To Bull or Not to Bull

In Jan 2019, I was virtually the only one calling for a V-bottom off the Dec lows while most were calling for either the beginning of a 2008-09 bear market or at least a retest of the lows.  At the time I also pointed out the potential for a rally structure similar to that off the Oct 2014 lows thru the May 2015 period.  This continued to be accurate thru Nov 2019, until the final blow off stage.  But now the roles seem to be reversed.

Over the past two weeks, I pointed to similarities to the 2008-09 period, but now many are looking at market action in reaction to the extraordinary stimulus from both the Fed's QE-finity and massive fiscal bailouts as the beginning of a V-bottom similar to the Mar 2009 lows.  My approach is to first look at sentiment using a variety of measures and then look for price patterns with similar sentiment.  Sentiment is still most similar to that of the first down leg in Oct 2018, implying that the worst is still to come.

Last week, I showed that the extreme low of the McClellan Summation Index (-1200) was comparable to the July 2008 low.  Two weeks ago, I compared the Feb-Mar 2020 decline to that from Oct 2007 to Jan 2008 with an accelerated time frame of about 1 day in 2020 equal to 1 week in 2007-08.  Last weeks three day rally comprised a similar 38% retracement to the two week rally off the Jan 2008 lows.  Charts and more in Tech/Other.


I. Sentiment Indicators

The overall Indicator Scoreboard (INT term, outlook two to four months) bearish sentiment has only begun to decline.  Both the early and late 2018 sharp decline were followed by retests or lower lows.  Sentiment appears to be similar to that of early Oct 2018 before the Nov trading range of SPX 2600-2800.

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 (SPX vol adjusted) never reached the levels seen in the two major selloffs of 2018, but is also now in the range of Oct-Nov 2018.

One adjustment that I made several years ago to the VXX $ Vol after the Jan 2016 decline was to adjust for SPX daily volume since the low Dec 2015 vol distorted results.  For Feb-Mar 2020 SPX volume has been very high and may have understated VXX $ Vol and the following chart is unadjusted.  Here, we see that VXX $ Vol composite did slightly exceed the Oct 2018 decline but also never reached the extremes of Feb and Dec 2018.

Bonds (TNX).  Bond investors seem to be "All in", but with backing by the Fed with the announcement of QE-finity, downside price risk seems low as long as inflation risk is low.

For the INT outlook with LT still negative, the gold miners (HUI) bearish sentiment briefly rose to the INT BUY level early in the week, but the ST 50% retracement rally sent sentiment back to the SELL area.

II. Dumb Money/Smart Money Indicators

The option-based Dumb Money/Smart Money Indicator as short/INT term (outlook 2 to 4 mns/weeks) rose only moderately from the SELL levels of Jan 2020 and has now declined to the 1.1-1.15 levels showing a strong warning.

And the sister options Hedge Ratio sentiment is similar with a weaker warning from the 1.15-1.2 levels.

No SPX or NDX ETF charts this week.

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 negative reinforcement when put support is broken or call resistance is exceeded. Due to extreme volatility, this weeks outlook is EOM, Mar 31 and NFPR, Apr 3. Also, This week includes a look at the TLT for Apr exp.

With Fri close at SPX 2541, options OI for Tue EOM shows room for volatility between strong put support at SPX 2300 and 2570 with call resistance moderate at 2530 and 2550 and strong at 2590.  Whipsaw between 2400 and 2600 is possible.

NFPR Fri has Smaller OI with most positions hedged (calls and puts offset) down to put support at SPX 2350.  A drop below 2400 is possible.

Using the GDX as a gold miner proxy closing at 23.47, last week showed put support at 23 and 25-7 with call resistance at 24 and 28.  GDX rose from 21 to 27 before falling to support.
 
Currently the TLT is 167.7 with the TNX at 0.75%.  There is very strong call resistance at 175 with very little unhedged put support.  Prices could fall to 150, but given economic uncertainty prices should remain in the 160s.

IV. Technical / Other

This is an updated weekly chart from 2008 which shows a five wave decline (EW) from the Oct 2007 ATH to the Mar 2008 lows.  Note the extremely sharp w4 of A down late Jan which was a 38% retrace of w1-3 similar to last weeks 3 day retrace rally of 37%.  What followed was a w5 retest/lower low.  Using a similar timeline with 1+ day in 2020 to 1 week in 2008 implies a decline into mid Apr before a larger 50% retrace rally, note timing is likely to vary going forward.  A decline to about 2100 would imply a retrace rally of A to about SPX 2750.

