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posted on 16 May 2017

SP500 Going Nowhere, But Bullish Sentiment Jumps

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Macro Tides Technical Review 15 May 2017

When the S&P rallies it is natural for bullish sentiment to increase, just as it is normal for sentiment to become more bearish as the S&P declines. It is noteworthy when sentiment becomes more bearish even as the S&P trends sideways after a decline, or becomes more optimistic as the S&P fails to rally further.


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Since April 25, the S&P has been trading in a 1% range for 15 consecutive sessions. On Friday May 5, the S&P closed at 2399.29, and rallied a whopping 0.34 by the close on May 10 when the S&P finished at 2399.63. While the S&P was effectively doing nothing, the Call/Put ratio rose from 1.153 on May 5 (115 calls for every 100 puts), to 1.49 on May 10. This increased the 10-day average from 1.13 on May 4 to 1.247 on May 10, the highest since December 9, when the S&P closed at 2360. In the following 3 weeks, the S&P made no progress and closed on December 30 at 2339.

The important difference between last week’s spike higher and in December is that the December increase in the Call/Put ratio was in response to a 3% rally in the S&P from 2191 on December 2 to 2360 on December 9. The blue arrows highlight the increase in the Call/Put ratio and S&P for each period.

Click on any chart for large image.

The short term increase in the Call/Put ratio is compatible with the intermediate message provided by the weekly Investor Intelligence (II) survey. After the S&P made its initial high on March 1 at 2401, the net plurality of Bulls minus Bears in the II survey was 46.7%. This extreme is comparable to the reading on February 27, 2015 when the plurality of bulls was 45.4%. Readings above 40% are unusual and only appear after a big move up in the S&P.

In 2015, the S&P intra-day high on February 27 was 2120. In early May, the intra-day high in the S&P was 2126, but the plurality had narrowed to 43.5%. The S&P traded sideways for another 2 months before experiencing a sharp decline in August.

As the S&P made a marginal new high of 2404 on May 9 compared to 2401 on March 1, the plurality of bulls narrowed to 41.1%. Still high, but the lesser plurality may be a sign that on an intermediate basis bullish sentiment has peaked, which would suggest that the swing in bullish sentiment has run its course as it did in 2015.

Another indication that sentiment is too bullish is reflected by the low level of the Option Premium Ratio (OPR), which has dropped below the red horizontal line for the seventh time since late 2014. (Red arrows on the OPR and S&P) In 5 of the 6 prior instances, the S&P experienced a correction within weeks after the OPR fell below 0.7%. The one exception was in mid February of this year. The S&P has managed to hold above 2350 since the signal was generated, although it did dip to 2330 in mid April.

The message from sentiment indicators is that the S&P is ripe for a pullback. Momentum indicators are displaying less upside momentum, which is another sign that the S&P is to a modest pullback, if a reason to sell materializes. When the S&P made the initial new high on March 1, the 13 day RSI was 82.4, but was only 64.1 after today’s new closing high. Since the momentum peak in on December 9, the number of stocks making a new 52 week high has contracted noticeably, and the number of stocks making a new 52 week low has crept higher. This is another indication that market breadth, as measured by the number of stocks making a new high, has narrowed. It is also unusual that 40 stocks made a new low today with the S&P at a new all-time closing high.

For the first time in quite awhile, the ‘Jive with the Five ’ - Apple, Amazon, Facebook, Google, Microsoft - displayed some relative weakness. Apple, Amazon, and Facebook closed down, while Microsoft was only up 0.07%. Google was the only stock to outperform the Nasdaq 100, closing up 0.52% versus a 0.31% gain for the Nasdaq 100.

As noted last week, when these five stocks exhale, the S&P, Nasdaq 100, Nasdaq Composite, and the overall market, will experience a correction.

While the S&P, Nasdaq 100, and Nasdaq Composite averages made a new high today, the Russell 2000, Midcap, DJIA, and the DJ Transports did not. The underlying technical indicators suggest that a breather could happen soon.

This week is options expiration and it is likely that option writing oriented funds have been selling call options above 2400 on the S&P for weeks, since the S&P has been unable to climb above 2400. If the S&P does mange to close above 2407, call option sellers at the 2410, 2415, and 2420 strikes could be pressured to cover their short call position by either buying the calls back at a loss, or by buying S&P futures to neutralize the short call position. Either action would put upward pressure on the S&P in the next four days. When the S&P closed above 2300 for the first time on February 9, call option sellers were forced to cover, which helped the S&P run to 2350 by options expiration on February 17. Irrespective of sentiment and momentum indicators, the S&P could pop to 2420 merely on short covering before Friday.

Possible Reasons to Sell

As discussed at length in the May issue of Macro Tides,

“Faulty seasonal and inventory swings have lifted estimates for the second quarter GDP to 3.5%, with the Atlanta Fed’s GDP now forecasting growth of 4.2%. These estimates may prove too optimistic. The prospect of fundamental changes to the tax code have raised hope and confidence, but also provided a good reason not to act. There is a good chance that investor’s patience will become impatience, as Congress fumbles and bumbles without giving investors what they have already priced into the market - tax cuts and better economic growth.

