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US Index Open Interest Put / Call Ratio Analysis

The following is an excerpt of commentary that originally appeared at Treasure Chests for the benefit of subscribers on Wednesday, January 25, 2017.


 

Not long now. Not long to month end. Not long until we see what the (fake?) January Barometer signal tells us to expect this year. There's only one problem - this signal has been rendered redundant by speculator betting practices and the machines. Case in point - last year. Last year stocks were hammered in January. But how did stocks end the year? Answer: Higher - much higher. They were higher not because of 'fundamentals'. But because the consensus of speculators were (are) still betting on lower prices, where 'bad news', like a Trump victory was supposed to be, triggers another short covering rally. Thing is, the entire 'reflation rally' from 2009 has been one short covering rally after another because of this ruse - conceivably the best 'con job' to date pulled off by status quo price managers.

And as you can see in the attached, true sentiment conditions have changed little post expiry this month, yet again, with continued slow motion erosion in both broad market bears and precious metals bulls alike (but going in different directions.). Certainly if the OEX ratio is any indication of true pro-trading stock jockey sentiment, this group is now broken, which in and of itself should bring trouble for stocks all on its own. These are the guys who control the big positions across the spectrum, which could spark movement in other trend following markets, not the least of which being QQQ put buyers. Therein, if trend following ratios like QQQ join the others, which have already collapsed into downtrends (SPY, IYT, MNX), the machines would have nobody remaining to squeeze, and stocks would go down.

In the meantime however, and despite this developing condition, because of the ratios trending higher (QQQ, DIA, RUT), higher to sideways prices in the broads remains a distinct possibility. The 'trick' will be if a positive January Barometer signal will affect speculator betting practices the same way as last year, where the consensus wagered on lower stock prices for the remainder of the year, which again, is why they finished 2016 higher. This year things should turn out to be the opposite, especially with Trump so loud about how great things will be under his administration. Everyday it's another opportunity to grandstand for The Donald - and eventually this noise, and the gains in stocks, will exhaust the bears (put buyers), bringing all broad market put / call ratios down in the process.

And of course it's just the opposite for precious metals. Speculators remain stubbornly (stupidly?) bullish on these markets (understandably), which should continue to affect North American (Western) paper pricing mechanisms negatively; however, the hope is just as bearish broad market speculators become exhausted for reasons discussed above (continued and intensifying Trump hype), bullish precious metals speculators will do the same. Again, timing this transition is difficult, however as mentioned previously, where if this does not take hold in the first quarter, the second appears probable at the outside. It could be the broads rolling over need to lead in terms of sequencing, however this will not matter in the full measure of time (years).

Talking specifics about the precious metals ratios (see here), when posting them yesterday morning I actually got excited when the big spikes higher in AGQ and GDX came up, however this euphoria was quickly replaced by very mixed feelings in seeing the rest of the ratios (except ABX and GG), which are rising, however it's a start. Again, slowly but surely, the bulls are capitulating, meaning more of the key open interest put / call ratios we follow are rising for real (over unity like GDX), which will turn the machines in the bull's favor. So with any luck a very insistent (on success) Trump will cave paper market speculators heads in to the point they finally capitulate on a lasting basis. Again, the barrage of news should be like a machine gun until the speculators give up.

This was the reason for the S&P 500 (SPX) to go up and test key resistance at 2280 today, where you will remember, if this mark is breached on a closing basis, no discernable resistance is encountered until it gets up into the 2400-plus area (never mind Dow 20k), the bottom side of the long-term channel (see Figure 3). You may have noticed the CBOE Volatility Index (VIX) closed right on important support at 11 yesterday, where any breach now would propel the SPX / VIX Ratio above long-term sinusoidal resistance on a sustained basis (see Figure 1). What does this mean? It means the market is a 'run away', where although further strength will likely prove temporal, still, a move to 2400-plus SPX is definitely possible running into February in blow-off fashion.

For precious metals, this might be enough to kill the rally for a bit. Who needs gold when you have Trump and rising stocks - right? Watch gold at $1180. A breach would not be good.

No 'rope-a-dope' for Trump. He's come out of the corner swinging. The only problem with fighters like this is they burn out fast. That's what happened to him with his Atlantic City Casinos. One casino wasn't enough. Then they all got in trouble because of his huge ego.

Looks like a repeat here style wise, with the big question how long it lasts.

So while there's no telling how long it will take Trump to punch himself out, if the 1928 / 1929 analog is any indication, summer is quite possible.

See you next time.

 

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