Although I disagreed with Avi Gilbert prior to the Feb top when his primary count was for a continued rally into the Fall to SPX 3700 because sentiment strongly implied a 30-40% decline was more likely.  His latest public outlook shows a similar price pattern with a w4 top between 2600 and 2725 with an expected w5 low between 2060 and 2190 (SPX 60 min).

Conclusions.  A lower low for the SPX in the 2050-2190 area may be the best oppty for a swing trade since the current decline began in Feb.  With many of the declines and rallies since Feb beginning with large gaps of 50% or more of the entire move, it was impossible to provide any meaningful outlook with weekend posts, and to tell the truth I spend most of my free time grocery shopping now that it takes 2-3 trips to find everything you are looking for.  The next two weeks may be very important in determining the nature of the current selloff, since a 5 wave decline in EW implies the next opposite move is corrective and probably means we are in the beginning of a larger bear market.

Weekly Trade Alert.  A lower low by mid-Apr is likely when firms start releasing their forward earning guidance that are likely to be awful.  A reprieve with summer weather may usher in a "summer rally" and a 50% rally of the entire decline similar to that seen in Apr-May of 2008, especially if Covid-19 takes a breather.  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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The Curse of Jekyll Island

A series of financial panics in the US starting in the late 1800s, including the 1893 and 1896 depressions, the 1901 railroad share panic and the panic of 1907 that resulted in a 50% decline in the NYSE, contributed to the gathering of banking leaders on Jekyll Island the Fall of 1910.  The result was establishment of a national bank of last resort to centralize the US flow of banking reserves and it became known as the Federal Reserve System.  Things to seemed to work well for 19 years increasing complacency and public confidence in the stock markets until the blowoff in the fall of 1929 led to the markets crash and the depression of the 1930's.

The main reason for the history lesson is that even before the advent of Covid-19, markets were showing a similar pattern of behavior, only needing a spark to start a blazing fire.  19 years after the the 1981 recession we had the tech bubble and crash, and 19 years after 9/11 2001 we had the Trump everything bubble with overwhelming investor complacency based on the belief that the Fed can prevent or fix all catastrophes, but what if they can not?

Speaking of complacency, you would think that following the worse ST decline in stocks, including 1929, that investors would be lining up around the block to sell their stocks the same way they are lining up to buy bread and toilet paper because of Covid-19, but last week actually saw a reduction in fear as DM seems to be convinced that BTFD is now the way to go after panicking in Feb 2018 and Dec 2018.


I. Sentiment Indicators

The overall Indicator Scoreboard (INT term, outlook two to four months) bearish sentiment has now reached the level seen at the Oct 2018 lows that may support a trading range before lower lows/retest.

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 remains significantly below either the Feb or Oct 2018 lows, indicating more volatility ahead.

Taking a closer look at the VXX $ volume indicates that most of the complacency in the ST indicator is the lack of belief in higher volatility and may result in a VIX of 100 or more before a final bottom.

Bonds (TNX).  Interest rates are starting to show extreme volatility.  As measured by the TLT that reached a high of 180 this week from a 120 low a year ago, prices dropped as low as 144 during the week before closing at 159.

For the INT outlook with LT still negative, the gold miners (HUI) bearish sentiment rose from the extreme lows two weeks ago to about half way to neutral with prices closing near the lows for the week.

II. Dumb Money/Smart Money Indicators

The option-based Dumb Money/Smart Money Indicator as short/INT term (outlook 2 to 4 mns/weeks) turned lower for the week, dropping below neutral as the DM seems to be expecting a near-term bottom (SPX 2250-2350).

And the sister options Hedge Ratio sentiment is similar, again a sign of complacency especially given the selloff of 30% over the last few weeks.

This week I want to continue to follow the INT term SPX Long Term/Short Term ETFs (outlook two to four wks/mns) bearish sentiment (2x DM/3x SM) saw a sharp drop as the DM (2X) is now buying (BTFD) while SM has similar selling.  The result was a sharp drop in sentiment, and is likel;y warning of lower prices ahead.  NDX SM/DM shows similar sentiment.

