Right the Wrong Way

Last week saw more volaility than expected as someone seemed to have decided to dump their bonds probably the Chinese, who had already sold about 30% during Trumps reign, but were hoping to see a more amicable Biden administration and when he continued Trumps trade war, decided to bail, pushing the TNX as high as 1.6%. The result was a 10% drop in the NDX, led by Teslas 30% drop, from 14k to below 13K as higher rates tend to threaten high growth sectors more.

My outlook from Feb 6 was that the the SPX was likely to retest the Jan lows, targeting 3750-3800, but short term I thought we could see strength into mid-week to 3930-50, but by Tue AM the NDX selloff took the SPX down to 3806 before rallying to 3930 Wed. A second retest of the low at 3790 on Thur has now set up a possible successful retest of the Jan lows and is consistent with the mid-2015 pattern shown below. We could still see 3750 as indicated by OntheMoneyUK, but from a contrarian perspective, the more bullish the markets look ST, the more bearish will be the LT result. The key is whether rates stabilize for the next few weeks with the TNX around 1.4-1.5%.  If the mid-2015 analog is followed, a low is near with a slow and choppy path to new ATHs around 3980-90 in mid-late Apr, just in time for "sell in May".  Several recent articles regarding the millennials (ages 25-40) plans to invest additional stimulus money may provide an upward bias.

The data mining alternative to the normal charts turned out to be more dificult than expected so todays Tech/Other only looks at the SPX 2x ETFs. Next week will look at the NDX 2x ETFs.

I. Sentiment Indicators

The overall Indicator Scoreboard (INT term, outlook two to four months) bearish sentiment rose slightly last week, but not enough to support a sustained rally.

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, exceeding slightly sentiment from the late Jan selloff.  Combined with overall sentiment, this points to a more labored rally with less volatility to crush vol buyers.

Bonds (TNX).  Bearish sentiment in bonds continues to lag behind prices. With the TLT (20 yr) now down 20% from the Mar 2020 highs, a combined 30-40% loss is probable by EOY.

For the INT outlook with LT still negative, the gold miners (HUI) bearish sentiment is close to unchanged and a move in HUI below 250 could easily fall another 20% to 200.

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 surprisingly FELL sharply as the dumb money jumped on the BTFD band wagon with both fists and is now approaching the late Dec 2020 levels.

And the sister options Hedge Ratio bearish sentiment also fell sharply after spiking during the Jan pullback.  Less dynamic rallies are likely.

The INT term SPX Long Term (2x/DM) ETFs (outlook two to four weeks) bearish sentiment also surprisingly fell, showing INT investors share much the same complacency as ST options traders.

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 Mar 5. Fri is jobs report day, and large SPX OI will likely provide guidance for the week

With Fri close at SPX 3811, options OI for Mon show moderate put support at 3800 with minor support up to 3875 where call resistance starts.  Moderate call resistance starts at 3925.  Any early weakness is likely to be reversed.

Wed has smaller OI where SPX moderate put support moves up to 3850 with little net call resistance until 3925.

For Fri very large SPX OI is likely to drive weekly movements with strong put support up to 3850 and should be the minimum target for the week.  Only minor call resistance exists between 3850 and 3950 so a larger rally can not be ruled out.

IV. Technical / Other

The following data mining chart shows the SPX 2x ETF components and the normal ratio.  Sentiment fell to about -1.5 SD before the Jan pullback then rallied to a lower high late Jan.  Surprisingly, the recent pullback saw lower bearish sentiment as longs (SSO) increased faster than shorts (SDS).

In order to examine the SDS & SSO options I set up an algorithm to see the outcomes of various combinations as shown below. As it turns out for an INT indicator, the ratio SDS/SSO (line 4) turns out to have the highest correlation (R).  The next best is line 10, Dif A-B.

The data mining equivalent A-B is shown below and the more erratic movement in 2018 makes the simple ratio more preferable.

Conclusions.   The rounded top I have been anticipating the last two months still seems to be in play with bonds and the PMs also following the expected script.  Most of the bullish sentiment seems to be coming from the millennials who were born at the beginning of the greatest bull market of all time in bonds and have no idea what a secular bear market in bonds can be like (last time was the 70s).  It is very likely that at sometime the Fed will have to chose between saving the bond market or the stock market, imagine the surprise if they chose bonds.

Weekly Trade Alert.   ST weakness to start the week is not impossible, but SPX 3850+ is likely by Fri close with an upward bias to new ATHs thru mid-Apr.  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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Deep Freeze in Texas

Last weeks stock market followed "the Big Sideways" outlook to a tea as the SPX tested the high of the range given several weeks ago of 3650-3950 with a Mon top almost exactly3950 before dropping to a lower low than the previous week at 3885 causing the EW analysts to flip/flop once again calling the "5 wave" decline the beginning of a much larger decline.  There are some indications in the SPX options OI of a move up (3930-50) before resumption of the decline, possibly causing the same EW analysts to flip/flop once again.

