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
Article Index 2016 by Topic

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