The Boomerang Effect

Last week I outlined that, in general, the SPX sentiment was approaching a rally setup, but that several indicators pointed to short term turbulence.  Problems included the NDX ETFs on a near SELL with a likely target of 7500 (act 7464 Tue AM), ST Indicator and Hedge Ratio that showed more volatility was likely, and the SPX ETF DM/SM indicator that had a similar configuration to early Dec 2018 before the final plunge.  The result was the Australian boomerang effect (not the new age social media effect) with the SPX starting the week at 2962, rallying Mon/Tue AM to 2993, then a Wed/Thu AM plunge to 2856, only to close Fri at 2952.

I. Sentiment Indicators

The overall Indicator Scoreboard (INT term, outlook two to four months) bearish sentiment has risen to a level in between the June 2018 and May 2019 lows, so a multi-month low may be in.

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 continues to oscillate around neutral similar to June-Oct 2018 which indicated a rocky advance.

Bonds (TNX).  Interest rates fell last based on the weak ISM outlook as did sentiment that may mean a trading range between 1.5% and 2.0% is forming.

For the INT outlook with LT still negative, the gold miners (HUI) bearish sentiment did fall sharply last week as expected with only a minor bounce with the swoon in SPX mid-week.  A break below 200 confirms the H&S for the ST with a target of 180.

II. Dumb Money/Smart Money Indicators

The option-based Dumb Money/Smart Money Indicator as short/INT term (outlook 2 to 4 mns/weeks) continues in a pattern like Jul-Oct 2018 that implies a positive bias, but not overwhelming strength.

And the sister options Hedge Ratio sentiment has reversed its ST negative bias, also similar to Jul-Oct 2018, but with less strength, implying greater volatility than 2018.

The INT term SPX Long Term/Short Term ETFs (outlook two to four wks/mns) bearish sentiment (2x DM/3x SM) has been gradually improving since June that may indicate a breakout from the SPX 2800-3025 is ahead, and the similarity to Dec 2018 proved accurate with a flush lower.  Bearish levels are now approaching those of Mar 2018 that supports an eventual breakout to the upside.

The INT term SPX Long Term (2x/DM) ETFs (outlook two to four weeks) bearish sentiment is approaching that seen at the Aug lows and recent vacillations may be indicative of more of a stair-step advance that seen in Jul-Oct 2018.

The INT term NDX Long Term (2x/DM) ETFs (outlook two to four weeks) bearish sentiment has moved back to the neutral level and is also similar but less positive than Jul-Oct 2018.

III. Options Open Interest

Using Wed close, remember that further out time frames are more likely to change over time, and that closing prices are more likely to be effected.  This week I will look out thru Oct 11. Also, This week includes a look at the GDX for Oct.

With Fri close at SPX 2952.  Although Mon OI is fairly small, last week's volatility increased put support dramatically as long as SPX stays above 2950, there is little call resistance to 3000, although below 2950, put support is also weak until 2875.

Wed shows a potential for a very wide price range, much like last week, where the only significant put support is SPX 2875 and call resistance at 3030.

For Fri, the net result of last week's whipsaw action was to increase put support at SPX 2950 and below and increase call resistance at 2975 and above.  The conclusion is a likely tight range of outcomes with the SPX between 2950 and 2975 with a wider band below at 2925 and 2900 and above at 3000.  China trade talks may disappoint those taking straddle trades.

Using the GDX as a gold miner proxy.  For Oct exp, currently 27.87, GDX faces stiff call resistance at 28 & above with only moderate put support down to 25 and less below.  This seems to support the H&S.

IV. Technical / Other

Last week I noticed an extreme reading in the Technical Indicator Composite (NYMO + TRIN + NYAD + NYUD), but the last time this happened was at the Dec 2018 lows so the interpretation was unclear, but the outcome last week was not.  Last weeks selloff has produced an almost mirror-image reversal in sentiment that supports a test of the ATH.

Conclusions.  Was last weeks performance a preview of fireworks to come or simply an exhaustion move for both bears and bulls?  Sentiment indicates that disappointment may lie ahead for both sides that could result from some type of detente rather than escalation with the China trade talks.  Trumps views are always a coin toss for me, but China;s recent actions to purchase more US soybeans may mean some positive progress, but likely only in baby steps.  Trump's attention may start to be diverted toward EU trade and potential impeachment hearings and less toward the evil Chinese.