I am still waiting for the snow and ice to melt before going anywhere, but one good side effects of this pandemic was storing extra food and water in case of shortages so most hardships were avoided.  In the progressive state of Texas, however, who would ever expect a cold wave that would knock power for a week.  So much for going green.

This week will continue looking at some of the new data mining composites in Tech/Other.  In case you wonder where I going with this, I hope to replace the EMA indicators by the summer and these "new" indicators are a first look at possible replacements.  Next week will include ETF indicators for the SPX and NDX.

I. Sentiment Indicators

The overall Indicator Scoreboard (INT term, outlook two to four months) bearish sentiment dropped sharply last week even as prices stalled out.  The majority still seem to be looking for a "melt up" before a "melt down".

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 remains in a tight range near historical lows.

Bonds (TNX).  Bearish sentiment in bonds continues to follow rates higher with little panic even as the TNX reached 1.35% last week.  A move to the 3% level looks likely before reaching the Buy level.  A stall around the 2% level is possible as this would likely be the catalyst for a 10%+ correction in the SPX.

For the INT outlook with LT still negative, the gold miners (HUI) bearish sentiment remains muted even with the breakdown to new lows.  As I have been warning for months, the gold bugs assumption that a pickup in inflation would power gold to 3000 and PMs to the sky was flawed, with a sell off more likely due to the resulting higher interest rates.

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 retreated sharply last week, giving up about half the gains from the late Jan decline.

And the sister options Hedge Ratio bearish sentiment declined even more sharply, now close to the levels seen before the late Jan decline.

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 26 and EOM Mar. Also, this week includes a look at the GDX & TLT for Mar exp.

With Fri close at SPX 3907, options OI for Mon are very light with only small call resistance at 3950 and first significant put support at 3750.

Wed has similar size OI where SPX shows small support up to 3925 and resistance at 3950.

For Fri EOM, we have large OI with SPX showing strong support at 3850 and strong resistance at 3925 in between is a "no man's land" where straddles are neutral.  Two weeks ago I pointed out that the data mining indicators showed low put-call volume was generally bullish and may carry over to OI and the next week was bullish, so we may see an early week retest of 3950 before weakness later.

For Mar EOM, high call OI at 3875 and 3900 may indicate weakness into late Mar.

Using the GDX as a gold miner proxy closing at 32.7, as I have been warning the lack of put support below 34 and high call resistance above 35 would likely lead to weakness.

Currently the TLT is 143.7 with the TNX at 1.35%, TLT is down 4% from last Fri level of 149 or about the same as a drop in SPX from 3950 to 3800.  I probably should have been looking at the EOQ as the "smart money" puts were hiding in Mar, indicating a drop toward 140.

IV. Technical / Other

This week I want to take a look at a potential replacement for my standard INT and ST composites. For the INT composite I started with the VIX Buy/Sell and Equity P-C indicators, but the volatility in the Equity P-C was not consistent with an INT composite. One of the indicators I referred to in my LT forecasts had been the $NYUPV/$NYDNV using the idea that volume led price with the potential for a 2007-08 setup. As you can see below a sharp drop in relative up volume typically precedes INT tops, so I decided to use a simpler approach and use SPX volume. The result was promising as seen below using equal wts, but still is too volaile.

For the next step I reduced the Equity P-C wt and increased the SPX vol wt which produced a more reasonable output and also increased the "fit" using the correlation (R).

For the ST composite I have only looked at the ETF and SPX calls and puts from the Composite Put-Call indicator using equal wts. Comparing the results of the INT and ST indicators, the conclusion is that the INT composite is showing a setup for something bigger in time and/or price than the corrections seen over the last three years, but the ST composite is showing that the setup is not yet complete.

Conclusions.   Marking time seems to be the most appropriate expression for the current state of the stock market.  Interest rates, however, have decidedly taken a turn higher which is pressuring the PM stocks.  For the stock market, modestly higher rates can be a positive  when an improving outlook for the economy increases the prospects for cyclical stocks (DJIA), but may pressure high growth stocks with low yields (NDX).  At some point (likely TNX between 1.5% to 2%) comparison to the dividend yield, or as some prefer, the earnings yield, reduces the advantage for stocks and an asset allocation back to bonds occurs.  This could continue into the summer with a potential range of SPX 3650-950.  One EW analyst that shares the same outlook is OntheMoneyUK.

