Total Put/Call Ratio Sell Warning Suggests Negative Returns Ahead

For longer term followers of the blog, you may recall my repeated notes on times when the total put/call ratio drop relative to its intermediate range.  The following chart shows the way I have tracked it for years.

Click on Chart to Enlarge

The 5 day average of the total put/call recently dropped to its lower 1 standard deviation band.  This indicates relative complacency compared to the recent range.

Now there is a seasonal tendency to lower put/call reading in December, though they still may be significant.  But today I looked at past instances where the reading came in the doldrums of the year - in this case either July or August.

It is well known that there is a seasonal tendency for increased volatility in the Sept/October time frame, and that many major sell offs historically have often been in Sept and October.  So I wondered if the current signal would reflect a tendency for subsequent market sell offs.

So I looked back through my data going back to 1995 and looked at all similar set-ups on the total put/call in July or August.  I removed any clustered signals after the first in a series so that all readings are "unique".

The short of it is that past signal did indeed lead to average poor performance and negative skews to forward price changes in SPY.

From the 1 month to 5 month forward looking time frames the average MAX loss was greater than 3 times the average MAX gain.

My options trading model shows the following data, suggesting a 200% limit order on an ATM put with 2 months until expiration would be a great option strategy.  And even better according to the past instances (only 9 instances), would be to buy an ATM put option with 2 weeks until expiration and hold until expiration.  In this case that would be basically August standard expiration.  Personally I would rather buy time into September because that is historically the most negative month for stocks.

Click on Table to Enlarge

Some additional data on the equity/ETF side of things.......

At the 1 month forward mark, 7 out of the 9 instances had maximum declines of 2.6% or more.

And at the 4 months forward mark, 8 out of 9 instances had maximum declines of 3% or more.

And using my trading strategy of an OCO limit sell order and stop loss order on an inverse ETF, the MAX return scenario would be to set an 11.25% limit gain per the SPY etf and an 11.25% stop loss.  Then exit at 4 months if neither order is filled.  That would be approximately November 24th.

Now the stats on the past instances justify using leverage of 3x or more on this move, in which case you would take the percentage numbers above for SPY, and then triple them for orders if using an ETF like SPXU to try to capture the anticipated move.

Let me know if there are questions or clarification needed here.  Volatility makes its seasonal lows around this time of year, so understand that it pays to position yourself for the times of year when the odds of a significant move are higher.  It may take a little time to unfold, but feel the indications are clear that downside risk is higher than upside potential here.

Pete

Further Signs of Intermediate Term Topping and Probable Downside to Come For Stocks 5-25-17

Click on Table to Enlarge

Last week I showed stats from past instances where there was a 1.5% decline in SPY the day after a 52 week high.  And the average displayed a notable bearish skew for the next couple months, though about half of the instances rebounded back to near the highs after that initial big sell off day.

This rebound scenario is what we have seen in the current market.

I have run a couple scans over the last few days, and it still appears that similar past markets have had a notable bearish skew looking forward a few months,

The chart above shows the forward MAX gains and losses from a scan including bearish divergences in VIX, total put/call ratio, volume, MACD and stochastics on daily and weekly time frames.  So basically just an across the board price and real money sentiment bearish divergence.  And the bearish skew is notable for the first couple months.

Another scan criteria looked at unique instances when there was both daily and weekly bearish divergence in the MACD when the VIX closed below 11.  The results were similarly bearish.

There are good trading opportunities here based upon my method and the data at this point.
Based upon past SPY data, shorting here and setting a limit order to cover at 5.75% gain while also setting a 5.75% stop loss would provide a roughly 2.25% expected value over the next month.  The trade would be exited after 21 trading days if neither stop nor limit was filled.

Any where in the 4% to 6% paired limit and stop orders basis SPY would be very reasonable plays.  And 4% the ratio of the risk to the expected value is the lowest, and after that there may be higher expected values with wider orders, but the risk rises more than the expected value increase does.

I am electing to purchase SPXU here and use 12% limit and stop orders.  The simplest way to do this is with an OCO, one cancels the other, order where one order is a sell stop and the other order is a sell limit.  Then set a time reminder to exit on June 26th if neither order is filled already.

For the options side of things, a 130% limit gain order from the closing price yesterday on a 241 strike June expiration put option, would provide a very positive expected value with about a 66% win rate based on past similar instances and the calculation of my algorithm.  For this trade, there is no stop on the option.  It could expire worthless, but a limit gain GTC is set immediately after entry.

Pete

Short Term Market Action Suggests to Me That Stocks Will Fall Starting Late This Week or Next

Click on Chart to Enlarge

This chart is an hourly chart of SPY.  What we are seeing here is an obvious overlapping type short term action, not a directional upward movement that would signify major buying interest.