Weekly Trade Alert.  The SPX is still likely to be headed headed higher INT term, but ST may remain in a fairly tight range 2825-2925.  My view is still < 40% for a comprehensive trade deal with China, but progress can be made, if only piecemeal.  Updates @mrktsignals.

Investment Diary,  Indicator Primer,  update 2019.04.27 Stock Buybacks, update 2018.03.28  Dumb Money/Smart Money Indicators
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A Broken Analog

It had to end sooner or later.  I had been following the Oct 2014 to May 2015 analog for almost a year since calling for a V-bottom in Jan.  Typically, analogs only work for a few weeks so the longevity of this one was amazing.  The general concept of a rounded top extending into mid-2020 is still the most likely outcome according to sentiment, but the hills and valleys from here will probably be different.

The outlook for the week was early strength followed by weakness using the options OI as the level of SPX call buying over 3000 was getting ridiculous.  Tue AM rant against China's patent infringements at the UN by the POTUS was enough to turn the market sour, and later news that the Dems would start an impeachment process over the Ukraine/Trump conversations about Biden threw an anchor around the market.  The result was testing lower OI support at 2950 (2945 act), but 2950 is starting to look a lot like 2825 in Aug.

Overall, the market seems to be led higher by the DJIA and lower by the NDX, supporting the influence of buybacks on the higher dividend paying stocks as pointed out a few weeks ago.  With last weeks ETF sentiment for the NDX near a SELL, I suspected the 2015 analog might be in jeopardy and the upside target was missed by 1% on the SPX.  Implications of DJIA leadership are discussed further in Tech/Other.

I. Sentiment Indicators

The overall Indicator Scoreboard (INT term, outlook two to four months) bearish sentiment has risen back to neutral after reaching a ST SELL a few days ago.  The pattern continues to resemble Jul-Oct 2018 and Mar-Apr 2019.

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 only improved slightly, also resembling Jul-Oct 2018 and Mar-Apr 2019.

Bonds (TNX).  Interest rates moved lower, retracing about half the rise from early Sept as sentiment remains very low.

For the INT outlook with LT still negative, the gold miners (HUI) bearish sentiment remains near an INT SELL as prices may be forming a H&S top.  Recent strength in the US$ due to somewhat positive economic news has put pressure on gold/stocks.

II. Dumb Money/Smart Money Indicators

The option-based Dumb Money/Smart Money Indicator as short/INT term (outlook 2 to 4 mns/weeks) reached a near ST BUY last week and appears to be following the Aug-Oct 2018 pattern.

And the sister options Hedge Ratio sentiment is somewhat similar to the DM/SM indicator, but a sharp drop is warning that continued ST volatility is to be expected.

This week I noticed that the SPX related DM/SM ETF indicators seemed to be working better over the last year so I will switch back to covering them on a trial basis.

The Risk Aversion/Risk Preference Indicator (SPX 2x ETF sentiment/NDX ETF sentiment, outlook 2 to 4 mns/wks) as a INT indicator (pref to less risky SPX is bullish), has seen a rise similar to Oct 2018 and Aug 2019, indicating that the potential for a rally is building.

The INT term SPX Long Term/Short Term ETFs (outlook two to four wks/mns) bearish sentiment (2x DM/3x SM) has been gradually improving since June that may indicate a breakout from the SPX 2800-3025 is ahead, but similarities to Oct-Dec 2018 warn that a final flush lower is possible.

The INT term NDX Long Term (2x/DM) ETFs (outlook two to four weeks) bearish sentiment warned last week of potential weakness in the NDX and a retest of the 7500 area is possible before a turn around.

III. Options Open Interest

Using Wed close, remember that further out time frames are more likely to change over time, and that closing prices are more likely to be effected.  This week I will look out thru Oct 4. Also, this week includes a look at the TLT for Oct exp.

With Fri close at SPX 2962, the SPX is right at strong put support at 2960, but only moderate support below until 2925.  Weak call resistance starts at 2975 and strong call resistance is at 3000 and higher.

Wed is pretty much the same as Mon with put support at 2960 and similar call resistance.

For Fri, strong put support drops to 2950, but due to overlap there is little call resistance until 3000, so a wider range is possible.

Due to the trade talks with China scheduled for Oct 10-11, I thought I would also add a look at the following Fri, where the outlook is similar with put support at 2950, call resistance moves up to 3010, and overlapping puts/calls in between leave only slight downward bias.

