two to four months) bearish sentiment continued to decline, now just a fraction above an official SELL.

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 fell sharply last week, reaching the lowest level of the past three years.

The VXX $ Vol also fell sharply, now about the same as the Jan 2020 top and just before the June drop of SPX 200 pts the last half of the month.

Last month, I skipped the CITI Surprise Inflation Index because there was little change, but Dec shows a downturn, typically a sign of a slowing economy that may put some downward pressure on bonds. For gold stocks this may be good or bad, depending the outlook for Fed policy.  The most surprising aspect is that China appears to be in a deflationary spiral, whether their economic "recovery" is bogus or US tariffs and sanctions are taking a hit is unknown.

Bonds (TNX).  Bearish sentiment in bonds continued to be little changed as rates creep up toward 1%.

For the INT outlook with LT still negative, the gold miners (HUI) bearish sentiment is slightly higher as prices rallied back to the lower TL.

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 is only modestly lower as a moderate amount of skepticism remains.

And the sister options Hedge Ratio bearish sentiment fell more sharply as hedging has decreased, but not to the danger level.

The INT term SPX Long Term (2x/DM) ETFs (outlook two to four weeks) bearish sentiment shows a sharp drop in ST EMAs, but LT have not yet reached levels seen before prior corrections.

The INT term NDX Long Term (2x/DM) ETFs (outlook two to four weeks) bearish sentiment (no chart. see QQQ OI).


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 Dec 11. Also, this week includes a look at the GDX for Dec exp.  The Dec EOM remains unchanged with the large OI in SPX calls at 3515&25.

With Fri close at SPX 3699, options OI for Mon are fairly light with call resistance starting at 3675 and most of the put support in the 3400's.  A drop to or below 3675 is expected.

Wed has somewhat smaller OI where SPX put support moves down to 3575, but call resistance moves up near to 3700, so prices can go either way.

For Fri options OI is larger with strong put support up to 3600 and call resistance moves down to 3650.  With low P/C overall, this may be a setup for a pre exp pullback before a high vol distribution top Dec exp (18th).  Prices likely to drop to at least 3650. The last high vol top on an EOQ exp was Sept of 2018.

For the QQQ (NDX/41, 12.3k=300), closing at 305/12528, is mostly neutral between 290 and 300 with minor call resistance at 305 and large at 310.

Using the GDX as a gold miner proxy, closing at 35.3, it is now at neutral support/resistance which was 37+ two weeks ago.  In the last two weeks, about 80k calls have been added between 35-8 with 20k puts added at lower prices.   The drop in P/C increases the likelihood of more downside.

Currently the TLT is 155.2 with the TNX at 0.96% and the TNX is at the top of my expected range of .75 to .95%. 


IV. Technical / Other - LT in conflict with ST

For a LT indicator, I am using the Rydex Bear/Bull Asset ratio. Over the last three years, this ratio has fallen to about .035 before a INT top (Jan, Oct 2018, Feb 2020) comparing the current level to Dec 2019, this may indicate about 200 SPX pts of upside remaining.

For the ST, the Equity P/C factors have been accurate for the Sept and Oct tops. Looking at the vol of puts & calls (adj for SPX volume), the level of calls (dumb money) is at new highs, while the level of puts (smart money) is lower than the previous ST tops. Thus it is likely (at this time) that a correction of about the same magnitude as Sept and Oct is due.

Looking at the equity calls vs equity p/c, the speculative measure is showing a strong SELL.

Looking at the equity puts vs equity p/c, the hedging measure is showing a weaker SELL, comparable to the Sept and Oct tops.

Conclusions.   I have been watching the Rydex Bear/Bull for several weeks to see if it would confirm an INT top, but so far it has not.  From a LT perspective Rydex Bear Bull 1998-2020, it's possible we are in a rounded bottom as in 2000 given the blow off in Techs, but it could also mean a rally of a couple hundred SPX pts higher or possibly the rounded top (H&S) as shown in the DAX earlier this year.

Weekly Trade Alert.   SPX is likely to see a minor pullback next week to 3650 or slightly lower before a final push higher for the year into options exp Dec 18.  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