Is the Crypto Crash a Warning?

Last weeks outlook was for strength in stocks and bonds, but weakness in the PMs , mostly due to a "cooling" for the outlook in inflation.  The SPX rose 1% on Mon then traded sideways between 4180 and 4220 for most of the week, closing at 4204.  Int rates fell thru Wed, then rose at the EOW, while the PMs traded in a narrow range.  The spike in bearish sentiment for the SPX has reversed to neutral and is likely to limit any further gains.  Similar sentiment in the past was followed by modestly higher prices before a mild pullback of about 2%.

I have noticed a significant change in the options OI for further out time periods.  For much of the past year further out time periods showed mostly calls with much of the put OI being added for the very short time, this turned out to be smart money taking the LT call positions.  Now I am seeing the exact opposite as the LT options OI is mostly puts and this is showing up as a sharp increase in the $SKEW.  See Conclusion for chart and discussion.

An additional change to the indicators is made this week, replacing the Hedge Ratio with the std var format Hedge Spread since this format shows about a 20-30% increase in the "fit" to future returns as discussed in Tech/Other.

I. Sentiment Indicators

The overall Indicator Scoreboard (INT term, outlook two to four months) bearish sentiment fell sharply last week after the rebound from the early May pullback of 4%, following a pattern similar to Aug-Sept 2018 and Jan-Feb 2020.

The ST Composite as a ST (1-4 weeks) indicator includes the NYSE volume ratio indicator (NYDNV/NYUPV & NYDNV/NYDEC) and the VXX $ Vol/SPX Trend. Weights are 80%/20%.  This indicator remains near the neutral area similar to July-Aug 2020 that was followed by a sizable decline.

Bonds (TNX).  Bearish sentiment in bonds seems to have leveled off as rates consolidated last week.

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.  Bearish ETF sentiment continued to fall as prices consolidated below the GDX 40 level indicated by last weeks options OI.

II. Dumb Money/Smart Money Indicators

The option-based Dumb Money/Smart Money Indicator as ST/INT term (outlook 2 to 4 mns/weeks) bearish sentiment fell sharply last week.

And the sister options Hedge Ratio bearish sentiment will be replaced by the std var version this week as the Hedge Spread. Using the same underlying components, std var version increases the fit to future returns (shown in Tech/Other) by 20-30% and is an excellent ST/INT indicator (1-3 mns).  Here, the sharp spike in hedging mid-May provided the impetus for a strong rebound, but is now approaching neutral.  Similarity to early Mar may mean another ST pullback of about 2% shortly.

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 June 4.

With Fri close at SPX 4204, options OI for Tue is small with increasing call resistance up to SPX 4255, but put support is minor down to 4150.  Could remain range bound 4185-4215.

Wed has somewhat larger OI where SPX has stronger near term support and little resisance up to 4225 that may allow prices to drift higher.

For Fri there is much stronger call resistance at SPX 4200 and above that could reverse any gains seen early in the week.  There is no strong put support until 4150.

IV. Technical / Other

The previous Hedge Ratio is shown below with components.

The new Hedge Spread is shown below with components.  The most obvious difference is a less bearish outlook than the Hedge Ratio for May which proved to be correct.

Looking at the future returns table, the Hedge Spread has a stronger correlation, particularly in the 1-3 month time period (20-60 days) in the order of 12-20%.

Conclusions.   Overall bearish sentiment has reversed much of the gains seen during the mid-May pullback.  The strongest support for the rally into month end was from hedging (Hedge Spread) and that now has fallen to neutral.

From a longer term perspective and not having any better place to discuss it, the $SKEW 5 day EMA has now risen to 150 with the last occurrence Aug-Sept 2018 which fits my expectations of a similar INT decline as Oct-Dec 2018 in the not too distant future.  There have been several instances of SPX tops near $SKEW 145 before the Jan 2018 and Mar 2020 INT tops as well as the ST Oct 2020 and Jan 2021 tops.

Weekly Trade Alert.  SPX options OI, Hedge Spread and ST Composite are indicating a possible ST top next week near SPX 4225 before a 2% decline to about 4150.  Updates @mrktsignals.

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Entering the Doldrums?

Last week was somewhat weaker than expected as the SPX ignored options OI support levels and did make a successful retest of the lows the prior week before closing over Fri support level of 4150.  As seen in the Tech/Other section this may be due to the rapidly declining bearish options sentiment for the SPX indicated by the std var put-call spread and caused by rising SPX options volumes.  In fact both the SPX 2X ETF and put-call spread both indicate that bulls are mostly out of gas, while a new volatility indicator shows that a period of cooling off of volatility is likely.  Are we about to enter the summer doldrums?

