Do Taxes Matter?

Last week was expected to see a mild pullback of 1-2% before a rally to test the ATH by Wed Apr 28 (FOMC), and by Tue mid-day, the SPX bottomed at 4118 (down 1.5%) and actually made a new ATH Fri.  Options OI is now indicating a possible FOMC high near SPX 4225 before a decline down to/below 4100 possible by Fri.  This is also very similar to Trader Joes B Wave outlook.

The market seemed surprised Thur when Biden announced raising the capital gains tax rate on high income investors, but then reversed Fri as many concluded that resistance in Congress would only result in a rollback of Trump's tax cuts.  The more important factor may be that without higher taxes, deficit spending will pressure int rates higher which may be even more negative for stocks.  Otherwise, last weeks volatility saw little change in sentiment other than a sharp increase in VXX $ Vol which indicates that the next pullback should be BTFD.  The recent pickup in volatility has increased put buying that is likely to delay by several weeks any significant pullback.

The Tech/Other section covers similar patterns to the May 2015 top, while the data mining put-call indicators show that more time is likely before a top.  The Twitter update Tue AM saw a drop in the LT NYUPV/NYDNV to the sell level but the late reversal and subsequent rally reversed the signal.

I. Sentiment Indicators

The overall Indicator Scoreboard (INT term, outlook two to four months) bearish sentiment was little changed for the week as stocks fell early in the week then rallied back strongly.

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) and may be following the Jan-Feb 2020 analog.

The VXX $ Vol rose sharply, with a pickup in sharp day-to-day volatility that is sometimes indicative of a topping formation.

Bonds (TNX).  Bearish sentiment in bonds saw a fairly sharp drop in bearish sentiment last week with only a small drop rates, possibly as a safe haven with the pickup in stock volatility, but likely indicative of higher rates in the future.

For the INT outlook with LT still negative, the gold miners (HUI) bearish sentiment is presented in a new format using the data mining software to add the inverse TNX rate to the ETF ratio.  Prices rallied last week as expected with the pickup in bearish sentiment, but sentiment fell even more sharply, now indicating that a resumption of the decline is not far away.

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 rose slightly last week.

And the sister options Hedge Ratio bearish sentiment rose by about the same amount.

The recent rise to ATHs in the NDX has now almost completely reversed the high bearish sentiment seen after the Jan decline and will likely limit further gains.

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 Apr 30. Also, no charts for GDX or TLT.

With Fri close at SPX 4180, options OI for Mon moderate call OI may pressure prices down toward 4150 with significant put support there.

Wed has small OI where SPX has moderate put support at 4100 and call resistance at 4200 and more strongly at 4225 with little in between and that could contribute to wide price swings.  SPX 4225 is possible around FOMC conclusion, but could see a sharp reversal.

For Fri, SPX has stronger call resistance that could see a drop down to put support at 4075-85.

IV. Technical / Other

Over the past year, I've referred to the rounded top of May 2015 following the avian flu scare of Oct 2014 as a possible analog.  The recent daily price swings is reminiscent of the 3 mont price period around the May top where prices remained in about a 3-4% price range.  Is it a coincidence that prices are now almost an exact double of 2015?

Looking at the Composite Put-Call indicator, we may have seen the lows in Jan and Feb similar to early 2020, and in looking at the data from 2015, bearish sentiment bottomed several months before the top, moving to near neutral by May.

As I pointed out earlier, even though Equity Put-Call indicators were extremely low over the last year, SPX Put-Call indicators were very high and a INT drop may not occur until lower bearish readings are seen.

Conclusions.   The day-to-day volatility of the stock market has somewhat muddied the ST outlook as the increase in put OI and volatility hedging with VXX may delay a decline of more that 3-4% for several weeks.  Comparisons to the rounded top of 2015 showed that this type of ST volatility may go on for several months before an INT direction is made clear.  As long as int rates (TNX) remain in consolidation between 1.5-1.75% there will remain modest support for stocks, but sentiment for TNX and HUI indicate that upward pressure on rates is not far off.  SPX options activity is also increasing which us usually a sign of an approaching top, but may not reach a critical level for several months.

Weekly Trade Alert.   Things seem to be progressing mostly as outlined last week, but at more frantic pace than expected.  Next week may see another early pullback to SPX 4150-75, but a move over 4200 (possibly 4225) for FOMC Wed looks likely with the OI data.   A sudden reversal is possible to 4100 or lower by EOW or early May.  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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Clouds on the Horizon

Last week's melt up seemed to shatter the bears confidence as many of the sentiment indicators fell to multi-year lows and are likely an indication of an important top in the not too distant future.  There may still be some wiggle room for the bulls over the next two weeks as SPX options OI is indicating a possible 1-2% pullback ST, but an ATH retest is possible for FOMC Apr 27-8 that could be followed by volatility similar to that following the Mar 15-6 meeting with a drop to SPX 4050-100 possible by EOM.