III. Options Open Interest

With recent volatility extremes, SPX charts are of little use.

Using the GDX as a gold miner proxy closing at 20.55, two weeks ago the charts showed little put support below 25, and once support was broken a free fall occurred down to as low as 16.2 on Mon before rebounding.  Looking at the Apr 17 exp, optn positions are very light compared to the previous 50-60K calls in the 35 range and negative delta hedging is likely.  Only relevant support/resistance areas are 17 below and 23-24 above.

Currently the TLT is 159 with the TNX at 0.9%.  After dropping to put support at 145, TLT rallied sharply thru weak overhead resistance.

IV. Technical / Other

Last week was weaker than expected and the 38% retrace may have been the one day rally in ES from Sun night lows of 2400 to Mon 2700 high.  To get an idea of how oversold the SPX is, I want to review the NYSE McClellan Summation Index from 2005.  We are now so oversold at -1183 that it is considered a crash warning (<-1000).  The last two times this occurred was the Dec 2018 lows and July 2008.  Sentiment was showing a strong BUY at the Dec lows, but not today so I am going to focus on July 2008.

What did the market do in July 2008?  The SPX consolidated for two months to work off bearish sentiment and allow DM to BTFD before an even larger decline into Dec.  This is consistent with investors outlook today where a "wait and see" attitude is taken to see if Covid-19 gets better (as China is already claiming) and if the extraordinary stimulus works its magic.  But current sentiment is pointing to the less favorable outcome.

Conclusions.  There are some indications that the first downward thrust may be nearing completion (aka Oct 2018), while DM BTFD indications are pointing to a somewhat weak rebound similar to Jul-Aug 2008 of a 10% range of maybe SPX 2250-2500.  If notable economic improvement is not seen by the end of the 2nd Qtr, a big slide may be seen into the election.

Weekly Trade Alert.  None.  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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Chaos and Dislocations

We are likely in the midst of a once in a lifetime event in financial markets.  In tracking many who called a top in Jan and made money in the early stages of the decline, they have been calling for a bottom since SPX 2750 and have lost even more trying to catch falling knives.  Most EW followers fit this category as seen by Trader Joe where a 62% has been expected all week to SPX 3200 within a couple of weeks to days.

Personally, I prefer to adhere to Warren Buffets Rule #1 which is don't lose money since a 50% lose requires a 100% gain to break even.  Most of the "bear market rallies" have only lasted 1 day and sometimes as little as 1 hour, so if you are a very nimble day trader you may have done OK, but I don't expect a tradeable rally until the Dec 2018 lows are tested at SPX 2350.

Speaking of dislocations, over the last 6 trading days the gold miners HUI index has fallen over 30% from 245 to 164 with the two biggest gold buyers on strike, first China selling to prop up their economy and now Russia not able to buy with an oil price war with the Saudi's.  Specifically, on Thur Barrick Gold opened down 20% as sellers overwhelmed buyers, and Fri aft a massive sell order for GDX ETF drove prices down 25% during the day to 16.5 before a close at 19.  ZH has been discussing the possibility of order imbalances for ETFs for months, and we are likely to see similar behavior for the broad mark avg ETFs such as QQQ and SPY before the crisis is over.

Although there are still some similarities to the Oct-Dec 2018 analog, this week I want to present a much more  bearish analog using the 2008 financial crisis in the Tech/Other section that was presented in last week's Updates.  In 2008, the first leg down was SPX -18% related to the Bear Stearns crisis thru Jan.  With the first leg down in 2020 of 27% so far this could mean an ultimate low near SPX 1000, whew!  Also a real-time indicator based on the TRIN is used for comparison.

I. Sentiment Indicators

The overall Indicator Scoreboard (INT term, outlook two to four months) bearish sentiment has risen sharply, now approaching the level of mid-Oct 2018, but this may be misleading due to the included 2X ETF sentiment (more in DM/SM section).

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 remains rather mild compared to Feb and Dec 2018.  Way to much BTFD and belief in Fed interventions and bailouts.  Last week I heard one trader say that the motto on the US$ should be changed from "In God we trust" to "In the Fed we trust", imagine what happens if faith is lost in FED interventions.  Much more volatility ahead.

