Is It Time to Revisit 2015?

Last weekends post was expecting a rally based on the first Buy recorded by the new ST Composite (NYDN volume + VXX $ Vol) and I was surprised by the strength of the move which was likely the result of the anticipated infrastructure/stimulus bill as I did not expect passage until the Fall.   Now everyone is expecting the SPX to continue powering higher although it is only 1/2% higher than two weeks ago.  What most seemed to have missed is that Fri CPE inflation used by the Fed came in at a 30 year high and may have started the next up cycle in int rates.

Sentiment remains somewhat of a mixed bag and is likely to take several more days of up to sideways action before a directional change.  Fri July 2 is the payroll report for June and is expected to be strong and typically produces a ST top.

The Tech/Other section makes some comparisons to the May 2015 top where an analog could see an SPX 150-200 pt pullback into late Aug.  Also included is a comparison to the VIX Buy & Sell components of 2015 and today.

I. Sentiment Indicators

The overall Indicator Scoreboard (INT term, outlook two to four months) bearish sentiment is mostly unchanged as the SPX has increased 1/2 % over the last two weeks.

The ST Composite is a ST (1-4 week) indicator includes the NYSE volume ratio indicator (NYDNV/NYUPV & NYDNV/NYDEC) and the VXX $ Vol/SPX Trend. Weights are 80%/20%.  After showing a strong BUY on the decline two weeks ago, it still remains over neutral supporting modestly higher prices in the ST.

Bonds (TNX).  Bearish sentiment in bonds has fallen to near the recent lows and last weeks CPE may be the start of the next move higher as an IHS still looks possible.

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.  Not much change for prices or sentiment although the gold bugs must be perplexed at the lack of response to higher inflation.

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 remains mostly unchanged and near the level of the Jan-Feb 2020 top.

And the sister options Hedge Spread bearish sentiment as a ST/INT indicator (1-3 mns) remains near neutal with no clear directional bias.

The ETF ratio of the INT term SPX INT (2X) ETFs (outlook two to four mns) as bearish sentiment shows a modest pullback.

The INT term NDX ST 3x ETFs (outlook two to four mns) bearish sentiment is nearing recent lows and may reach a Sell by EOW.

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 July 2.

With Fri close at SPX 4281, options OI for Mon-Fri are mostly consistent with moderate to strong call resistance at 4275+ and put support at 4200 with the potential for a modest pullback to 4225-50.

Wed is much the same.

Fri (jobs report) is much the same.

SPX vol shows a somewhat different story as weakness appears to be more likely early in the week with a move back to the 4275+ area possible with Fri jobs report.

IV. Technical / Other

With the SPX reaching my INT target of 2X the 2015 high of 2135 in the 4270-80 area which does seem to be providing some ST resistance, I thought it might be interesting to review some comparisons between then and now.  Sentiment indicators remain short of Sell levels, however, so higher prices of SPX 4300-50 can not be ruled out.  The May top showed about a weeks consolidation before beginning a 4% pullback so a consolidation next week may allow sentiment to turn negative enough to support a 150-200 pt pullback thru late Aug.

First looking at some of the indices, in 2015 the DJTA, which is considered to be a measure demand for goods thru shipping volume, topped out in late Feb, 4 months before the SPX and DJIA.  This year both DJIA and DJTA appear to have topped out in early May.  Int rates were rising off of multi year lows.  The SPX continued to be held up for several months past the DJIA due to strength in the NDX.

Next, I want to look at volatility measures, namely the VIX Buy & Sell components, the SKEW and VIX term structure (VIX/VXV).  As pointed out two weeks ago. the VIX B&S was showing a similar setup to the Sept-Oct 2018 top with the SKEW at historic levels.  This has been commented on by others, including Fri by GS, and Fri the SKEW powered higher by 10 pts to 170.  As it turns out 2015 also saw a historic level in the SKEW, in late Oct, two months before the Jan 2016 15% correction as seen in the chart below.