Several new charts are shown this week starting with a composite int rate and ETF indicator for the PMs, and a composite of SPX/NDX ETF ratios.  The Tech/Other shows an update of the ETF ratio and a volatility composite.

I. Sentiment Indicators

The overall Indicator Scoreboard (INT term, outlook two to four months) bearish sentiment saw a sharp drop last week matching the levels seen in late Dec 2019 and Aug 2020, both about a month before a sharp drop.

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 is also testing the lowest levels seen over the last three years.

Bonds (TNX).  Bearish sentiment in bonds remains at a low level while rates consolidate.

For the INT outlook with LT still negative, the gold miners (HUI) bearish sentiment is presented in a new format using the data mining software to add the inverse TNX rate to the ETF ratio.  This shows the strong effect that rates have had over the last two years as prices began to rise when rates began to decline in late 2018, then prices went vertical as rates plummeted in early 2020, only to begin a long decline as rates rose late 2020.

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 now made a new low below levels seen in Jan 2020 and Sept & Oct 2020.

And the sister options Hedge Ratio bearish sentiment has been lagging other indicators the last six months, but the melt up over the last month saw a sharp drop in hedging almost matching the Sept 2020 top.

Since the ETF ratios have performed as well or better than the individual data mining equivalents, I decided to take a look at a ratio composite of the INT term SPX LT (2x) and the SPX & NDX ST (3X) ETFs (outlook two to four weeks) bearish sentiment.  This is an INT to LT indicator and now shows the lowest bearish sentiment of the last three years.

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 Apr 23. Also, this week includes a look at the GDX and TLT for May exp. 

With Fri close at SPX 4185, options OI for Mon is small with week/moderate call resistanceat 4150 and above that may result in a pullback to 4150 or lower.

Wed has somewhat smaller OI where SPX has very small OI between put support at 4000 and call resistance at 4200.  It makes me wonder if both call and put buyers are becoming very ST traders.

For Fri SPX OI is showing very strong support at 4100 with small/moderate call resistance at from 4150 to 4200.

For Fri Apr 30 EOM and FOMC scheduled for 27-28, an ATH retest for FOMC could be a recipe for similar fireworks to what was seen at Mar 15-16 FOMC where a sharp drop may be seen through call resistance down to 4050-100.

Using the GDX as a gold miner proxy closing at 36 shows strong put support at 31-2 and only hedges up to current price.  This is almost the opposite of what was seen a couple of months ago.  Is another lockdown coming that will push rates sharply lower and PM prices higher?

Currently the TLT is 139.3 with the TNX at 1.57%, and options OI is much the same as GDX where the large put OI at lower prices is looking like dumb money and there is almost no call resistance at higher prices.

IV. Technical / Other

Two of the data mining indicators I want to look at this week are the ETF put/callratio and the Volatility composite.  The ETF put/call ratio as a ST/INT indicator was the only P/C ratio that worked as well as the data mining indicators and is a good measure of excess speculation (high calls) and hedging (low puts).  Current levels are almost identical to what was seen at the Jan 2020 top.

The Volatility composite using the VIX Buy/Sell (VXV/VIX and Skew) and VIX P/C as an INT/LT indicator is one of the few indicators not at levels of recent INT tops and may be supportive of a May pullback before a final high in June.

Conclusions.   Last week, the SPX reached the top of the target range of 4150-200 at 4191 before backing off into the close.  Options OI is indicating a possible 1-2% pullback, but is showing strong support in the 4100 area. With the next FOMC meeting scheduled for the last week of the month a retest of the ATH is expected at that time before a more serious downturn.  The extreme low hedging and the VIX call Sell from last week indicate that a sharp but short decline of 7-8% is possible.  This could mean SPX 3850-900 as a target, or about 300 pts.  With the next FOMC June 15-16, there could be a fast and furious rally into June optn exp to setup an INT top.

Weekly Trade Alert.  It is probable that a decline of 1-2%, max SPX 4100, occurs next week, but a retest of the ATH is expect by Wed 27th FOMC.  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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Welcome to Never-Never Land

The stock market is beginning to look like a magical kingdom of fairies and pixie dust where stocks never-never go down.  There were several interesting reads at ZH last week, this one discusses the global investing euphoria over the last 5 mns (since first stimulus check) where equity inflows equaled the previous 12 years, while another, points out the probable letdown in the 2nd half of 2021 as the effects of stimulus wear off.  As shown in the main section, this is showing up in sentiment as bears are being forced into hibernation.