Bonds (TNX).  Bond sentiment remain pinned to the lows, while interest rates remain low.  I wonder what would happen to rates if the Fed stopped intervening, possibly something like the gold miners?

This week I wanted to look back to 2015 to see what a sentiment-based (3X EMAs) rally looked like, and compare it to today.  The rally since mid-2018 has been based on talk of negative rates and collapse of the dollar, but looked what happened when rates collapsed - so did the gold miners.   The gold miners (HUI) bearish sentiment remains near historical low levels, indicating that prices could fall much farther and stay down for a considerable period of time.

II. Dumb Money/Smart Money Indicators

The option-based Dumb Money/Smart Money Indicator as short/INT term (outlook 2 to 4 mns/weeks) remains close to neutral, indicating that the Fed induced rally hopes of the BTFDers are likely to be crushed.  Thurs & Fri call options volume on the SPX rose to 1.1 & 1.2M, over three times the daily avg of 350k and higher than any time as far back as I could go (2016).

And the sister options Hedge Ratio sentiment is near neutral, indicating much more volatility ahead.  An interesting article at ZH on hedging by Nomura about CTA hedging with a chart showing hedging at neutral (0) where -1.0 is usually seen at bottoms (now same as early Oct 2018).

This week I wanted to look at the SPX related DM/SM ETF indicator since extreme positions of the 2X ETFs may not be as impt, depending on the relative position to 3X ETFs.  The most favorable outlook is DM (2X) selling and SM (3X) buying, but now both are strong sellers.

The INT term SPX Long Term/Short Term ETFs (outlook two to four wks/mns) bearish sentiment (2x DM/3x SM) has been a decent indicator for longer term outlooks and now shows that selling is stronger for DM with a slight positive bias, similar to Feb of 2018, but still a long way from a BUY.  NDX SM/DM is inconclusive and is excluded.

III. Options Open Interest

With recent volatility extremes, SPX charts are of little use,

Using the GDX as a gold miner proxy closing at 19 from the prior weeks 29.4, last week showed a big increase of call resistance at 32-34 and only small put support at 27 and 25, and when prices fell below 25 the free fall began. 

Currently the TLT is 153.9 with the TNX at 0.95%.  Without Fed intervention, rates should rise with the TLT dropping to at least 147, but with an active Fed it is hard to tell.  If rates do rise in spite of the Fed, it is probably an indication of a bigger problem.

IV. Technical / Other

First a look at the data mining indicator using the Equity P/C as SM compared to the overall CPC Revised.  Although not perfect, higher levels are generally positive (missed Feb highs due to ext shock).  Currently we have seen a rapid decline of about the same length as from the Oct 2018 lows to the Dec 2018 highs as Equity P/C is rising while ETC and SPX P/C are falling.  Is another Dec 2018 style crash possible?

Looking at the 2008 analog, the first thing that jumps out is that the 2020 decline for a single day resembles the weekly decline for 2008 from the Oct 2007 high of SPX 1571 to the Jan low at 1270.  After the low a 38% retrace 2 bars (week to 2020 day) and from 2480 from 3393 that is 2827, possible this week.  Next came a lower retest that may be to Mar EOM and with the O/N ES low of 2400 Thur that could be 2350 in 2020.  A somewhat larger retrace of 50% followed, now equal to about 2870.

2008 weekly.

2020 daily.

The TRIN or arms index is a complex ratio of advancing & declining issues and volume and is generally considered a FEAR indicator.  Looking at the TRIN with 10 and 20 SMAs, which was selected based on similarity to some of my indicators, a rise to 1.25 is generally bullish (high fear) and a decline below 0.9 is bearish.  Unfortunately the low last week left the TRIN SMAs near 1.0, well short of a bullish reading, so more volatility and/or lower prices are likely near term.  This indicator is also updated intra-day so may be useful for spotting reversals or placing EOD trades.

2008.

2020.

Conclusions.  One partial solution to the Covid-19 crisis is under development by Darpa which boosts the immune system to lessen the effect of the virus,  This is still expected to take a couple of months to develop, but would probably alleviate a lot of fear for investors.  The timing also lines up well with the 2020/2008 day/week analog.

The primary reason I mentioned the SPX 1000 level was that I think a break of the 2007 highs at 1571 would cause "true" panic and the expectation of a return to the 2009 lows.  This may seem unrealistic, but the NYSE has already broken it's 2007 high, so who knows.