A new overall INT indicator (3-6 mns) is introduced this week as a possible replacement for the overall Composite.  This leaves me with a gap in the 1-2 mn period as a ST/INT indicator and I am watching several alternatives.

There seems to be less chatter about the melt up/melt down scenario, while my 2015 rounded top scenario is looking more likely.  One week left for Avi's SPX 4400 target in May which is now looking very doubtful.

I. Sentiment Indicators

The overall Indicator Scoreboard (INT term, outlook two to four months) bearish sentiment seems to have peaked at similar levels to the Jan and Feb-Mar pullbacks, but below that of Jan 2020.  A marginal ATH is possible.

This week I am introducing the leading contender for a replacement of the overall INT term indicator using the data mining components. There are three separate components. First is the SPX and ETF put-call indicators (30%), second the SPX 2X ETF ratio (40%), and third a volatility indicator (30%) which combines the ratio of the ST SPX options volatility (VIX) to the ST VIX options volatility (VVIX) with the VXX $ volume. A complete description is shown in Tech/Other.

What I like most about the new INT composite (3 to 6+ months) is that less extreme sentiment is shown during ST pullbacks (< 10%), therefore highlighting major turns.  The fit to future returns (Tech/Other) is also much higher.  This chart also seems to highlight my preferred alternation pattern with crashes following the extreme low sentiment of early 2018 and 2020, While current sentiment seems to be more similar to mid & late 2018, pointing to a more complex correction although likely stronger and longer than late 2018.

The NYSE volume ratio indicators (NYDNV/NYUPV & NYDNV/NYDEC) is a very ST (1-4 week) indicator including the VXX $ Vol as a possible replacement for the above ST Indicator. Weights are 80%/20%.  Currently, sentiment is near neutral, supporting more sideways action.

Bonds (TNX).  Bearish sentiment in bonds surprisingly saw a strong move higher and in agreement with the options OI for TLT supports more consolidation or lower rates.

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.  The large divergence with prices and sentiment is likely to cause a price reversal soon.

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 strong move up over the last two weeks and should support a move to ATHs in June.

And the sister options Hedge Ratio bearish sentiment remains low, however, indicating continued volatility is likely.

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 May 28. Also, this week includes a look at the GDX and TLT for June exp. 

With Fri close at SPX 4156, options OI for Mon is light but indicates call resistance at 4200+ and moderate put support at 4150 and below.

Wed has somewhat smaller OI where SPX again shows put support at 4150.

For Fri EOM with Mon a holiday, 4200+ has strong call resistance with put support starting at 4165 and a strangle at 4175.

Using the GDX as a gold miner proxy closing at 39.3, a month ago with GDX at 36, I pointed out the only call resistance was 6K OI at 37 for May, but now for June we have 40K call OI resistance at 40 with very minor support until 35.  This is a complete reversal and should see prices fall.

Currently the TLT is 137.7 with the TNX at 1.63%, overall P/C has risen from 250% to 380% and is likely to pressure prices higher and rates lower, even with higher inflation. 

IV. Technical / Other

The potential replacement for the overall INT indicator is shown below by components.

The table below shows the correlations with future returns compared to the old CompositeWTD.  Correlations are over twice as high and in the 3-6 month periods near 70%.

Looking at the SPX and ETF options component, the sharp decline in bearish sentiment for the SPX may be contributing to the weakness compared to the options OI.  We are now at or below levels seen at the Sept-Oct 2018 top, but well above the pre-crash levels of early 2018 and 2020.

Comparing the SPX put-spread shown above to the SMA options data with the "normal" ratio shown on the third axis shows the weakness of the normal ratios.  P/C ratios rose with rising volume prior to the late 2018 and early 2020 tops, while this is captured as declining bearish sentiment with the std var put-call indicators.  One possible reason is that as rallies mature options investors switch from undervalued sectors to general market exposure.

Looking at the SPX 2X ETF ratio as EMAs, we see an extreme level of complacency for INT investors comparable to that seen in early 2020.

The final component as an INT volatility component saw sentiment drop to levels comparable to late 2018, but not early 2020.  Current levels are comparable to July 2018.

Conclusions.   Overall sentiment remains consistent with another ATH.  SPX appears to be forming a triangle as a daily pattern that would target about SPX 4275 mid-June if an apex is formed near 4125.  This would be an ideal location for the ATH of a rounded top, but may still require several months before significant downside is seen.  Impetus for continued rally in stocks and bonds with weakness in PMs may become evident with next months inflation surprise release.  Sentiment seems to be most consistent with some evidence of a "cooling off" period for inflation.

Weekly Trade Alert.  Expecting to see more consolidation next week between SPX 4125-75.  Updates @mrktsignals.

