Sentiment Trumps All (Pun Intended)

Last week produced the post-election rally as expected, but started a little sooner than expected with the FBI reneging on the Hillary email investigation followup Sunday afternoon.  So I missed the Friday target posted earlier on Twitter (@mrktsignals)  I admit that since April when the SPX first hit 2080, I have been a cautious bear using extra caution approaching long positions.  So now that the election is over and the Tin Man won, but none of the markets crashed outside of bonds and gold, what is next?  As expected those looking for a Trump led crash in stocks have now switched sides looking for SPX 2300-2500, but I am seeing similarities to the Nov 2015 top as well as early 2000 where GB's proposed tax cuts produced a strong rally in the DJIA even as the NDX faltered.

Over the next few weeks I hope to update my long term view (arthurk024.wordpress.com) last updated in March 2015.  The Republican victory has given much clarity to my overall bearish view as I have for several years viewed the global economy like a 6-cylinder auto engine where the US and Europe are two cylinders each, China one and the ROW the other.  Now only 4-cylinders are working with Europe sputtering and Trump is proposing switching from mid-grade to high octane fuel for two cylinders but ignoring the rest.  My bullish LT forecast previously was dependent on a resurgent Europe resulting from a much higher US dollar (and lower Euro), but Yellen prevented that from happening by also adopting a US-centric position and keeping short term rates too low.

Since this is supposed to be a stock market sentiment site I want to take a look at several long term sentiment indicators using 25, 50 and 100 day EMAs to see if LT sentiment is bullish or bearish.  First looking at the VIX term structure (VXV/VIX) since mid 2012, you can see that the SPX rallied strongly while the VTS stayed above the mean, but began to lose momentum as the VTS spent more time below the mean thru mid 2015.  Since March of 2016, the VTS has spent most of the time below the mean, pretty much the opposite to 2013 and not much support for the bulls.

The second long term measure is the volatility ETF ratio VXX/XIV.  Here we see less cyclicality chart wise, but the same overall results.  Interestingly, the pre-election dip barely moved sentiment.

Finally, in case you feel that this is just an anomaly related to volatility, take a look at the SPX 2x ETF ratio SDS/SSO.  This looks almost like an average of the previous two charts.  As a result of long term sentiment, I am going to go out on a limb and predict the same "born again bulls" that are calling for SPX 2300 and beyond similar to Nov 2015 will get an even ruder awakening over the next 9 to 12 months with the SPX falling 15 to 20 percent (and more is possible longer term depending on what happens in Europe and China).  Part of the problem is likely to be sentiment as most will look at declines of 10 to 12% as similar buying opportunities to the 2015 and 2016 declines providing less bearish sentiment.

Return to Regular Programming (from Outer Limits)

After giving a Buy signal last week, it will probably take two to four weeks of distribution for a Sell signal to form using the overall Indicator Scoreboard which has just started to turn down.  Compared to the July and December 2015 tops, this would probably mean a reading of about -8.0.

The Short Term Indicator is in much the same position and is likely to drop close to the Sell line before a significant market decline starts.

Looking at some of the other indices, the gold bugs seem completely oblivious to what is happening in the HUI and despite Avi Gilbert's call for a doubling of the GDX in 12 months a couple of weeks ago, new lows look more likely.

Finally, I've been waiting for the bond market to wake up for at least six months.  While I expected a more gradual rise in the TNX to 2.5 to 3.0% with the Dems in control, the Reps policy to cut taxes and spend baby spend like GB2 is likely to drive rates to the 3.5 to 4.0% level.  If you read the FEDs dot-plot projections for rates, you know they were planning to gradually raise ST rates to 2% with a 4% TNX, but they may end up playing catch up with the TNX.  The long period of low bearish sentiment means MEGA distribution.

Conclusion, a top of significance is near.  Some of you may have seen Tom DeMark's comments last week calling for a top next week in the DJIA at 19,400 and the SPX at 2200+ before an 11% pullback.  I don't disagree, since this matches the 2015 top in Nov where a six week consolidation was followed by the January collapse.  This time I expect a more gradual decline with timing similar to 2008, with a first quarter pullback, a spring-summer rally then a fall decline.  Here, the outcome becomes more uncertain due to several key elections in Europe that may result in increased turmoil in the EU.

Weekly Trade Alert.  None at present.  Updates possible only at @mkrtsignals.

Setup for a Bounce or More?

First, I want to thank the loyal readers since I first started this journey a year ago October.  Many thought my contrarian approach was too left field, but the last few weeks have seen over 3,000 page views a week, so I must be doing something right.  I was also able to provide some timely updates last week at twitter.com/mrktsignals

The past week saw a fairly strong rise in some of the bearish sentiment indicators, especially those related to options as the VIX has risen to the highest level since the BREXIT in June (22 now vs 26 then) and so have put/call ratios.  Oddly other measures, especially the money flow measures (SPXU/UPRO) have barely budged.  This leads me to believe that we are likely to see what John Hussman called several years ago, "a fast and furious short-covering rally that is prone to fail", rather than the 5th wave blowoff to SPX 2300 or 2500 that many EWers are looking for.