Otherwise, the general outline is in the Tech/Other Section.

Weekly Trade Alert.  If we do manage a retrace to the SPX 2827 level this week with the TRIN around 1.0, that should provide a shorting oppty for a lower retest to SPX 2350.  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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Article Index 2018 by Topic
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More Volatility Than a Nashville Tornado

Last weeks stock market saw more volatility than any time over the past twenty years other than the depths of the 2008 financial crisis with the VIX exceeding 50 by Friday.  I live just east of Nashville and was out of power for much of the week with tornadoes hitting on three sides, the closest about two miles away.  The result was much like the SPX with a 100 pt rally the last half hour on Tue, a surprise half percent cut by the Fed Wed that gave back the rally, a retest of the Tue highs, then a move to Mon lows by Fri.

Sentiment indicators are still conforming to the Oct 2018 setup, but still seem likely to play out over a longer time frame thru the EOY.  Next week looks like a retest of the SPX 2850s is likely by mid-week with a rally to EOM at SPX 3100+ to follow.  So far the 50% retracement level from the Feb high/lows (3124) has proved elusive with Wed close at 3130 and Tue brief spike to 3139.  Bearish sentiment in the overall and ST composites indicate that the volatility is just beginning, while record sentiment in the INT 2x ETF SPX and NDX show that limited downside (SPX 2600) is likely for the next several months.


I. Sentiment Indicators

The overall Indicator Scoreboard (INT term, outlook two to four months) bearish sentiment has risen sharply since late Feb but has only reached the level of the first down leg in Oct 2018, truly a scary thought given the relative size of the decline.

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 risen only moderately higher than seen in Aug 2019.  Again, an amazing amount of complacency probably due to faith in the Fed's ability to solve all problems by printing money as well as Trump's probable re-election over the less that stellar Dem front runners.

Bonds (TNX).  Somebody has to be wrong as bond investors seem to believe the end of the world is coming and at the current pace rate will reach 0% in two weeks time, while stock sentiment is giving the "all clear" signal.

For the INT outlook with LT still negative, the gold miners (HUI) bearish sentiment remains near record lows as gold stocks are under performing gold which jumped on the surprise rate cuts which resulted in dumping of the dollar.

II. Dumb Money/Smart Money Indicators

The option-based Dumb Money/Smart Money Indicator as short/INT term (outlook 2 to 4 mns/weeks) and the Hedge Ratio below are the two most disconcerting indicators, reaching about the same level as the Sept 2018 pullback before the Oct high.  If we do see a retest of the lows next week near SPX 2850 followed by a rally to the mid 3100s by late Mar, a SELL is likely pointing to the 2600s as the next target.

And the sister options Hedge Ratio sentiment has shown the weakest rise in bearish sentiment, remaining lower than any of the previous rallies over the last two years.  Along with the ST Composite much more volatility is to be expected.

The INT term SPX Long Term (2x/DM) ETFs (outlook two to four weeks) bearish sentiment for the ETFs, in contrast to other indicators, has seen the strongest rise in bearish sentiment.  This may be due to flight to safety by switching to bonds, but since this tends to be longer term compared to options, it is the main reason the correction may stretch out over most of the year with the biggest damage in the Fall.

The INT term NDX Long Term (2x/DM) ETFs (outlook two to four weeks) bearish sentiment has seen an almost identical rise to the SPX ETFs with same conclusions..

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 negative reinforcement when put support is broken or call resistance is exceeded. The SPX hedge spread (SPX puts - ETF calls) moderately positive, indicating that put support should hold. This week I will look out thru Mar 13 with an expanded range from 2800 to 3200. Also, This week includes a look at the GDX for Mar exp.

With Fri close at SPX 2972, options OI for Mon is small with very few calls below 3040 and almost all puts below 3000.  Delta hedging may cause downward pressure, but rallies could be dynamic.  No clear direction.

Wed is pretty much the same.  No clear direction with downside potential to SPX 2800 and upside to 3060.

For Fri, large OI is likely to provide more upside pressure from put support where a hold over SPX 2900 could extend to 3060.

Using the GDX as a gold miner proxy closing at 29.4, even with gold pushing higher to 1680, GDX has been caught between put support at 27 and call resistance at 30.  This month even much stronger call resistance was added at 32 to 34.