The Citigroup Economic Surprise Index has plunged from +58 to -19 over the past eight weeks as a majority of economic reports came in less than estimated. The weakness in the first quarter has carried over into the beginning of the second quarter. The trend of reports coming in less than estimated could continue since auto sales and production are not likely to pick up in the second quarter. The lack of legislative progress on health care and tax reduction for consumers and business is likely to deflate the surge in confidence, and do little to improve consumer spending or business investment in the second quarter. If growth in China slows as I expect, and U.S. GDP growth doesn’t show signs of rebounding to the 3.5% rate economists are forecasting, the potential of a growth scare or disappointment could materialize in coming months."

The Euro: A New High and Then a Reversal

In anticipation of a Macron victory, the Euro rallied on Friday May 5 and overnight on Sunday May 7, after the results were announced. It promptly reversed lower on Monday May 8, putting in an outside day in the process. As long as the Euro does not close above 1.1036, the high after the election, the Euro has made at least a short term high. If it closes below 1.0860, a decline to the lower trend line at 1.0660 seems likely. (Chart below)

In the first week of May 2014, the Euro traded up to 139.93 before reversing lower and recording a 3 week negative key reversal. The peak at 139.93 was just 0.46 above the 50% retracement of the decline from the July 2008 peak at 160.38 and the June 2010 low of 118.77. I thought this technical reversal was significant, since Mario Draghi had said in April 2014 that the strength of the Euro in the prior 18 months had shaved 0.4% off of the EU’s already too low inflation rate of 0.4%. Draghi’s comments suggested he wanted the Euro to decline, since the ECB wasn’t ready to launch their QE program and interest rates were already low. In my May 2014 commentary I recommended shorting the Euro.

“Shorting the Euro has the potential to result in a profitable trade over the next year. From a risk management point of view, a stop on a short trade should be either just above the May 8 high or pennies below it."

In the following 10 months the Euro declined by 24%.

For the first time since May 2014, Large Speculators have a long position in the Euro, after being short for almost 3 straight years. In early May 2014, Large Specs were long +32,551 contracts when the Euro was trading over 1.380 (Green line middle panel). When the Euro bottomed in March 2015 below 1.05 and down 24% from May 2014, Large Specs were short -226,560 contracts. Now these wrong-way Corrigans are long +22,399 contracts. The shift in positioning reflects a more positive attitude toward the Euro, but also sets up the potential for another decline in coming months.

The rally from the low in January 2017 has been choppy, with each up leg overlapping the prior rally’s push higher. This is the signature of a bear market rally. Whether a decline to new lows is beginning now, sooner or later, the Euro is likely to drop below 1.040 in coming months.

As noted last week, the Dollar’s RSI was near 30 on May 8, so a bounce was likely. From a low of 98.59, the Dollar rallied to 99.89, before pulling back today to 98.78. The key is whether the Dollar can exceed the prior high of 101.34, so that the pattern of lower highs and lower lows can be broken. A rally up to the April 10 high near 101.34 is likely. The ‘big’ picture will be clarified if the Dollar is able to close above 102.25. Until it does that, the odds of a new high are low.

Treasury Bond Yields

I turned neutral on the bond market after the short covering I expected drove the yield on the 10-year Treasury bond below 2.2%. I thought the yield on the 10-year could climb to 2.34% - 2.42%. On Thursday it reached 2.423% before falling to 2.322% on Friday. If the yield on the 10-year Treasury is going to fall below the April 18 low of 2.177%, it will be due to surprisingly weak economic data, which I don’t expect, or an event that causes a rush to safety.

Gold and Gold Stocks

The positioning in the futures market still suggests that the path of least resistance for gold, silver, and the gold stocks is down. As noted previously, there is a gap on the gold stock ETF (GDX) at $20.31 from December 28 and a gap from December 23 at $19.43 that I still expect to be filled.

Tactical S&P Sector Rotation Portfolio Model: Relative Strength Ranking

The Sector Relative Strength Ranking is based on weekly data and used in conjunction with the Major Trend Indicator (MTI). As long as the MTI indicates a bull market is in force, the Tactical Sector Rotation program is 100% invested, with 25% in the top four sectors. When a bear market signal is generated, the Tactical Sector Rotation program is either 100% in cash or 100% short the S&P 500. The MTI crossed above its moving average on February 25, 2016 generating a bear market rally buy signal. The MTI confirmed a new bull market on March 30, 2016. The MTI has continued to indicate that a bull market is in force.

The Technology sector (XLK) has been in the Top Four of the Sector Relative Strength Ranking since October 2, 2016, and has been in the number one position for weeks. The Financials (XLF) moved up into the Top 4 on October 28, just before the big run up after the election. The Industrials (XLI) made it into the Top 4 on November 18, 2016. The Russell 2000 entered the Top 4 on August 19, 2016, and remained in the Top 4 until it was replaced by Consumer Discretionary (XLY) on May 5.


The S&P 500 Index is a broad-based measurement of changes in stock market conditions based on the average performance of 500 widely held common stocks. The Russell 2000 Index is a small-cap stock market index of the bottom 2,000 stocks in the Russell 3000 Index. The Nasdaq 100 is composed of the 100 largest, most actively traded U.S. companies listed on the Nasdaq stock exchange. All indices, S&P 500, Russell 2000, and Nasdaq 100, are unmanaged and investors cannot invest directly into an index.

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