Last weeks price guidelines were easily exceeded as stable int rates were followed by a 5% rise in the NDX pulling the SPX over 4100, but most of the gain occurred the first two hours Mon and the last two hours Fri.  This weeks SPX coverage is over a somewhat shorter timeframe, starting 1/2/2019 rather than 1/2/2018.

This sentiment measures are nearing dangerous levels and seem to setting up for the "sell in May" event discussed over the couple of weeks.  A likely downside target is SPX 3800-50 or about 300 pts.  The Tech/Other section includes coverage of the VIX Call indicator that shows similar levels prior to the 7-8% declines of Sept-Oct 2020, an update of the CPCRev composite put-call indicator, and a LT look at the volume indicator, $NYUPV/$NYDNV, that seems to line up with an INT top in June.

I. Sentiment Indicators

The overall Indicator Scoreboard (INT term, outlook two to four months) bearish sentiment saw a sharp ST decline and remains at dangerous levels compared to before the pandemic.

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 also showed a sharp downturn, now about the same as the highs of Jan, Sept and Oct of 2020.

CITI Surprise Inflation Index for Apr (Mar data) shows a slight decline for the US and EU which probably helped bonds, but a pickup in China and Emerging likely means higher import costs down the road.

Bonds (TNX).  Bearish sentiment in bonds saw a slight uptick.

For the INT outlook with LT still negative, the gold miners (HUI) bearish sentiment surprisingly increased and may mean higher inflation numbers ahead that may help the miners, but pressure bonds and stocks into May.  Last weeks PPI certainly supports this idea.

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 continues to decline, now lower than Jan 2020 and closing in on the post-pandemic lows of Sept & Oct 2020.

And the sister options Hedge Ratio bearish sentiment has also started to sharply decline, nearing the Jan 2020 lows, but still above Sept & Oct 2020.

The INT term SPX Long Term (2x/DM) ETFs (outlook two to four weeks) bearish sentiment has been falling more slowly nearing a double bottom from Dec 2020 with several double bottoms seen prior to downturns, including early Jan and late Feb 2020 and May and Sept 2020.

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 Apr 16 and EOM.  No change for GDX or TLT.

With Fri close at SPX 4129, options OI for Mon are small with the strongest call resistance around the 4150 area and substantial put support at 4085.

Wed has very small OI where SPX has strongest call resistance at 4085 and very little put support until 4000.

For Fri call resistance is moderate and strongest between SPX 4100 and 4150 that may lead to weakness later in the week.  Over 4150 there is little resistance and below 4100 no support is seen until below 4050, so a break either way is possible.

For EOM, last months call resistance proved futile, but declining overall bearish sentiment will impede prices at some point, likely when rates begin to rise again.  Here, a move below SPX 4050 shows as likely with support at 4050 and 3950.

IV. Technical / Other

One of the biggest risks indicated ST (1-4 wks) is the VIX Call volume shown below with the 10 day SMA.  Last week saw a sharp increase in volume with the SMA jumping from 180K to over 300K for only the 3rd time since Jul 2020, the previous being the Sept 2020 and Feb 2021 tops.  The sharp increase is similar to that prior to the Oct 2020 and Jan 2021 tops.  Increases during rising prices are usually smart money expecting a reversal, while increases during declining prices are dumb money expecting a trend continuation.

For the INT term, the combined put-call indicator CPCRev (Equity+ETF+SPX) continued to decline sharply last week, now reaching the level of the Jan top.

For the LT, my favorite volume indicator, $NYUPV/$NYDNV, has been dropping sharply and now reached a level similar to early Jan 2020.  Although less precise than the Rydex Fund Bear/Bull ratio shown last week (which made a lower low), a decline to 1.5 is usually seen before an INT top with a lead time of 1-2 months before a major downturn as in Sept 2018 and Jan 2020.  The lead time before the Jan 2018 top was 9 mns, however, due to Trumps tax cuts.  If like Sept 2018 and Jan 2020, this indicates a probable June top.

Conclusions.   Over the past two weeks, I have been discussing the possibility of a ST top around mid-Apr following the latest stimulus payouts with a likely "sell in May" to follow.  Sentiment is now agreeing with many now focusing on a continued rally to SPX 4800-900 as "stocks never-never go down".  Whether it's disappointing earnings or a pickup in inflation pressuring bonds is hard to tell, but a negative surprise is increasingly likely.  As additional warning, the ST VIX call indicator is now flashing red with a typical lead time of 1-2 weeks before a sharp downturn.  NYSE volume does not, however, support this as an INT top and that may not occur until June.