Currently the TLT is 142.7 with the TNX at 1.67%.  There is very strong put support at 139 with almost no call resistance up to 150.  This comes as a complete surprise, but with the various risks to the stock market that are emerging, everyone seems to feel that rates will rise.  My outlook is that rates will hold steady or fall, probably thru mid-2020.  If Dems succeed in ousting Trump, spending policies will likely trip the bond market.

IV. Technical / Other

Since the relative strength of the DJIA to SPX/NDX favored by the buyback spread (Div/TNX) seems to be consistent and getting stronger, I wanted to look back over the last couple of years to see what this has meant.  As you can see from the chart below, the $INDU/$SPX ratio is mid-range for the last two years and rising.  Notably the last two peaks were Jan/Feb and Nov/Dec 2018.  Both Jan and Oct 2018 saw the ratio rise to 9.3 before an INT top, while initial downturns saw spikes to the 9.6 level.  Apparently, more money flows into the largest and most liquid stocks (DJIA/INDU) as the top approaches and risk increases.  We are not there yet.

Conclusions.  Trade talk, the economy,  the Fed and now impeachment.  The stage of possible candidates for an INT correction or more keeps increasing, but no immediate catalyst is in sight.  What seems to make most sense now is for a continued media circus similar to what we saw in 1998-99 with the Clinton/Lewinsky affair when the POTUS was accused of lying under oath about getting a BJ in the WH.  With the Reps firmly in control of the Senate, conviction seems like a remote possibility, but similar to Clinton, the daily airing of dirty laundry between now and the 2020 elections can swing things in favor of the Dems. 

A Dem win for POTUS and/or Senate is likely to swing things in favor of those that spend (middle class/elderly) and away from those that invest (1%) with strong negative implications for the stock market.  The potential should be clear by mid-2020 which fits in my expected timeline.  Longer term, stronger consumer spending and a move back to global cooperation, instead of isolationism, is likely to restore growth that may provide the impetus for a final blow off.

Weekly Trade Alert.  Bearish sentiment shows a balance between bulls and bears that is likely to result in a ST trading range of roughly SPX 2950-3000, but the INT term sentiment is building for a rally.  SPX 3100-50 by mid-2020 still doable.  Updates @mrktsignals.

Investment Diary,  Indicator Primer,  update 2019.04.27 Stock Buybacks, update 2018.03.28  Dumb Money/Smart Money Indicators
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Repo Madness

The most interesting news in the financial markets the last two weeks has been the spike in the repo rates.  Although not a common topic, the repo rate represents the over night inter-bank lending rate and is the underlying rate to the fed fund target rate set by the Federal Reserve.  Briefly last week the overnight rate hit 10%, indicating a severe shortage of funds.  This prompted action by the Fed to provide additional liquidity which some are saying will lead to some form of QE-light that may have propped up the stock market last week more than expected.

Typically this type of funding shortage has preceded broader financial problems and prompted Martin Armstrong to predict that this is the result of negative interest rates world-wide, as banks see extremely low reward to risk for short term lending, and will be cause of the next financial crisis.  This fits into my thesis that investors focused on China trade and actions by the Fed will not see the source of a stock market downturn.  The ICMA Group discusses several aspects of repo rates and the effects of negative rates if anyone wants more info.

Last week showed more strength than expected with only a brief "sell the news" reaction to the FOMC actions, but did succumb in the last couple of hours Friday to the high level of bullishness in the options OI.

I. Sentiment Indicators

The overall Indicator Scoreboard (INT term, outlook two to four months) bearish sentiment saw a brief sharp drop before bouncing late in the week and may be repeating the stair step decline seen from Jun-Oct 2018 and Mar-Apr 2019.

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 fallen more slowly and seems to be following the Jun-Oct 2018 pattern.

Bonds (TNX).  Interest rates have consolidated off their recent lows as bearish sentiment remains very low.

For the INT outlook with LT still negative, the gold miners (HUI) bearish sentiment remains at extreme lows as prices consolidate.

II. Dumb Money/Smart Money Indicators

For this week and possibly for the next several months, I am going to replace the DM/SM ETF indicators with other indicators.

The option-based Dumb Money/Smart Money Indicator as short/INT term (outlook 2 to 4 mns/weeks) bearish sentiment is similar to the ST Indicator and has not dropped much, also like the Jun-Oct period.

And the sister options Hedge Ratio sentiment did see a sharp drop and reversal and may support a larger rally when the ST EMA (gr) reaches a BUY.

The INT term SPX Long Term (2x/DM) ETFs (outlook two to four weeks) bearish sentiment has declined considerably, but nowhere near the point of a significant top.