Notice that the overlap has occurred underneath 2 trend lines, one from the consolidation beginning in September.  The other origin is not shown, but is a trend line from Feb 2016 lows to the June 2016 lows.

Also interesting is that the 214.50 level is level that SPY was trading at just prior to the last FOMC meeting announcement.  It had been support for the triangular consolidation in September.  Now prices have met some mild selling each of the last 4 times price attempted to reach that level.

The next FOMC meeting is next week.  And so we could possibly see some market movements with higher volatility next week.

Currently I am positioned in 3x leverage (SPXU) at ~24.00.  Also, the banking sector stocks and brokerages have hit the extreme end of their harmonic reversal zones and it looks like today could have been the final day up in that major rally in big banks.

Based on what I have posted here in recent weeks, as well as the larger prices pattern and cycles, it seems likely to me that a substantial move down is imminent.

But we shall see.

Pete

SPXU and SPY Puts Both Achieved Profit Targets

As of today, the 100% gain limit order to exit the SPY May 20th 209 strike puts bought on 4-20-16 has been filled.  

So the SPXU and SPY trades entered 4-20-16 are closed for tracking purposes.

SPY touched its lower daily bollinger band today.  And price has reacted by rally off the lows.  While price certainly could continue the bullish run and move to new highs, the rally may be a technical "blip" based upon the factors mentioned in the last post.  The overall level of panic or real money negative sentiment (by the measures I use) was very modest on this decline.  Many corrections achieve a higher level of selling pressure than this before bottoming.

In any case, currently I see no strong edge in the market for initiating new positions.  So for trading purposes, I suggest staying on the sideline, until a very profitable back tested scenario arises.

Pete

Trade Stats for Bearish Set Up in SPY 4-19-16

 Click on Stats to Enlarge

So based upon the trade set up posted earlier for SPY, the maximum expected value for the equity side of this set-up based upon my simple trade method, would be to enter short SPY and set a limit order of 2.5% gain on the short position and a corresponding 2.5% stop loss on the position.  Then IF the orders are not filled in 1 month, the trade is exited at the market (after 21 full trading days).  The expected value of the trade is 1.48% on SPY, so this suggests a ~4% expected value over the next 1 month using the 3x leveraged bear ETF.

Seeing as the past stats on that system are so positive, the stats justify use of 3x leveraged funds with 100% allocation of the account.  That would still be well below 1/2 Kelly Bet on the risk.

Now SPXU is a 3x inverse fund to SPY, but understand that it won't trade perfectly in sync.  So I always suggest using SPY as instrument to track and slightly tweak the orders on the leveraged ETF to create the suggested risk reward profile.

Click on Stats to Enlarge

The MAX reward play on the options is as suggested in the last post.  Buy the May standard expiration at the money put option (209 strike) and set a limit order of 100% to exit.

The Kelly Bet % on the 15 historical instances is 33%.  So a 1/2 Kelly Bet of about 16% would be sensible for the money set aside for options trading.


Let me know if there are specific questions of how to apply this analysis to your situation.


Pete

New SPXU Trade

I don't have time for details on this one. A bearish engulfing formed yesterday in the major indexes.

New SPXU Trade:

Place a "day only" limit order of 44.50 to buy SPXU today. Place a GTC sell stop at 42.50 immediately after entry if filled. Please refer to the money management section if there is any question of how many shares to buy for your account size, etc.

New SPXU Trade

Click on Chart to Enlarge

The chart above shows SPXU over the last 8 days or so. SPXU is a newer 3x ETF mirroring the S&P 500. It has caught on in popularity and has good volume. For any potential 3x trades I will probably use this from now on to try to avoid some of the problems with my analysis being on the S&P 500, but trading BGZ which is based on the Russell 2000. The slight differences in performance make placement of stops, etc more tricky.

The chart is showing a possible head and shoulders bottom developing (a H&S top in the S&P 500) on a short term basis. Now it would be safest to wait for the neck line to be exceeded, but that will significantly diminish the reward to risk ratio. So I am going to post a trade on it with an entry at current levels. There are mre than enough factors to justify this in my opinion. So ideally the market will fall over the next couple days and we can move a stop to breakeven quickly with possibly a MAJOR market move on the horizon. If not we will probably be stopped out. So make sure that your risk is sensible. If you have any questions use this post to decide how much to risk on the trade. Use the "Trades with a Stop Loss" section.


New SPXU trade:

Buy SPXU today with a market order. Place a GTC sell stop at 52.15 immediately after entry. Blog entry price is the current price of 53.40.


For any smaller accounts that would be following the cumulative method of money management and still holding SDS, just continue to hold and forget this trade. I will either post an exit on that at the next oversold signal, or start to trail a stop if the market appears to be making a major top.