Weekly Trade Alert.  Higher prices are still expected into next week, but possible hiccups may occur with the release of CPI on Tue and earnings throughout the week.  A downside target of SPX 3800-50 is possible by mid- late-May after highs in the 4150-200 area.  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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Who Said You Can't Buy Love

No I'm not referring to certain FL congressmen, but to investors who have fallen in love with gov't handouts, both from the Fed and Congress. Last weeks romp over SPX 4000 was in response to additional trillions in stimulus promised by Biden's new infrastructure plan (shades of FDR), while muted response by the bond market was followed by an explosion upwards by tech stocks.

So far it's hard to tell if this the beginning of the "crash up, crash down" scenario as we've seen repeated since 2018, the beginning of the mythical third wave tp SPX 5-6K as some EW analysts are calling for, or something else. With bearish sentiment as low as it is both INT and LT, it's hard to envision the third wave continuation, but the other options are possible.

In the DM/SM section is a review of the SPX and NDX ETF ratio indicators that show the potential for more ST rally in the NDX, but more of a warning for the SPX. In the Tech/Other section, shows the Tech Indicator composite following a 6-week cycle in 2021 with a ST top due mid-Apr and a rare SELL by the INT Rydex Fund Bear/Bull ratio that has preceded each INT top since Jan 2018.

I. Sentiment Indicators

The overall Indicator Scoreboard (INT term, outlook two to four months) bearish sentiment remains at very low levels with very little change for the week.

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 also remains at low levels with only a slight decline for the week.

Bonds (TNX).  Bearish sentiment in bonds has also declined modestly as rates have stabilized in the expected range of 1.6-1.5%.

For the INT outlook with LT still negative, the gold miners (HUI) bearish sentiment fell sharply as prices fell early in the week then rallied Wed-Thur, but lower sentiment is expected before a resumption of the decline.

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 continued to fall, inching closer to the record levels seen at the Sept & Oct 2020 tops.

And the sister options Hedge Ratio bearish sentiment continues to hover in the mid-range of the past few months with no immediate direction bias.

The INT term SPX Long Term (2x/DM) ETFs (outlook two to four months) bearish sentiment (using the data mining software as a test) did see a sharp downturn with the last few months (since Dec 2020) in a similar pattern to what was seen in May-Oct 2018.

The ST term NDX Short Term (3x) ETFs (outlook two to four weeks) bearish sentiment may help explain the recent strength in the NDX along with stable rates as some are expecting a retest of the highs that could carry the SPX to 4200-300.

The INT term NDX Long Term (3x) ETFs (outlook two to four months) bearish sentiment is somewhat less bullish, however, as the increase in bearish sentiment from the Jan lows is about the same as that to the Sept 2020 top that may indicate a ST top is near.

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 Apr 9.  No charts for GDX or TLT.

With Fri close at SPX 4020, options OI for Mon are very light except for the strong put support at 3900, but there is moderate call resistance near the Fri futures indicated level at 4040 with a slight downward bias toward 3975.

Wed has smaller OI where SPX is showing moderate call resistance at 4050 and put support at 3900.

For Fri, we see the largest OI for the week where there is a clear downward bias from call resistance from 4000 to 3950 with put support appearing in the 3900-50 range.

IV. Technical / Other

From a ST perspective the Tech Indicator composite (NYMO+TRIN+NYAD+NYUD) has down a good job in weakly trending markets as seen this year where about a 6 week cycle could indicate a ST top mid-Apr.  Early sentiment spikes at the beginning of a up/down trend as in Jun & Nov 2020, similar to the VIX $ Vol, tend to be misleading.

(from Thur update) One of the more reliable (100%) indicators of an INT top (10%+ correction) for the SPX since Jan 2018 is the Rydex Fund Bear/Bull ratio. This week it reached the SELL level of 3.5%. Previous lead times have varied from 1 week in Jan 2018, 1 month in Oct 2018 & 2 months Dec 2019.  One interesting aspect is that the increasing lead times have been followed by increasingly large declines.  This may fit into the scenario of an Apr top followed by a 6-7% "sell in May decline" with another rally into the June optn exp to test/best ATH before a possible 40% decline that could extend into 2022.

Conclusions.   Little change in the primary sentiment indicators last week allow for continuation of the current trend (up).  SPX options Oi are relatively small M-W, but stronger on F with an indication of an early week range of 4000-50 and likely 3950-4000 by Fri.  A pullback this week is likely a setup for at least a ST top optn exp Fri Apr 16, but with FOMC on Apr 27-28 more strength can be seen into EOM.  Following the 1929 stock market crash with record unemployment and decline in growth, strong monetary and fiscal stimulus led to a complete economic recovery by 1937, but an increase in inflation to the 5-6% range resulted in a bond market crash and an ensuing stock market decline of 50%.  1937 also included the famous Hindenburg crash.

Weekly Trade Alert.  A modest pullback is expected next week to SPX 3950-4000 before a move up to or beyond the ATH by Apr 16..  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
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