The VIX B&S worked well in 2015, but notice that similar to 2018-21 most of the ST tops were indicated by lower levels of VIX/VXV sentiment and the more serious Dec top stands out as the one where the SKEW showed lowest sentiment.  Aug and Oct 2014 are also notable.

The relationship between SKEW and VIX/VXV is examined further with the Dif function below.  Lower VIX/VXV were notable before the May 2015 top and Aug flash crash.  As evidenced at the Oct 2018 top, the Nov 2015 top did not show a Sell until the levels of SKEW and VIX/VXV matched and I expect the same in 2021.

Conclusions.   Seattle is expected to be only two degrees cooler than Las Vegas on Sunday at 105 F, I am sure glad I don't believe in global warming.   The only other thing hotter than the stock market seems to be the SKEW which seems to be discounting an alien (UFO) encounter.  Unfortunately, sentiment is not giving a lot of indication of which way stocks are going, but hopefully next week will give some indication.  Fri jobs report is often a ST high, but SPX options OI is showing stiff resistance over 4275 with support around 4225.  Hopefully in July I will have the time to document some of the new data mining indicators with a new chapter for the Investment Diary.

Weekly Trade Alert.  Any weakness early in the week will likely be followed by a move up to test/best ATH on Fri.  Updates @mrktsignals.

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June Swoon or Blue Moon?

Over the past two or three weeks, I have been warning that the Fed's message of "transitory inflation" would be put to the test, and after May's CPI and PPI reports came out, the Fed apparently got the message and indicated that rate hikes may be possible before the next Pres election after all.  In reality, rate hikes in the face of supply shortage driven inflation have little effect compared to excess demand driven inflation because it raises the cost of starting new production and does not effect supply as found out in the 1970s oil shortage in the face of Arab embargoes.

The SPX fell somewhat short of my upside target of 4270-80, hitting 4258 Tues, although the O/N FXCM price got to 4267.  In any case, the Fed's "hawkish" turn appears to have started the move down to the SPX 4100-25 target and the move last week was eerily similar to the week of the Mar optn exp as a 3-4 day decline of 100 pts was followed by a 62% retrace before another leg down of 100 pts for a 150 pt pullback.  This could be a setup for a contrarian play in Sept as most will be looking for a rinse and repeat.  There are rumors that after Congress finishes its summer break, the Dems will come back with a budget reconciliation bill that can be used once a year for each subject as a means of passing a larger stimulus/infrastructure package with a simple majority vote.  The $2T may come later in Sept-Oct.

In Tech/Other, the Equity P-C indicator is shown to be one cause of the recent decline while the banking sector (borrow ST and lend LT) is getting squeezed as the yield curve flattens as ST rates go up and LT rates go down.

I. Sentiment Indicators

The overall Indicator Scoreboard (INT term, outlook two to four months) bearish sentiment appears to be following he pattern of the Feb-Mar pullbacks with lows around -1.5 SD before a rally back to neutral.

The ST Composite is a ST (1-4 week) indicator includes the NYSE volume ratio indicator (NYDNV/NYUPV & NYDNV/NYDEC) and the VXX $ Vol/SPX Trend. Weights are 80%/20%.  Previously, I had pointed out that the string of neutral sentiment was likely similar to mid-2020 before the June pullback, and the sharp pickup in NYDN volume is similar to the first leg down and means a retrace is near.  In particular, comparison to late Mar 2021 qtrly optn exp showed a first leg down of SPX 100 pts followed by a 62% retrace before a final leg down of 100 pts for a total of about 150 pts.

Bonds (TNX).  Bearish sentiment in bonds fell sharply and as seen in the options OI section, rates may be near a low.

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.  Gold fell sharply as the US$ rallied following the Fed's "hawkish" outlook bring the PM stocks down as predicted by ETF sentiment.  HUI 240-60 is likely with little support in the options OI.

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 largely unchanged.

And the sister options Hedge Spread bearish sentiment as a ST/INT indicator (1-3 mns), showed a moderate pullback was forecast similar to those seen in Jan-Mar and is likely not over just yet.

