January has pretty much followed the outlines posted with an early trading range expected between 3700 and 3800, but the Dem victory for the Georgia Senator seats set up the possibility for stronger stimulus, pushing my upside target to 3860 (act 3870) with weakness coming late in the month, likely to test the SPX 50 day SMA (right at Fri close 3714). Feb is much more uncertain with some indicators showing a Sept 2020 setup of a 7-8% decline (low ETF hedging) while others are still pointing to a Jan 2020 type decline with one more ST high (SPX 3850-90) before a 10%+ decline. My view still favors one more rally but only a 60/40% probability. A larger decline now increases the prob of SPX 4000k later, while a smaller decline favors the rounded top.
Much of what happens will depend on the GOP support for a larger stimulus package ($1.5T+), less that $1T is likely to disappoint. If the Trumpster was still stockbroker in chief, he would likely rally GOP congressmen, but with Dem Biden, less interest in market reactions and less support from the GOP is likely.
I have been making good progress on setting up a new Composite P/C using the std var format, but the CBOE data was not as useful as expected although it did show that Equity contracts are much smaller in $ and therefore should be weighted lower. So I decided to use the future returns model used to construct the Overall Composite in 2016 (more in Tech/Other).
I. Sentiment Indicators
The overall Indicator Scoreboard (INT term, outlook two to four months) bearish sentiment has risen sharply but is still near neutral. Any rally is likely to stay within Jan trading range.
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 less strongly as Equity call buying remains strong.
The VXX $ Vol rose sharply, and close to the level seen at the Jan 2020 pullback.
Bonds (TNX). Bearish sentiment in bonds is little changes as rates stayed between 1.0-1.1%.
For the INT outlook with LT still negative, the gold miners (HUI) bearish sentiment rose slightly as prices tested recent lows.
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 risen sharply now slightly higher than at the Jan 2020 lows with the overall pattern similar late 2019 - early 2020.
And the sister options Hedge Ratio bearish sentiment has only seen a modest rise as hedging remains weak and could mean more volatility.
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 Feb 5. Also, this week includes a look at both the GDX and TLT for the Feb exp.
With Fri close at SPX 3714, options OI for Mon show fairly strong put support from 3675 to 3725 and a close at or above 3725 seems likely. Note, however, very light OI but likely Fri decline bolstered put support.
Wed has smaller OI where SPX has put support up to 3750.
For Fri (Jan jobs data), SPX OI shows fairly strong put support up to 3750 and call resisance at 3800, in between straddles provide little direction bias.
For Feb EOM, OI is to low to be conclusive, but now indicates SPX 3650-700 possible.
Using the GDX as a gold miner proxy closing at 34.5, virtually unchanged for the week as is OI sentiment with a continued tight trading range likely. Both puts & calls up about 50%.
Currently the TLT is 151.8 with the TNX at 1.09%, very little change here with tight range likely.
IV. Technical / Other
Starting with the Equity P/C using the EMA output it's easy to see the extremely low bearush sentiment that has everyone so worried.
Comparing the EMA format to the std var put/call spread, the biggest difference is seen when there sharp declines in SPX price since both put and call volume decline together.
While the addition of the inverse function for the puts correctly adjusts for the decline in option volume when SPX prices fall.
Finally, a regression is used to compare the current put/call measure to the difference between the current SPX price and the future price in 5 trading day increments (ie, starting Jan 2, 2018 price diff between closing SPX now and Jan 7, etc). For the base case, I used the P/C 10 day SMA for last weeks SPX and this weeks Equity P/C. For the SPX the changes are dramatic with a 4-5X improvement (but less than the 10X I thought last week), while for the Equity P/C the improvement averages about 2X. The Equity P/C seems to be better INT at calling bottoms (followed by long rallies), while the SPX and ETF (next week) are better ST at calling tops (short but sharp declines).
Conclusions. Bearish sentiment is up somewhat, but not likely enough for new ATHs. PX options indicates a rally is likely next week to the 3750-3800 area. Everything else is riding on the coat tails of the next stimulus package.
Weekly Trade Alert. Highly uncertain but some type of rally is likely.. 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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