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Everybody's Bullish at the Top

A couple of weeks ago I was expecting a 3-4% pullback in the SPX from the 4118 high and I also warned about a fake out early May to catch the seasonal trend followers off guard.  The result was a move to a slightly higher high (4238) before the real decline which marginally exceeded 4% at 4158.   Normally at this point I would expect a retest of the lows before a stronger rally into a June INT top, but the rapidity of the declines of the last two weeks has caused a very sharp increase in SPX put OI below 4150 and very high VXX $ Vol over 3X daily avg just below the June 2020 low level.

As the charts below will show, indicators that include volatility "bets", ie options and VXX $ Vol would appear to support a sizeable rally, but the ST NYSE volume indicators are just above neutral while the INT SPX and NDX ETFs  were largely unchanged.  I should have paid more attention to the ST NYSE volume indicators which showed the highest correlation to week two, but live and learn.  Again, the most likely outcome seems to be a consolidation between SPX 4150 and 4225 for a week or two before a final move up into June.

Many of the long term readers know that half of my targets for the next week or two happen in a much shorter time period and it always seems like someone with deep pockets is looking over my shoulder.

I. Sentiment Indicators

The overall Indicator Scoreboard (INT term, outlook two to four months) bearish sentiment rallied sharply based on indicators that include volatility "bets", ie options and VXX $ Vol.

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) matching levels see at the Sept & Oct 2020 declines, where Sept consolidated before besting the previous lows and Oct continued to rally.

This week I have decided to start showing the NYSE volume ratio indicators as a very ST (1-4 week) indicator including the VXX $ Vol as a possible replacement for the above Short Term Indicator. See Tech/Other for discussion.  This indicator failed to reach levels seen at prior bottoms.

Bonds (TNX).  Bearish sentiment in bonds took a moderate pickup based on rising inflation.

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.  Sentiment saw a modest uptick as prices moved over 300.

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 moved to levels that marked many ST bottoms over the last year (also Jan 2020 lows).

And the sister options Hedge Ratio bearish sentiment is somewhat similar, but slightly weaker.

Since the ETF ratios have performed as well or better than the individual data mining equivalents, I am using a ratio composite of the INT term SPX LT (2X) ETFs (outlook two to four mns) as bearish sentiment.  This is an INT to LT indicator and saw very little change and may be following the setup of Jan-Feb 2020.

The INT term NDX Long Term (2x/DM) ETFs (outlook two to four weeks) bearish sentiment saw only a small movement given the decline of 8% with a 50% retrace.   It is possible the NDX is forming a H&S into a June high.

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 May 21 & EOM.

With Fri close at SPX 4174, options OI for Mon are somewhat light, but high P/C will likely push prices to test/best the 4200 area with call resistance at 4210 and put support at 4150 and 4175.  Many seem to be expecting a similar selloff to start the week as the last two weeks.

Wed has somewhat larger OI where the SPX could drop down to the 4150 area.

For Fri, there is moderate put support at 4150 and 4175 with call resistance at 4225 and 4250.

For the EOM moderate put support exists at 4175 and call resistance at 4200 to 4250.

IV. Technical / Other

Comparing the ST Composites based on the correlation with future returns, the NYSE volume ratios are much stronger for the 1-3 week period, but the ST Composite is similar for the 1-3 month period.

In addition to the NYDNV/NYUPV & NYDNV/NYDEC volume ratios discussed last week and shown below, I still wanted to include the VXX $ Vol. The NYSE volume ratios are wtd at 80%.

With the VXX $ Vol, I decided to use the same approach used with a VIX call indicator used several years ago and compare the VXX $ Vol SMA to the SPX Trend defined as the % above/below the 10 day SMA. The VXX $ Vol indicator is wtd as 20%.

Conclusions.   Overall sentiment is somewhat mixed as options and volatility indicators support higher prices, while SPX and NDX are looking very much like the Jan 2020 lows before a final rally into the Feb top.  A drop in the NDX to the 12400 area before the end of May could be a warning of an impending H&S top around 13.8K.

Weekly Trade Alert.   Last week was a miss with a woops I missed it decline, although the following rally could be the BTFD for everyone's  retirement contributions.  Looking for trading range 4150-4225+.  Updates @mrktsignals.

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Stagflation Anyone?

Last weeks outlook was for a "Sell in May" fakeout, and that was certainly what happened with a 2%+ drop thru Tue AM after a Mon rally to SPX 4200+ capped the expected early week strength.  Fri jobs report was expected to produce fireworks, but the weaker than expected outcome sent int rates tumbling and that began a short covering rally in Techs and the rest of the market followed as the FOMO crowd chimed in.  Oddly rates ended up slightly for the day.