Weekly Trade Alert.   SPX options OI indicates early week strength is possible targeting 3930-50 while a decline is likely to 3875-900 by Fri.   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
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The Big Sideways

Last week turned out to be a good week to take a hiatus from the markets as the SPX remained in a narrow 1% range (3890-3935) after the wild 4-5% swings of the last two weeks. The general consensus seems to be that there will be a “crash up, crash down” sequence (Nomura's C.McElligott) or its opposite, while I have been looking for a rounded top. There may be a clue in the longer trend of the put-call indicators discussed in the weeks Tech/Other.  Remember, my Alt scenario is a 1987 redo where a strong economy with rising rates saw stocks rise 20% the 1st 6 mns before falling 40% the second half.

Not much change in the normal sentiment indicators. This week will continue the series of data mining indicators in the Tech/Other section with the wrap up of the Composite Put-Call Revised (Equity+ETF+SPX) indicator. Next week will continue by looking at a start for replacements of the INT and ST composites.

There have been some comments recently as to how my views are not "popular", particularly political, but remember the dictionary definition of a contrarian is "a person who opposes or rejects popular opinion", so I am always suspicious when everyone agrees on anything.

I. Sentiment Indicators

The overall Indicator Scoreboard (INT term, outlook two to four months) bearish sentiment saw a sharp drop last week, and is now in the area that should at least slow advances.

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 fallen again to the mid-Jan levels after a modest rebound late Jan, now supporting another pullback.

Bonds (TNX).  Bearish sentiment in bonds continues to follow rates higher as the TNX closed at 1.2%.

For the INT outlook with LT still negative, the gold miners (HUI) bearish sentiment also rose modestly as prices seem to be testing the 275 support level.

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 a modest drop last week, and remains in the general area of the Jan-Feb 2020 top.

And the sister options Hedge Ratio bearish sentiment has fallen sharply from the late Jan spike.

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 19 and EOM. No change and no charts until next week for TLT and GDX.

With Fri close at SPX 3935, options OI for Tue is very light.  Fri close over 3925 may cause delta hedging to push prices toward the 3960 call resistance level, but a move below 3925 may target put support at 3900.

Wed also has very small OI where SPX put support resistance zones are 3900/3950.

For Fri AM, I usually only look at the PM due to overlapping, but this week is unusual due to the large amount of unhedged calls over SPX 3825.  If the SPX can each 3975 delta hedging can support prices but a move below 3950 will likely drop to at least 3900, possibly 3850.

For EOM, SPX OI is somewhat less bearish than optn exp with put support starting at 3850 and call resistance starting at 3875.

IV. Technical / Other

This week I want to continue with the Composite Put-Call Indicator (Equity+ETF+SPX). Starting with the standard Composite Put-Call Ratio, the following chart shows the 10 day SMA for each category where the combined is based on totaling contracts. The regression correlations (R) below show that Equity P/Cs are the strongest, somewhat supporting its wide usage, but note the low ST Rs, indicating that Equity P/Cs are poor ST indicators of tops. ETF P/Cs are next strongest, while SPX has negative Rs, indicating that high P/Cs are bearish.

Next the std var Composite Put-Call Indicator is weighted by using the Rs for trading day categories for days 5-40 with 40 days given a half wt. The reason for this weighting was to give it a ST bias with the duration (days using R wts) of about 17 days, or an optimal holding period of 3+ weeks. The results shown below turned out very well with the ETF P-C given the highest wt at 38%, SPX next at 34% and Equity at 28%. Currently the overall reading is just below neutral and seems to be repeating the Sept-Oct rally/retest sequence, currently at he same level as the Oct top.

I extended the time period back to mid-2017 to emphasize an interesing pattern between he Equity and SPX P-C indicators. For the first third of the period Equity P-Cs were very high while SPX P-Cs were very low, but since early 2020 their roles reversed. Not sure what it means, but likely to indicate a major change in market behavior.

One additional data mining chart I wanted to cover is the VIX puts. Direct interpretation is difficult since moves higher can start as dumb money buying at tops as we see today, then smart money moves in as markets tank when the VIX rises. Current put levels are almost identical to that seen at the Oct 2020 high, right before a retest of the Sept lows. Rs are largest for 5-10 days and negative meaning high put levels implies lower SPX prices.

Conclusions.   I didn't miss a whole lot last week and I was able to catch up on my sleep.  With the majority now looking for the melt up/melt down scenario seen at the last three INT tops in Jan and Oct 2018 and Feb 2020 will the market surprise?  There are several indicators pointing to the likelihood of a retest of the Jan lows over the next few weeks prior to the next stimulus package expected in March.  Trader Joe sees this as a B-wave top in an expended flat with a target down to SPX 3800+/- and sentiment seems to agree, although bigger picture he is still bullish.