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 Jun 28. Also, this week includes a look at the GDX and TLT for July exp and an additional SPY volume chart.
With Fri close at SPX 4166, options OI for Mon shows moderate put support up to 4190 and call resistance starting at 4200.  Look for turnaround Mon/Tue.  Call resistance at 4250.

Wed has somewhat smaller OI where SPX shows somewhat stronger put support above 4175 and a Mon close at or above 4175 could test 4200.  Strong call resistance at 4275.

For Fri, moderate put support moves up to SPX 4225 with strong call resistance at 4250+.

For EOM, P/C has now risen to 100%, but a retest of the lows near SPX 4115 still likely.

Over the last two years, I have been manually tracking the SPY ETF P/C volume and have found that ATM P/C have been a reliable indicator of market turns.  In this weeks updates, I used the SPX OI model to chart the P/C volume.  One advantage is that OI is updated O/N while volume is available intraday where I have added a time stamp (CST).  The low P/C indicates that the decline is not likely over, but the inflection areas at 417 and 420 are similar to the SPX OI as important resistance for a retrace rally.

Using the GDX as a gold miner proxy closing at 34.1, down about 10% for the week.  I was expecting a fall of only about half as much to 37-8 and we could see a retrace rally to that level if int rates and the US$ stabilize, but the low P/C is still worrisome INT as there are no signs of a panic low.

Currently the TLT is 145.7 with the TNX at 1.45%,  the OI outlook has changed tremendously where June showed a PC of 350% and almost no call resistance to higher prices.  TLT has moved up from below 140 the last week and has rallied up to strong call resistance.  Most of the rally is likely over.  A look at Sept shows a drop in P/C to 75%, indicating the possibility for a strong reversal by the end of Q3.

IV. Technical / Other

This week I want to take a brief look at the Equity Put-Call spread indicator, which matched the extremes of high P & C last seen at the Mar 2021 top, so a similar outcome is possible.

Everyone is likely aware of the underperformance of the DJIA lately, as it is down over 5% while the SPX is only down 2%. The culprit is mainly the banking sector shown by the BKX index using the 3x ETFs (FAZ/FAS) as sentiment shows a decline so far similar to Sept 2018 has produced almost no reaction.  A continued decline is possible INT/LT to the 90-100 area.

Conclusions.   The biggest surprise of last week was the Fed announcing that it would not necessarily wait until unemployment reaches its all time lows before raising the Fed funds rate with two possible in 2023 and the second was the bond market reaction as it seemed to start pricing in the next depression.  The SPX seems to well on its way to my EOM target of 4100-25, and appears to be following the same playbook as the Mar qtrly optn exp which resulted in a 150 pt ABC decline into the EOM.  Sentiment indicators are also showing similarity to late Mar with a sharp rise in NYDN volume pushing the ST indicator to the Buy area, likely indicating a counter trend rally next week.

Weekly Trade Alert.  A turnaround is likely Mon/Tue with SPX options OI and Mar comparisons pointing to a possible target of 4210-20 by next Fri.  A second decline of similar size is likely to follow.  Updates @mrktsignals.

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Dems Turn Conservative

The big news for the week was that conservative Dems sided with the GOP, effectively blocking the large $2T stimulus package paid for with an increase in corp taxes.  The counter proposal is a much smaller $750B with no new taxes.  This was cheered by the bond market as being non-inflationary and the TNX fell to a low of 1.45% from 1.65% the previous week.  The lower rates spurred a rally in tech stocks, but you wonder how this effects the broad market rally in Mar-Apr based on higher stimulus expectations.

The about face by the Dems took me off guard although I had been expecting higher prices for the SPX into mid-June.  The ST pullback due to higher inflation news failed to materialize as the lower stimulus supported the "transitory" inflation outlook.  However, one of the best economic forecasters of the past decade, Prof C. Harvey of Duke Univ has discussed in a recent paper why he thinks that annual CPI inflation will still surprise to the upside at 4-5%.