The INT term NDX Long Term (2x/DM) ETFs (outlook two to four weeks) bearish sentiment has again fallen more than the SPX even though the NDX is a couple % below its high and may under perform .

III. Options Open Interest

Using Wed close, remember that further out time frames are more likely to change over time, and that closing prices are more likely to be effected.  This week I will look out thru Sept 27. Also, This week includes a look at the GDX for Oct.

With Fri close at SPX 2992, we see a sharp reversal of opex OI as put support is likely to hold at 2975, while weak call resisiance and put support could push prices back to SPX 3010.

Wed, however, shows signs of an expected EOQ window dressing rally with large call OI at 3055, so likely a drop back below SPX 3000.

For Fri, continued pressure toward SPX 2975 looks likely although early week weakness could increase put support where a 3000 close is possible.

Looking out to the Oct exp for SPY (1/10 SPX), call resistance is likely to keep prices below SPX 3000, but the large put OI at 308 may lead to a rally well over SPX 3000 by mid-month.

Using the GDX as a gold miner proxy, currently 28.7.  For Oct exp, rhe like;y range is 27-29.

IV. Technical / Other

It's probably time to revisit the 2015 analog again as last week's intra-day pullback followed the same general pattern with a couple weeks of higher prices before a 50% retracement of the previous rally.

While the longer term Rydex Bear/Bull ETF Ratio is in about the same position as the SPX 2x ETF ratio and implies several more months of uptrend before a significant top.

Conclusions.  Last week was range bound between SPX 2875 and 3025 as the bullish OI positions did put some downward pressure on the SPX.  Next week looks like more of the same.  Given the recent chatter comparing Sept 2019 to Sept 2007 which preceded the Oct 2007 high, my preference is a delayed rally top into mid Oct.  If this follows the 2015 analog, a sharp 50% retracement of the rally from the Aug lows will setup sentiment for a rally several months long.

Weekly Trade Alert.  The next couple of weeks may be pretty boring, but by mid-Oct the SPX should reach a top in the 3040-50 area before a late Oct swoon down to the 2930-40 area.  Updates @mrktsignals.

Investment Diary,  Indicator Primer,  update 2019.04.27 Stock Buybacks, update 2018.03.28  Dumb Money/Smart Money Indicators
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Did the Bond Bubble Just Burst?

Most non-economist (POTUS) seem to think that the term structure for bonds always stays the same, so that lowering ST rates will lower INT and LT rates as well.  But, as we saw this week with Draghi's farewell hug to negative rates in the EU, if a drop in rates is viewed a stimulative, then the result can be higher LT rates.

This raises an interesting conundrum for the Fed next week.  Although a 25 BP cut in the Fed funds rates is likely already decided, more stimulus may also push longer rates higher.  It's possible if an economic turn around appears by next summer, the Fed may be forced to raise rates to stop a bond market rout. Then wave adios to Trump.

Since the beginning of Sept, bonds (TLT) are down 8%, dropping almost twice as fast as they rose in Aug.  It's interesting, however, that everyone thought the end of the world was coming when the SPX fell 7% in Aug, but judging by bond sentiment, bond holders seem to have shrugged off a similar drop in bonds.

In this week's Tech/Other section, I will take a closer look at the comparison of the NYUPV/NYDNV comparison between 2007-09 and today.

I. Sentiment Indicators

The overall Indicator Scoreboard (INT term, outlook two to four months) bearish sentiment saw a sharp drop last week and is consistent withe Jun 2018 and Mar 2019 where a 75 pt drop followed in the SPX.

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 dropped somewhat more slowly, but is also not far from the levels seen in Jun 2018 and Mar 2019.

Bonds (TNX).  Interest rates in Sept have risen about twice as fast as they fell in Aug, but bondholders seen not to have noticed as sentiment remains near low extremes.  The first support level is at 2.1-2.2% which could be seen as early as next week.

For the INT outlook with LT still negative, the gold miners (HUI) continue to move inversely with interest rate levels and bearish sentiment remains at very low levels after a 15% correction.

II. Dumb Money/Smart Money Indicators

For this week and possibly for the next several months, I am going to replace the DM/SM ETF indicators with other indicators.

The option-based Dumb Money/Smart Money Indicator as short/INT term (outlook 2 to 4 mns/weeks) is lagging other sentiment indicators and appears to be setting up a repeat of the July-Oct 2018 period where skepticism proved to be correct thru the Oct decline, but the strong BTFD optimism for a year-end rally in Nov provided the sentiment backdrop for the Dec collapse.  I am expecting a similar sentiment setup in 2020 on a somewhat larger scale, where an early year pullback sets up expectations for a strong BTFD for the presidential cycle rally into the election.