So let's start by looking at an update of two of the short term measures I mentioned last week. The Short Term Indicator (VXX $ volume and Smart Beta P/C) is not at levels seen during BREXIT but has reached the levels of early Feb and Oct.

The 3x SPX etf ratio SPXU/UPRO has struggled to reach the mean, showing that outside the options market, investors remain unconcerned about the current pullback.  This leads me to believe that a sharp post-election rally is likely but it is not likely to have much follow through and may not make it above the SPX 2160-2180 level.

The tech sector which I mentioned two weeks ago as having extremely low intermediate term bearish sentiment has almost gone into crash mode with even less concern by investors as measured by the short term SQQQ/TQQQ ratio.

Finally, switching to the intermediate term view, the overall Indicator Scoreboard has almost reached levels seen at the June 2015 lows before the final rally of mid-2015.

One other thing I should cover for those looking for a safe have in gold stocks is an update of the HUI etf ratio DUST/NUGT.  Other than for very short term plays, the sentiment picture here is not much better than for the NDX.

Conclusion.  Short term rally but not much more.  I want to enter a long position Mon-Tues around SPX 2080 with a target of 2160.  If the H&S pattern in the NDX holds, the SPX should top out in two to four weeks and be in full decline by late December.

Weekly Trade Alert.  Long SPX around 2080, stop 2065, target 2160.

More Focus on Short Term for Now

As you will see from today's sentiment update, I apparently had a lot of company during the middle of the week in my siesta as bearish sentiment dropped low enough on the very short term to generate a sell signal.  This is the Short Term Indicator (VXX $ Volume and Smart Beta P/C) using 3, 5 and 10 day EMAs (one-half normal).

Looking at the less volatile SPXU/UPRO money flow ETF indicator short term shows bearish levels comparable to the 2016 tops of April, June and August.

Based on this short term view, more downside appears likely with a possible challenge of the SPX 2100 level. It now appears that Hillary's emails may follow her for some time, much like Bill's Monica Lewinsky during the late 1990's, and will lead to uncertainty before the election.  It's likely this uncertainty holds the market in check until after the election.

The overall Scoreboard Indicator continues to look eerily similar to the May-July period of 2015
where a breakdown of the trading range of the previous two months was enough to generate one last buy signal before the final market top.

Another indicator which supports this view is the VIX P/C which pushed to new lows last week to match the level of mid-June 2015

Conclusion.  Given the above sentiment outlook, I will be looking for long setup before the election, but probably not until election week.  Shorting here is probably the lower risk trade now, but potential gains appear to be limited.

Weekly Trade Alert.  Changed to siesta with one eye open.  Any changes in outlook at @mrktsignals.

Taking a Siesta

With a little more than two weeks until the U.S. Presidential election, bearish sentiment seemed poised to support a further market advance starting last week, but as I warned on Twitter at the Tuesday open, the sentiment from Mondays weak decline did not support much of a rally.  For the week the SPX was up 8 points, but overall sentiment as shown by the Indicator Scoreboard fell back to neutral and continues to follow the pattern of mid-June 2015.  The result, if followed, still supports higher prices into the election, and if bearish sentiment continues to weaken would probably be followed by a sharper decline.  Most other analysts seem to be looking for near term weakness then a strong year-end/presidential cycle rally to well over SPX 2200, but how often is the majority right.

The Short Term Indicator (VXX $ Volume and Smart Beta P/C) has fallen even more sharply and is now back to neutral, indicating that any advance is likely to be fairly tepid.

The VIX P/C has started to bounce upward as expected last week and is also in a similar pattern to mid-June 2015.

Also this week I wanted to look at a couple of market sectors, i.e., tech (NDX) and small caps (RUT) to see if they were in a position to provide leadership for a possible year-end rally. 

First for the NDX, using the QID/QLD ETF$  ratio for a longer term perspective and the SQQQ/TQQQ $ ratio for shorter term, there is little support for a sizeable rally with bearish sentiment for the past several months hanging around the lowest levels for the past two years.

The results for the RUT are even more revealing.  Using the TZA/TNA $ ratio, bearish sentiment has continued to fall in a choppy pattern even as prices moved downwards - the same pattern seen at the mid-2015 top.

Conclusion.  The most likely scenario continues to be as outlined last week, with strength into the election, a sharper decline to lower levels, then a rally that everyone assumes will make new highs, but will probably disappoint.

Weekly Trade Alert.  Taking a siesta until the election.  Possible updates @mrktsignals.