In Tech/Other this week I will discuss some volatility measures including the VIX Buy&Sell (using the SKEW) and the VXX $ vol.  Two weeks ago I mentioned the high level of the SKEW and the following week  iSPYETF did an in depth feature as a "Black Swan" warning, but this weeks conclusion is that the VIX/VXV confirmation is needed for a Sell signal.

I. Sentiment Indicators

The overall Indicator Scoreboard (INT term, outlook two to four months) bearish sentiment has fallen sharply after the rally to ATHs following the May pullback.

The ST Composite is a ST (1-4 week) indicator includes the NYSE volume ratio indicator (NYDNV/NYUPV & NYDNV/NYDEC) and the VXX $ Vol/SPX Trend. Weights are 80%/20%.  This indicator continues to bounce around neutral similar to Aug 2020 and may indicate a ST top next week.

Bonds (TNX).  The recent rise in bearish sentiment in bonds was proven correct with last weeks fall in int rates, but the reason was a surprise as conservative Dems sided with the GOP to block more liberal stimulus financed by higher corp taxes.

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.  Here, lower int rates was not enough to offset low bearish sentiment as prices fell.

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 relatively unchanged as the SPX moved to new highs.

And the sister options Hedge Spread bearish sentiment as a ST/INT indicator (1-3 mns) continues to work its way lower and seems to be following a pattern seen before the Feb-Mar and May pullbacks.  This may indicate a pullback thru the EOM after next weeks Qtrly optn exp.

Taking a look at the ETF ratio of the INT term SPX INT (2X) ETFs (outlook two to four mns) as bearish sentiment continued to rise even as the SPX made ATHs, indicating that a pullback into the EOM would be a BTFD oppty.

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 Jun 18.

With Fri close at SPX 4247, options OI for Mon shows call resistance at 4250 is likely to limit gains with put support beginning at 4225.

Wed has smaller OI where SPX shows modest call resistance starting at 4225, but little above until 4300.  Put support starts around 4160.

For Fri PM, there is more call resistance between SPX 4200 and 4275, and a move over 4250 may result in positive delta hedging up to 4275.  There is little put support until 4150.

For EOM Jun 30, the 45k call OI at 4115 is likely to act as a magnet to pull prices down to that level by the EOM.

IV. Technical / Other

This week I want to revisit the VIX Buy & Sell indicator (VIX/VXV + SKEW).  My LT view has been for several months that we were likely to see a rounded top similar to 2015 with an outcome similar to Oct-Dec 2018, and the VIX Buy & Sell indicator certainly looks the same, although now at lower levels.  However, it took several months for a top to arrive and as shown in the next chart, this did not happen until the VIX/VXV reached the same level.

Another way of looking at the SKEW and VIX/VXV is the difference (B-A), where a higher (inverted) SKEW produces less bearish sentiment and most of the tops are "confirmed" when the VIX/VXV drops to a lower level.  The exception was the Mar 2020 top.  Current levels are similar to Aug 2018.

One of the other volatility indicators, the VXX $ Vol produced a strong Buy at the May lows and has not yet reached the Sell level but is similar to Aug 2018.

Conclusions.   The recent decline in int rates has changed my ST outlook in that lower rates will likely sustain a higher level of prices, but the lower stimulus increases the possibility of negative growth surprises by the fall.  The result may turn out to be an SPX range of 4050-4100 for the downside and 4250-4350 to the upside for the summer.

Weekly Trade Alert.  Next weeks qtrly optn exp could see a high in the 4270-80 area with the possibility of a pullback to 4100-25 by the EOM.   A similar setup several months ago saw a low a few days before the EOM, so timing is not exact.  Updates @mrktsignals.

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Next Week's CPI Could be a Doozy!

Last week's outlook for the SPX was spot on as an early week rally to about 4225 was expected to fail, falling back towards 4150.  After Tue opening to 4234 was immediately sold, the Wed update indicated OI put support was raised to 4175 and the Thur low of 4168 then quickly rallied back to 4200.  Fr bond rally after a weaker than expected jobs outlook and factory orders sparked a tech rally and raised the SPX back to 4330.