 

Currently the TLT is 166.8 with the TNX at 0.71%.


IV. Technical / Other

Just a quick look at two of the data mining indicators.  First, the Crash Indicator that has improved sharply, but also very much like the Oct 2018 period, indicating that a tradeable bottom is near.

Secondly, the SPX hedge spread (SPX puts/ETF calls), indicating that put support is more likely to hold.

Conclusions.  I am sure may were disappointed that I exited early, turning cautiously bearish on Dec 21 with the SPX at 3220 that resulted in missing about 5% of a 40% rally from 2350, but since I caught the exact bottom and foresaw a risk of a 30-40% loss back to 2000-2200s, the risk/reward was not worth it.  With the SPX now at 2970, that still seems like a prudent decision.  Sentiment works much better at timing bottoms than tops.

The next few weeks now show the potential for gaining an additional upside of about SPX 300 pts on a retest of the lows at 2850 to about 3150 to be followed by another possible downdraft of about 500 pts to 2600.

Weekly Trade Alert.  Mon-Wed amy show some weakness after the Thur-Fri selloff of SPX 200 pts.  A retest of the Feb lows at SPX 2855 should be a buying oppty thru EOM Mar, early Apr with a target of 3100-50.  Unless there is a miraculous turnaround of China production, earning guidance for Q2 in Apr is likely to take a strong hit and could take the SPX to 2600s.  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

Article Index 2019 by Topic, completed thru EOY 2020.02.04
Article Index 2018 by Topic
Article Index 2017 by Topic
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Trump's House of Cards

We now know what happens to a stock market that is only propped up by central bank intervention and corporate buybacks.  I have been wondering why the public has been fleeing the stock market for the safety of bonds, and it now looks like it was due to a lack of faith in our nations leaders.  Trickle down economics is dead.

Trumps warning about an epic stock market crash if he is defeated in the 2020 elections may turn out to be a self fulfilling prophecy as it has only added to investors fear and as the stock market crashes, so does his chances of re-election.

Although my LT indicators have been warning about a downturn greater than that of Oct-Dec 2018 for several months, I missed the top since the ST indicators were not clear.  The same thing happened in Oct 2018, but by Dec 2018 the ST indicators did identify the final crash wave.  There are also a lot of similarities both sentiment-wise and price-wise to the Oct 2018 downturn and these are covered in the Tech/Other section.  In my defense, Avi G. as late as Tue called for a bottom at SPX 3150 with projections for 3700 by Fall.

The one "seer" that did correctly ID this downturn was Raj at Time and Cycles, although he had several earlier calls that did not pan out.  Trader Joe has also been warning of a sharp downturn, both ST and LT, as he sees the rally from Mar 2009 as complete as wave 5 of (5) of Cycle V which could mean the beginning of a major bear market.  This supports my outlook for a 30-40% decline.


I. Sentiment Indicators

The overall Indicator Scoreboard (INT term, outlook two to four months) bearish sentiment saw a sharp jump last week but is less than the first leg down in Feb 2018 and about the same as the first leg down in Oct 2018.  Not supportive of a strong bounce at this time.

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 saw an even weaker jump with the LT EMA only at neutral.  Expect more volatility.

Bonds (TNX).  Interest rates continue their downward trend even with sentiment at record lows.  Bonds may continue their strength into the election, but as we saw last week from stocks and gold, reversals can be swift and strong when bearish sentiment is this low.

For the INT outlook with LT still negative, the gold miners (HUI) extreme low bearish sentiment may have caught up with the HUI last week and at one pt was down 10% on Fri alone.  Apparently China has begun liquidating some of its gold hoard to help bail out its faltering economy and with Russia and China CBs the largest buyers of gold over the last several years, weakness may persist until China's economy recovers.

II. Dumb Money/Smart Money Indicators

The option-based Dumb Money/Smart Money Indicator as short/INT term (outlook 2 to 4 mns/weeks) remains surprisingly weak, perhaps due to hopes of Fed intervention, but sentiment remains well below that need to support even a strong bear market rally.

And the sister options Hedge Ratio sentiment is weaker still, so more downside is expected.

