Something for the Bears to Chew on

Last week here the title of my post said it all: The Trend Still Supports Bulls as Does the Open Interest. The roughly month in a half range finally broke to the upside and at the present moment bulls clearly have the edge. With that said, there are some concerns going into next week that could jeopardize that edge and bring some bear relief.

SPX Breadth: I have seized posting or analyzing breadth in my public posts this year (mostly because I too want to enjoy my weekend), but I decided to post them this week to highlight some concerns. Please note these are not timing tools, but more like “hey heads up” tools.

SPX stocks at 20-day highs: Last week 20-day highs spiked to its highest level this year (that is a positive). Unfortunately, there was no follow through yet, which could be concerning. Should SPX make a new high next week bulls want to see 20-day highs make a higher high along with it. Screen Shot 2017-01-28 at 11.19.42 AM

SPX stocks at 20-day lows: Again, this is not a timing mechanism in calling a top (although it is helpful in calling a bottom). Over the last month there has been a build up of mini spikes. Often they present as a  warning before a much larger spike that sends 50% or more of SPX stocks to 20-day lows. Also, with the most recent SPX high (which importantly was a breakout and not just a grind higher), 20-day lows made a higher low.Screen Shot 2017-01-28 at 11.26.05 AM

SPX stocks above their 20-day MA: A lower high despite a higher high in SPX should also raise some eyebrows; especially since SPX  just broke out from well over a month of digestion.Screen Shot 2017-01-28 at 11.28.24 AM

SPX stocks above their 50-day MA: Similar to what was said above, bulls want to see stocks above their 50-day MA start to make a new high and currently it is hanging on the low end of its recent consolidation. Screen Shot 2017-01-28 at 11.30.06 AM

QQQ Breadth: Although there is also some near-term concerns with the breadth of the QQQ sector, there is also some good news to come out of it.

QQQ stocks at 20-day highs: Last week QQQ 20-day highs reached a level not seen since July of last year (a positive). Furthermore, a backtest of 20-day highs crossing over 40 reveals that looking out 10 and 20 trading days, QQQ average returns tend to be neutral to slightly higher. Thus, just based on this study, any near term QQQ weakness should only be temporary.*Screen Shot 2017-01-28 at 11.35.10 AM

QQQ stocks at 52-week highs: On Wednesday QQQ 52-week highs reached its highest level since April of 2015. A look back reveals that on average there is near term weakness, but looking 20-days out returns are neutral to slightly higher. Thus again, based on this study alone near term weakness has good odds of being bought.*Screen Shot 2017-01-28 at 11.37.47 AM

QQQ stocks above their 20-day MA: Finally, one more cause for concern that further validates the potential for near term weakness is the lack of stocks above their 20-day moving average despite a new index high.Screen Shot 2017-01-28 at 11.39.42 AM

It would be remiss of me to not make mention that sector correlations are currently at much lower levels than they have been since 2009. It’s possible that the divergence in the above breadth indicators is not as good of a warning as it was when correlations were higher (i.e. retail can get hammered and create a breadth divergence, but it doesn’t necessarily mean other sectors will hurt). I don’t know if the divergences will matter to the indexes in the same way that they used to and so, all I can do is present you with the information I have for you to make your own judgement call.

*Note that both studies only reveal average to slightly higher returns looking out a few weeks. Thus, buying the dip (or not shorting in the hole) is a better strategy than going long the QQQ’s now.

Short Interest: Todd Salamone, Senior V.P of research at Schaeffer tweeted an updated chart of SPX short interest. Although lack of short interest does not imply that SPX will drop, without shorts the SPX will solely be relying on natural buyers to go higher. As you can see below, short interest can go lower; however, the steep and rather fast drop in short interest bears attention. Couple that with a VIX at levels not seen since 2014 and it may cast some doubt about remaining long this breakout. Perhaps weekend news of DJIA 20K will bring in natural buyers; however, should that be the case they will likely be the mom and pops of the investing world and relaying on them is likely not the best strategy. (Note: blue circles are my own)Screen Shot 2017-01-27 at 5.30.44 PM

SPY Open Interest:

SPY-W: (16 of 20 pins since Wednesday expiration inception).**  Taken at face value this presents more bearish. Should SPY be able to get over the high 230 calls, and those calls remain in the open interest through Wednesday, there is high potential for SPY to fall back to that level or below. One caveat I want to mention is that the majority of those calls were likely put on primarily by one fund. Thus, it’s possible the 230 calls close out before expiration and have no affect on price. Furthermore, it’s possible those calls were sold to open and that fund is expecting price to remain above 230. Due to the fact that we don’t know the meaning of the 230 calls and they likely were not a bunch of bullish retail orders, it’s best to wait for an actual technical signal before assuming that SPY will close below 230 on Wednesday (if it gets above).SPYW

SPY-F: (11 of 15 pins since I began tracking).**  Similar to the above comments, taken at face value this presents more bearish with high strikes at 230 and 230.5. As I said above, there are good odds this was done primarily by one fund and thus, they could close out before Friday or be part of a larger strategy (perhaps one coupled with the high calls from the Wednesday expiration). The takeaway is that it currently suggests that SPY will close below 230 by Friday; however, blindly expecting SPY to drop without some type of technical signal isn’t advised (I am only offering that disclaimer because 1) the trend itself is bullish and 2) because those high calls were very likely not accumulated by many different parties  which is when the call walls work best). Finally, perhaps price never gets over 230 and then looking for a signal is a moot point, but knowing there isn’t much put support (yet) is something to keep in mind – especially for bulls. spyf

In sum: As the SPX and QQQ index make new highs, the recent divergence in breadth is near term cause for concern. Furthermore, SPX short interest and the VIX are at their lowest levels in a year and a year and a half respectively. Finally, both the Wednesday and Friday expirations have many calls at the 230 level. High strike calls are typically seen as resistance; however, that is more-so the case when they are put on by many different investors (institutional and retail alike). When they are put on by one fund (which looks to be the case – but of course I don’t know for certain) the objective is unknown and thus caution is warranted in assuming that SPY will close below those high calls. In the end, the best takeaway I can offer is that the trend is currently bullish (meaning don’t blindly fight it); however, keeping longs tight as well as being more vigilant of a possible bearish signal would be wise.

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** An explanation as to how I define pinning can be found here.

Wednesday 1/25: Failed to pin.Screen Shot 2017-01-27 at 2.35.44 PM

Friday 1/27: Success.Screen Shot 2017-01-27 at 4.01.09 PM