So far June is starting much like May where an early decline to the mid-4100s was followed by a sharp rally to the mid-4200s in the first week.  The second week of May, however, saw an inflation scare with a three day decline of 4% into the CPI release that came out as 0.4%.  As shown below, the CITI inflation surprise index indicates this months CPI release could be much worse, but with the FOMC the following week expected to support "inflation is transitory", any losses are also expected to be transitory.

In this weeks Tech/Other, there is a revisit to the Combined Put-Call Indicator using the std var approach.

I. Sentiment Indicators

The overall Indicator Scoreboard (INT term, outlook two to four months) bearish sentiment saw a sharp downturn last week as the SPX moved back towards its ATH.

The ST Composite is a ST (1-4 week) indicator and includes the NYSE volume ratio indicator (NYDNV/NYUPV & NYDNV/NYDEC) and the VXX $ Vol/SPX Trend. Weights are 80%/20%. This indicator is back near its recent lows and may be suggesting a near term test of the recent lows near SPX 4150 next week.

The CITI Surprise Inflation Index for May saw a huge move upwards.  One of the reasons I started following this series several months ago was that it is released the first week of the month, a week ahead of the CPI and two weeks before the PPI.  Inflation has been relatively tame since 2017, but this year the CITI index has correctly indicated an upward trend and if the proportions are correct could be predicting a CPI of 1.0% or higher (compared to 0.4% for Apr).

Bonds (TNX).  Bearish sentiment in bonds fell slightly as a combination of weaker than expected nonfarm payrolls and factory orders reduced fears of a strong economy.

For the INT outlook with LT still negative, the gold miners (HUI) bearish sentiment with the inverse TNX rate and the 3x ETF ratio continues to decline.

II. Dumb Money/Smart Money Indicators

The option-based Dumb Money/Smart Money Indicator as ST/INT term (outlook 1 to 3 mns) bearish sentiment rose slightly.

And the sister options Hedge Spread bearish sentiment as a ST/INT indicator (1-3 mns) after warning of a ST pullback last week (5 Day EMA), remains near neutral.

Taking a look at the ETF ratio of the INT term SPX INT (2X) ETFs (outlook two to four mns) as bearish sentiment, sentiment rose for the week, indicating that the rally is not likely over.

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 Jun 11. Also, this week includes a look at the GDX and TLT for Jun exp. 

With Fri close at SPX 4230, options OI for Mon show moderate call resistance from 4225-35 and strong resistance at 4250 and little put support until 4150.  May see downward pressure late in day.

Wed has somewhat larger OI where SPX  has strong put support at 4200 and little call resistance up to 4260.  Could see an ATH retest.

For Fri, low overall P/C and moderate to strong call resistance over SPX 4200 indicate a decline to the 4150-4200 area is likely with a probable close over 4175.

Using the GDX as a gold miner proxy closing at 38.7, there is little change from two weeks ago where strong resistance at 40.5 has held and there is weak pressure into the 35.5 to 37.5 area.

Currently the TLT is 139.9 with the TNX at 1.56%, outlook is little changed where there is strong put support at 135 and little call resistance to higher prices.

IV. Technical / Other

This week I wanted to take a brief look at the Combined Put-Call Revised indicator (Equity + ETF + SPX).where we saw extreme low sentiment in Q1 and for several months have been coiling in an area below neutral similar to the last half of 2019.  A move down to test the earlier lows may be necessary before a top.

Conclusions.   Overall sentiment remains mixed as the CPC Revised shows bearish sentiment is not supporting a strong advance, but is not currently supporting a strong decline.  There may be a temporary inflation scare with the Thur CPI release as shown by the CITI index, but the expected number is 0.9% and anything less than 1.2% may only produce another drop into the SPX 4150 area.  The Hedge Spread has improved, while the ST COMP (NYDNVl) is weaker, and the SPX 2X ETFs are supportive for the INT, so more range trading is likely.

Weekly Trade Alert.   Mon-Wed may see an ATH retest with 4250 possible, while Thur-Fri may see a retest of the 4150-75 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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