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
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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