Last week I was looking for a modest rally in the SPX with the options OI showing storng support up to 3850 with the caveat that int rates (TNX) remained in the 1.4-1.5% range also warning that strong ST bullishness would be LT bearish. As a result. Mon saw a 100 pt gain to 3920 as rates remained in the 1.45% area, but when rates rose Tue-Wed to 1.62% a sharp selloff occurred down to 3720. However, Fri when rates dropped to 1.55%, a steady rally all day produced a close at 3842 after reaching a high at 3852. Again selling was concentrated in the NDX tech sector, dropping from 14k to 12.2k or -13%. This has produced a Buy for the NDX after a strong Sell in Dec-Jan as shown in the DM/SM section.
Last week also showed two opposing views on the effects of int rates on stock returns with Avi Gilberts "rates don't matter" in SeekingAlpha, while John Mauldins MauldinEconomics produced the following chart showing that virtually all of the SPX returns since 1880 have occurred during times of deflation. Although not exactly the same, rates tend to rise more in inflationary periods similar to today (see Citi Infl Surprise Index in main section). The NDX in particular rose in the second half of 1999 and 2020 even as rates rose, but at a certain point when rates began to matter, the effect was swift and dramatic.
As I write this, the Senate has approved the full $1.9T Dem stimulus package with voting strictly on party lines. Mon could be interesting both for stocks and bonds. Fri, OntheMoneyUK came out with a new post repeating what I said last weekend with an ATH target for the SPX by the end of Apr before a larger decline. In Tech/Other I look at the NDX 2x ETFs, but results are disappointing.
I. Sentiment Indicators
The overall Indicator Scoreboard (INT term, outlook two to four months) bearish sentiment has risen modestly, now slightly higher than seen at the Jan selloff which could produce a similar rally to ATHs.
The overall Indicator Scoreboard (INT term, outlook two to four months) bearish sentiment has risen modestly, now slightly higher than seen at the Jan selloff which could produce a similar rally to ATHs.
CITI Surprise Inflation Index for Mar shows a strong pickup in inflation in the US and EU, while China continues to lag. The US and G10 are now at the highest inflation surprise levels of the past five years.
Bonds (TNX). Bearish sentiment in bonds rose modestly but continues to lag rates.
For the INT outlook with LT still negative, the gold miners (HUI) bearish sentiment has risen close to the levels seen at the Dec lows and prices may be close to a counter trend rally of several weeks.
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 was warning of a potential downturn last week, but has now moved modestly higher that could support a temporary rally. Sentiment over the past 6-9 months is producing a rounded bottom similar to, but much larger, than what was seen over several months prior to the Mar 2020 selloff.
And the sister options Hedge Ratio bearish sentiment has reversed sharply now close to the level of the Jan lows.
The INT term SPX Long Term (2x/DM) ETFs (outlook two to four weeks) bearish sentiment continues to languish near the levels seen at the Sept-Oct 2018 top.
The INT term NDX Long Term (2x/DM) ETFs (outlook two to four weeks) bearish sentiment has seen a huge move up from the strong Sell level seen in Dec-Jan now reaching a ST Buy, somewhat similar to July 2018.
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 12. Also, this week includes a look at the GDX & TLT for Mar 19th exp.
With Fri close at SPX 3841, options OI for Mon is small with put support at 3925 and call resistance starting at 3875. At 3900 there is a large straddle with +1000 net puts that may act as an attraction pt with positive news on the new stimulus.
Wed OI is also small where SPX put support moves up to 3850 with first noticeable call resistance at 3925.
For Fri there is much larger put support extending up to 3875 with call resistance starting at 3900. Overall, should be a mildly positive bias for the week.
For Fri PMs Mar 19, there are several overlapping inflection pts which will likely lead to increased volatility between 3790 and 3880. I still wonder about the large strangle at 3500 and 3900 at EOM.
Using the GDX as a gold miner proxy closing at 31.8, there is fairly strong put support at 30.5 and little net call resistance until 35.5. There is potential for a 10% rally ST. (Stimulus?)
Currently the TLT is 138.9 with the TNX at 1.55%, prices dropped to the smart money put OI at 140 and 145 and may temporarily relieve downward price pressure. A drop to 135 or TNX 1.75% is still possible.
IV. Technical / Other
This week I will look at the NDX 2x ETFs. Similar to the normal chart shown in DM/SM there was a strong Sell in Dec-Jan prior to the current top. Comparing the results to last weeks SPX 2x ETFs, however, the standard ratio S/L has very low correlation compared to the components, mostly due to the strong Buy due to high bearishness in Oct 2018 which was not that bad very long term. The problem with he separate ETFs, however, is that they tend to be early as shown by the 5-20 day negative correlations and none of the different combinations produce very high correlations. So, still a work in progress.
Conclusions. Overall sentiment for the week increased only modestly, but a large increase in bearishness for the 2x NDX ETF indicator has created a Buy signal that could result in a 50-68% retrace for the decline from 14k, or about 8-10% to 13.2-13.5k. Reversals in both the Hedge Ratio and DM/SM options indicators are supportive of a rally, but the low bearish levels of the SPX 2x ETFs indicate weakness compared to the NDX or a possible 5-6% rally to 3950-4000. A Sell on the SPX 2x is likely after the next rally that could produce an SPX decline similar to what was just seen in the NDX.
Weekly Trade Alert. Recent volatility may temper SPX bullish enthusiasm after the last two weeks 100 pt one-day rallies were followed by 150+ pt declines. I am expecting more cautious rallies over the next few weeks with continued intra day volatility. 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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