Unlike the ST options indicators, the INT term 2x ETF indicators have reached high levels of bearishness, possibly indicating that a ST washout will result in an INT rally.  The INT term SPX Long Term (2x/DM) ETFs (outlook two to four weeks) bearish sentiment has reached levels seen at the Feb and Oct 2018 lows, but does not rule out a retest (Feb-Mar) or washout (Oct-Dec).

The INT term NDX Long Term (2x/DM) ETFs (outlook two to four weeks) bearish sentiment has risen sharply and most resembles that of Oct 2018.

III. Options Open Interest

Due to the extreme trading range of 500 pts last week in the PX, I don't think the options OI will be very useful, so more charts are covered in Tech/Other.

Using the GDX as a gold miner proxy closing at 26.2 dropping sharply for the week from 30.4, whipsawing from above call resistance at 30 to below put support at 27.  Corrected chart here.

Currently the TLT is 155 with the TNX at 1.13%.  TLT is in positive delta hedging with little put support, but also lower call resistance.  May continue higher, but with possible whipsaw potential.

IV. Technical / Other

The regular indicators (WTD & ST Comp) show that bearish sentiment has only reached the level seen on the first leg down in Oct 2018, while SPX and NDX 2x ETFs show stronger bearish sentiment.  Let's look at a couple of other indicators.  First the Crash Indicator.  Here you can see that only a weak SELL was given, about the same as the Sept 2018 top, and now has only risen to the neutral level weaker than the first leg down in Oct 2018.

Next a public indicator I have used several times, the Rydex Bear/Bull ETF ratio.  Here you can see the ST SELL level was weaker than seen in late Dec, but the rise in bearish sentiment has also been weak, again matching the first leg down of the Oct 2018 decline.

Next, I will look at price considerations. First a look at the entire "Trump rally" from 2016.  There have been several attempts to break above the top TL with violent retracements each time.  There seems to be an alternating pattern where several tests of the upper TL as in Apr-Oct 2018 and May-Oct 2019 are followed by breakouts that collapse.  Late 2018 saw a retracement all the way to the lower TL.  This seems likely again with the lower TL near SPX 2600.

Looking back at Oct 2018 the SPX retraced four months of gains in a little over a week.

In 2020, the SPX also retraced four months of gains in a little over a week.

Finally looking more closely at the Oct-Dec decline.  The first leg down was 230 pts from 2940 to 2710, then a 46.5% retrace to 2817 and finally a second leg down of 213 pts or 92.6% of w1 to 2604.  After several weeks of consolidation (flat), the Dec decline started at 2800 and fell 135% of the entire Oct decline from 2940 to 2604.  Applying the same % to the Feb 2020 leg down from 3393 to 2855 gives a retrace to 3105 to fill the gap then a second leg down to 2608.  With SPX and NDX ETF sentiment as strong as it is, a consolidation could last most of the summer, but Fall could see a Dec-like decline with the return of the flu season and covid-19 scare 2 and election uncertainty.  A similar decline to Dec 2018 from 3100 would target 2040s using the 135% extension from 3393 to 2608

Conclusions.  Many still seem to believe in the omnipotence of the worlds CBs, but seem to have forgotten that $600B combined repo bailout mid-Feb with the US and China only elevated markets for a couple of days, this following the fastest expansion of the Fed's balance sheet in history.  As some have pointed out, the problem is not from lack of demand that can be controlled by the Fed, but lack of supply going forward.  I have outlined my prognosis under Tech/Other as the Oct-Dec 2018 analog seems to be the most likely path going forward.  The first level to look for a strong bear market rally is the SPX 2600 level likely to be seen in Apr-May when forward guidance for earnings is likely to shown a 20-30% reduction from 2019.  After that the summer may see a relief rally with flu symptoms in remission, but recent info that show that Covid-19 can lie dormant for weeks if not months almost guarantees round two in the Fall.  If SPX 3100 is not taken out with authority by then, much lower levels may be seen in the Fall.

Weekly Trade Alert.  Don't try to catch a falling knife.  The US seems to just be getting started with reported covid-19 cases with more reported this weekend on the West coast.  There may be a short relief rally to about SPX 3100 with hopes that the Fed can conquer all, but no strong support is likely until 2600.  SPX 3100, if reached, may be another oppty to short with another 500 pt decline possible.  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

Article Index 2019 by Topic, completed thru EOY 2020.02.04
Article Index 2018 by Topic
Article Index 2017 by Topic
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