Weekly Trade Alert.   Next week may be an inflection for a retest of the Jan lows (SPX 3750-800), but any pullback is likely to be less dynamic that what was seen in late Jan with the ETF P-C indicator at neutral.  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
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© 2021 SentimentSignals.blogspot.com

Best Two Weeks Ever

Whipsaws can be fun when you are right with SPX 150+ pts to the downside and 150+ pts to the upside where the target range (3850-90) was beat by five pts.  I think I am going to retire for a few weeks and bask in the sub-freezing weather expected to envelop the eastern half of the US.

Is anyone else getting dizzy watching the range of predictions made by some of the more respected EW analysts lately?  One of the most widely followed just last Sunday was looking at the decline to SPX 3700 as the start of a larger decline, while Trader Joe in mid-Jan at least got the ST direction right, but was looking for sub 3000 for the SPX in mid-Feb.  Another whose forum I follow was talking about the end of supercycle V with the SPX targeting 3 digits after the prior weeks decline, but after a rally back to 25 pts over the prior high is now looking for an additional 25% rally.

From now on I want to standardize the language to differentiate between the normal "put/call ratios" and the std variable approach by using the term "put-call indicator" for the std variable approach.  See the Tech/Other section for a look at the ETF put-call indicator with the new Composite Put-Call indicator next week.

I. Sentiment Indicators

The overall Indicator Scoreboard (INT term, outlook two to four months) bearish sentiment saw a minor rise prior to last weeks rally, somewhat similar to the sharp selloff in Sept 2020 that may need a retest before a sustained rally.

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 only rallied very weakly.

Bonds (TNX).  Bearish sentiment in bonds remains below neutral and is at about the same level as Jan-Feb 2020, but not likely to prevent higher rates.

For the INT outlook with LT still negative, the gold miners (HUI) bearish sentiment coninues o fade even as prices fade, not a good sign for PM bulls.

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 .

And the sister options Hedge Ratio bearish sentiment .

This week I want to look at an update fo two data mining indicators for the SPX ETFs. First, the SPX ETF term structure (SSO - CPCRevised calls) bearish sentiment.  Here, we see a big improvement, but not enough to support a sustained rally.  Note this is the old version based on (Equity+SPX+ETF puts)/(Equity+SPX+ETF calls) using contracts so needs to be replaced with new version.

Next, the SPX ETF hedge indicator (SSO - ETF calls) bearish sentiment has reversed sharply with the rapid decline in ETF calls.  See Tech/Other for more on ETF calls as a hedge.

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 12 plus Feb 19 monthly exp.

With Fri close at SPX 3887, options OI for Mon is very light but has a bearish tilt with call resistance above 3850 and strong resistance at 3900.  Note last weeks look at the SPX data mining put-call indicators showed that low vol was bullish, so does it also effect low Oi?

Wed has small OI also, with resistance above SPX 3850 and little put support until below 3700.

For Fri OI is somewhat larger with call resistance starting at SPX 3850 and put support at 3800.

For optn exp Fri Feb 19, also very light OI where a large straddle at SPX 3750 may act as a magnet with small OI pt support below and small call resistance above.

Using the GDX as a gold miner proxy closing at 34.6 is near the bottom of its recent range.

Currently the TLT is 148 with the TNX at 1.17% as int rates rose on the basis of a Dem supported stimulus.

IV. Technical / Other

This week I want to continue the process of developing new Combined Put-Call Indicator by looking at the ETF puts & calls. The standard ETF put/call ratio for the original EMA model is shown below.

Rather than use a chart, I want to look at a table showing the results of the future price regressions.  Here we see low correlations for the std P/C for a 10 day SMA.  More importantly, looking at calls and puts separately, ETF calls have a higher correlation than the std P/C and combining with puts using the Equity & SPX (1/B - A) calc lowers the fit.  So, I decided to use the simple inverse (1/A).

Finally, the results with the inverted ETF calls only, here we see that a sharp rise in ETF calls has been present in several sharp declines in the past, supporting its use in the ETF hedge indicators for the SPX and NDX as shown a week before the recent decline.  Currently, the sharp drop in ETF calls is showing a slight bullish tilt.

Conclusions.

Stepping back to gauge the overall sentiment picture, There appears to be little support for a sustained rally at this point, but nothing pointing to an immediate collapse either.  The SPX put-call indicator using the data mining format is probably the most bullish and I will include an update with next weeks proposed put-call Composite.  Taking a look back at the rounded top of mid-2015, the options OI does agree with the circled area below where a successful retest of the recent lows around 3700 could lead to a multi-month rally into the summer with a range of perhaps SPX 3650-3950.

Weekly Trade Alert.  Some type of pullback is likely starting next week.  SPX options OI is currently showing possible targets of SPX 3800-50 by this Fri and 3750 in two weeks. 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

© 2021 SentimentSignals.blogspot.com