Bearish sentiment remains near extreme lows indicating that an important top is near, but an increase in options P/C ratios may provide ST support.  A revision to the ST volume indicator presented last week is covered in Tech/Other that shows moderate/strong correlations for up to three weeks.   The indication is that a Jan 2021 type decline is possible into optn exp week where an initial decline was followed by a new high, a consolidation, and then a new low.

Recent economic data showing strengthening inflation, and waning growth may be pointing to a 1970's style stagflation.  This could prove to be an anathema for the Fed who would be loathe to raise rates that could cause an economic downturn, but is then left with limited tools to fight inflation.

I. Sentiment Indicators

The overall Indicator Scoreboard (INT term, outlook two to four months) bearish sentiment remains at extreme lows, warning that an important top is near.

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 increased modestly with a moderate pickup in volatility increasing VXX $ volume.

CITI Surprise Inflation Index for Apr sows a strong global pickup in inflation, except Canada.  China's catchup is probably due more to unreliable reporting than anything else.

Bonds (TNX).  Bearish sentiment in bonds continues to fall with mixed signs of economic growth.

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.  Falling ETF bearish sentiment has been more than offset but low options call speculation, but that may reverse soon.

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 for the week and may be forming a rounded bottom similar to Jan-Feb 2020.

And the sister options Hedge Ratio bearish sentiment also rose slightly but not to a level that would support a sustained rally.

Since the ETF ratios have performed as well or better than the individual data mining equivalents, I am using a ratio composite of the INT term SPX LT (2X) and the SPX ST (3X) ETFs (outlook two to four mns) as bearish sentiment.  This is an INT to LT indicator and has continued to work its way lower, now considerably lower than before the Mar 2020 selloff.

The INT term NDX ST Term 3x ETF (outlook two to four mns) bearish sentiment has now completely reversed the Buy from a couple of months ago and is now in a similar position to the Jan 2020 highs.

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 Dec 11. Also, this week includes a look at the GDX for Dec exp. 

With Fri close at SPX 4233, options OI for Mon only small call resistance over 4200 until 4250 with a high P/C that may keep prices elevated.  Strong put support at 4175.

Wed has somewhat smaller OI where SPX could see downward pressure toward 4200 with put support at 4150.

For Fri larger OI also shows call resistance down to 4200 with put support starting at 4175.

For Fri optn exp week SPX options OI is similar to this Fri with call resistance down to 4200 and put support starting at 4150.

For EOQ June 30 the large call position at SPX 4115 may result in a test of that area late June.

Using the GDX as a gold miner proxy closing at 37.4, the last update Apr 16 showed little call resistance until 37 with a price at 36.  But strong call resistance at 35 & 36 could result in lower prices to the 35 level.

Currently the TLT is 139.2 with the TNX at 1.6%, prices are little changed since the Apr 16 update when the outlook was for a consolidation, but now a modest increase in puts 138 to 140 may pressure prices slightly higher and rates lower.

IV. Technical / Other

Last week, I looked at some of the components of the NYAD ($NYAD = $NYADV - $NYDEC) and NYUD ($NYUD = $NYUPV - $NYDNV), specifically the $NYDNV/$NYDEC as a capitulation indicator and the $NYUPV/$NYADV as a high risk indicator. Today I want to focus on two other ratios, especially the $NYUPV/$NYDNV, or the LT volume indicator (as an inverse for sentiment purpose). The table below shows the various components with ratios and their "fit" to future SPX returns from July 1, 2020 thru last Fri. The last two are new. The first portion of the table shows that the LT volume indicator provides a better fit than the capitulation indicator, while the second part show the result of the composite for the capitulation indicator and LT volume indicators .  The result is a 40-50% better "fit" with strong correlation thru week 3 and a moderate fit thru 5 months (100 trade days).

The chart below shows the composite results as a std var.  I will be watching this closely as a possible replacement for the ST Composite.  Two previous periods showed a similar sentiment setup.  The first was Oct 2020, where the first leg down was followed by a partial replacement then a strong leg down, and the second was Jan 2021 where the first leg down was followed by a new high, a consolidation for a week and then a second leg down to lower lows.  We may see a repeat of Jan 2021.

Conclusions.   I mentioned in the updates that the extension of the FIT tax deadline to May 17 could be an important factor for the "seasonality factor" or "Sell in May" due to the fact that many individuals contribute to 401Ks and IRAs up to that date and that the positive inflows will support the markets.  With the "Sell" from the ST NY volume indicator extending to three weeks, this could imply a very interesting option exp setup for May, the week of Mon 17th.  Above the SPX 4200 level, the SPX is in positive delta hedging which means at expiration there will be pressure down to at least 4200 and possibly to strong put support at 4100.

Weekly Trade Alert.  Next week may be a consolidation week near the ATHs if the SPX is following the Jan 2021 pattern with the potential for new ST lows near 4100 by May 21.  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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