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
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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