Setup for Options Expiration Nearly Complete

The last two weeks I have been expecting a tradeable low for the SPX prior to the October options expiration.  Last week I outlined a possible trading setup that was nullified by the strong decline early in the week (@mrktsignals.com) that seems to be following the early September decline (sharp initial, consolidate, then rally).  Sentiment indicators are also comparable to the September bottom.

Starting with the Indicator Scoreboard (overall wtd average), the EMAs are close to those a month ago and overall seem to be following a similar pattern to Feb-Jun of 2015, but it is difficult to tell if a stronger selloff is needed to see a buy spike prior to a July 2015 type top.  One possible scenario could be a rally to the SPX 2180s into the election, an even sharper selloff after the election that sets up a buy spike to a final top late November-early December.  It is clear that SPX 2200 is as important a resistance zone as the 2130s was in mid-2015.

Looking at the Short Term Indicator (VXX $ Volume and Smart Beta P/C), we are seeing a double buy spike that has occurred several times over the last year where a lower sentiment reading was followed by a stronger rally due to a cumulative build up in bearish sentiment.

Finally, the VIX P/C has little to add this week, but we seem to be at or near a low that may last several months.  As I have mentioned, the VIX P/C is difficult to interpret because smart money buys VIX calls at market tops, while dumb money piles in at market bottoms.  The latest dip seems to mark a bottom with dumb money buying calls.  A spike upwards (more put buying by dumb money) is likely to mark a market top.

Conclusion.  I would like to see one more dip to SPX 2120+/- Monday afternoon or Tuesday AM to complete the setup for a rally into expiration and beyond.

Weekly Trade Alert.  Last week, I forgot to mention that updates are posted on my Twitter account when appropriate  (@mrktsignals.com).  It's hard to identify an exact entry point other than SPX 2120+/- with a target by the election of 2180+.

Markets Direction Starting to Clarify

A myriad of forces are starting the clarify the market(s) direction.  On the political front in the land of Oz, the wicked witch from the East is pulling ahead of the tin man with no heart.  On the currency front, the inclusion of the RMB in the IMFs currency basket did not cause the crash in the US dollar that many had anticipated and instead caused a crash in the precious metals. Rising interest rates and a rising dollar are hurting the S&P but making the DJIA more attractive to foreign buyers.

Today, I am going to follow the bottom up approach, looking at several indicators and concluding with the composites.  First up the precious metals.  Goldman Sachs is recommending buying gold at 1250, but the gold miner's sentiment, using the DUST/NUGT ETF ratio is much closer to a Sell than a Buy.  In fact, last weeks sharp selloff was met with weaker bearish sentiment, indicating that the decline may have much further to go.

Looking at interest rates using the TBT/TLT ratio for 10 year bonds, there is not really any breakout until TNX rises above 2.0%.  But remember the long forecasting model I mentioned several weeks ago where since 1980 a 50% drop in rates equated to a 100% rise in equity fair value.  The result if interest rates rise is that a 100% rise in rates (1.4% to 2.8%) equates to a 50% drop in equity fair value.

I have also been following the VIX P/C ratio closely since it tends to decline at major tops develop with spikes higher at short term tops.  So no spike yet.

The Short Term Indicator remains in neutral territory as the equity market consolidates.

The overall Indicator Scoreboard is dropping at a faster rate, but still in neutral territory.

Conclusion.  Last week I incorrectly pointed to an options week setup which as it turns out should happen this week.  There is an interesting pattern developing especially in the DJIA using the 50 and 125 SMAs.  The 125 day SMA is popularized by the Fear&Greed index of CNN Money and provided support for the SPX for almost two years for 2013 and 2014. A good setup for a long into options expiration on Oct 21 would be if both SPX and DJIA decline to the 125 SMA with a stop just below.

Weekly Trade Alert.  Long the SPX at 2130 with DJIA at 18100 with a stop at DJIA 18000 and a target of SPX 2180-85.

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Sitting on the Sidelines

Last week the SPX gained 3 points roughly trading between 2142 and 2172 with strong resistance provided by the 50 DMA.  The indicators I follow also showed little net movement, but the VIX P/C may have bottomed with a move from the .30s to the .60s on Friday.  I have been looking for one last move up in the EMAs to match the May 2015 top.

The Short Term Indicator has moved down closer to neutral, but I expect a move down to near the SELL line similar to July-August of 2015 to indicate a selling opportunity.

The Overall Indicator Scoreboard is following a similar pattern timing wise to the ST Indicator and should decline more before a shorting opportunity.

Conclusion.   As the last two weeks have pointed out, sometimes sitting on the sidelines is the safest investment strategy.  November looks to be a pivotal month.

Weekly Trade Alert.  October option expiration week has provided upside surprises more often than not.  So I will be watching this week for a long setup.  No guidelines for now.