End of the Beginning, or Beginning of the End?

The recent run up to new SPX highs was somewhat stronger than anticipated with no pullbacks, but what does it mean?  Over the past year I have made several references to the May 2015 ATH and the Sept-Oct ATH as important references.  The Sept 2018 period was used to show that an important top was not likely at the Sept highs because of the high SKEW relative to the VIX term structure (1/3 mn ratio, see Tech Other for update),  and as it turns out the recent run up following the 1 month correction from the Sept high was almost identical to the run up from the May 2015 ATH pullback as shown below.  There we had a six week pullback of about 5% retraced in about a week and a half.  The main difference is that the recent run up made ATHs, which IMHO is actually more bearish INT/LT because the result was even stronger capitulation of the bears.  One prominent EW analyst, who had been calling for a Super cycle V top targeting SPX 1000ish, was forced to switch his outlook to an extended 5th wave blow off due to the new high.  From a contrarian perspective this is even more bearish because less short covering is likely to support declines.

Most of the mildly supportive bearish sentiment discussed in last weeks outlook has now been fully reversed as shown in the sentiment indicators below, but if the May 2015 analog holds true, a 4-6 week consolidation period is likely before the start of an even sharper decline than in Sept.  One interesting trend I have been watching for several weeks that supports more upside for some of the indices is the Dow transports ($TRAN or DJTA).  With the DJIA making new highs, a confirming high by the DJTA (+2-3%) would give a Dow Theory buy signal and may turn out to be the ultimate bull trap for the neophyte bulls (BTFD Gen-X and Y who buy all dips).  A final warning was also issued last week with the DJIA high when the dividend yield dropped to 1.58%, now below the TNX at 1.65%; this was one of the warnings seen at the summer 1987 top.

I. Sentiment Indicators

The INT/LT Composite indicator (outlook 3 to 6+ months) has three separate components. 1st is the SPX and ETF put-call indicators (30%), 2nd the SPX 2X ETF INT ratio (40%), and 3rd a volatility indicator (30%) which combines the options volatility ratio of the ST SPX (VIX) to the ST VIX (VVIX) with the VXX $ volume.

The brief blip up in bearish sentiment fully reversed last week.

The ST Composite as 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%.

A brief touch of the Sell level was seen at the Wed high, but has rebounded slightly since.

The ST/INT Composite indicator (outlook 1 to 3 months) is based on the Hedge Spread (48%) and includes ST Composite (12%) and three options FOMO indicators using SPX (12%), ETF (12%), and Equity (12%) calls compared to the NY ADV/DEC issues (inverted). FOMO is shown when strong call volume is combined with strong NY ADV/DEC. See Investment Diary addition for full discussion.

Strong FOMO and moderate reduction in hedging has brought this sentiment measure to a warning level.

With the EMAs, a sharp decline into mid-week started to reverse by the EOW.

Bonds (TNX).  Bearish sentiment in bonds has creeped slightly higher following rates up, but remains below levels of recent reversals in 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.

Bearish sentiment remains mildly bearish with a continued trading range most likely.

II. Dumb Money/Smart Money Indicators

This is a new hybrid option/ETF Dumb Money/Smart Money Indicator as a INT/LT term (outlook 2-6 mns) bearish sentiment indicator. The use of ETFs increases the duration (term).

Lows in bearish sentiment were seen about two months before the Oct 2018 top and three months before the Feb 2020 top and appear to have bottomed at the recent Sept top, indicating that an INT top may be 1-2 months way.

And the sister options Hedge Spread bearish sentiment as a ST/INT indicator (outlook 1-3 mns) dclined sharply last week, indicating a ST loss of momentum as likely, but not yet at the Sell level. 

Taking a look at the ETF ratio of the INT term SPX INT (2X) ETFs (outlook 2 to 4 mns) as bearish sentiment, most of the bearish sentiment has reversed from the Sept decline.

The INT term NDX ST 3x ETFs (outlook 2 to 4 mns) bearish sentiment has reversed even more sharply, even though the NDX did not make new highs last week and may indicate underperformance ahead relative to the DJIA.

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. 

With Fri close at SPX 4545, options OI for Mon is small with modest P/C support.  Prices could drop to 4515, but weak delta hedging may support prices.

Wed has similar OI where SPX could find support around 4500 and P/C support is relatively strong.

For Fri EOM shows large OI with weak P/C support and currently shows the best opportunity for a drop below SPX 4500.

IV. Technical / Other

This week I will take a look at the VIX Buy & Sell component spread, VIX (1/3mn) - SKEW.  Periods where the sentiment for the SKEW (grn) lower than the VIX (1/3mn, red) as Aug-Sept 2018 were typically bullish until the spread (blue) dropped to/below 0 (current, -.75 SD).

Conclusions.   The rally since early Oct has certainly caught many bears, but it may be premature for the bulls to start celebrating.  Given the extremes in low bearish sentiment, more negative surprises are likely before the end of the year with possible sources being continued financial problems in China and the Fed's increased commitment to reverse its QE bond purchases.  One potential positive influence ST is Wall Streets apparent goal of generating a Dow Theory buy signal with a high in the DJTA.  Watch for a trading range for the next 4-6 weeks before a potential start of a 15-18% decline into Q1 of 2022.

Weekly Trade Alert.  It's too difficult to tell if any consolidation maybe positive or negatively biased, or possibly both with weakness in the NDX and strength in cyclicals (DJIA/DJTA).  Updates @mrktsignals.

Investment Diary,  Indicator Primer,
 update 2021.07.xx  Data Mining Indicators - Update, Summer 2021 (in progress),
 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

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