And the sister options Hedge Ratio sentiment is dropping very quickly and is likely to see the LT EMA (blue) drop to 1.05 before a significant pullback.

The INT term SPX Long Term (2x/DM) ETFs (outlook two to four weeks) bearish sentiment has fallen more slowly than the shorter term (options) sentiment and is consistent with several months more of upward bias..

The INT term NDX Long Term (2x/DM) ETFs (outlook two to four weeks) bearish sentiment has now caught up with the SPX ETF sentiment, so it may start to performing more closely to the SPX, but still faces lack of buyback support.

III. Options Open Interest

Using Wed close, remember that further out time frames are more likely to change over time, and that closing prices are more likely to be effected.  This week I will look out thru Sept 20. Also, This week includes a look at the TLT for Sept.

Last weeks momentum was able to push the SPX over the 2980-3000 call resistance levels after the expected drop early in the week toward the 2950 area (2957).  Sentiment this week looks like a repeat of the July FOMC week where a "sell the news" reaction was expected and resulted in a 50 pt drop in the SPX. 

With Fri close at SPX 3007, the SPX is in a neutral pocket at 3005-10, but the higher level of calls at 3000 indicates a power struggle at that level.

Wed  there is little support above 2990 and a drop to the 2990-3000 level is expected..

For Fri, things become very interesting.  Due to the fact that most exp options for SPX are AM and mostly hedged, the OI for PMs are very light, but show a strong negative bias toward the 2950 level or lower.

As confirmation, I also looked at the SPY for Sept exp (price 1/10 SPX), but this also shows a strong negative bias towards SPX 2950.  My conclusion is another "sell the news" event, whether the market is disappointed with a rate cut, or potentially gets "freaked out" if selling continues in the bond market as we saw after Thurs ECB rate cut.

Currently the TLT is 136.5 with the TNX at 1.9%.  The TLT dropped through strong put support at 139 like a hot knife thru butter and the next significant support is at 128, so there is definitely room for continued turmoil in the bond market.  TLT 128 is about TNX 2.1-2.2%.

IV. Technical / Other

A couple of weeks ago I mentioned that one of the LT indicators I look at, the NYUPV/NYDNV was following a similar pattern to 2006-07 and today I will take a closer look at that comparison.  First for 2006-09, the green circles represent smart money buying, while the red circles are dumb money buying.  Smart money were buying mid 2006 before the runup to ATH and heavy buyers at the late 2008 and early 2009 lows, while the dumb money were mostly BTFD buyers buying pullbacks most of the way down in late 2007 and early 2008.

In 2018 and 2019, we have seen similar patterns as the dumb money has consistently piled in at the tops while smart money scoops up bargains at the bottom.  With 2020 an election year similar to 2008, I expect to see the same BTFD behavior by dumb money if there is a correction early 2020 based on the expectation of a strong rally for the presidential election.

Conclusions.  Many of the people who were looking for SPX 2600-700 two weeks ago are now looking for the SPX to advance to 3100-50 over the next two weeks, but I am highly skeptical given their recent track record.  The last quarter of 2017, I was comparing the SPX setup to 1999 where we had a sharp spike in bearish sentiment (ST Indicator vs LTCM crisis), but were facing rising TNX rates due to the Fed's ending QE.  In 1999, as rates rose the SPX typically stalled, but then chugged forward when rates paused.  We may see something similar today, but I am not expecting a "melt up" unless there is a trade agreement with China (probability < 40%).  A trade agreement could push the SPX to 3200-300.

The highest probability is a continued upward bias thru the end of the year, although the 2015 warns of the probability of a 50% retrace from the Aug lows.  If there is a "sell the news" following the FOMC that backtracks to SPX 2940-50, EOQ window dressing will likely push the SPX to 3025-50 by EOM, then an Oct retrace may begin.  LT 2020 could be a very interesting year.

Weekly Trade Alert.  M-W looks like the SPX will dance around 3000 according to options OI, but W-F will provide a negative bias toward the SPX gap at 2940 at least thru Fri.  Updates @mrktsignals.

Investment Diary,  Indicator Primer,  update 2019.04.27 Stock Buybacks, update 2018.03.28  Dumb Money/Smart Money Indicators
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