"The SPY's trading pattern is similar to August-September action that preceded a double-digit percentage rally into November."
-- Monday Morning Outlook, February 16, 2015
Loyal readers of
Monday Morning Outlook are strongly aware that we have been pointing out for weeks that the price action in the SPDR S&P 500 ETF Trust (SPY - 200.43) during the January and February period mirrored that of August and September 2015. As I observed in mid-February, the rally off the September bottom produced a double-digit gain over a multi-week period. With that said, I continue to be fascinated, per the observation via Twitter late last week, that the SPY's rally from last month's low is well on pace to produce another double-digit percentage gain from its low, as the observed pattern continues to play out.
In fact, in both cases, the SPY's 80-day moving average was challenged 13 days into each rally and did not act as resistance. This is a trendline that has had more historical significance over the years that one might think. In recent months, it acted as resistance at the August 2015 top -- and provided short-term support in November and December 2015, following a bullish crossover in mid-October. A gap below this moving average signaled two weeks of pain for equity investors in early January. The takeaway is that bulls are betting on this pattern to continue to play out during the next few weeks, following SPY's move above this trendline and the round $200 level late last week.
With the SPY approaching an overbought condition, according to its 14-day Relative Strength Index (RSI), simultaneous with potential round-number resistance at the $200 mark -- and
other equity benchmarks approaching potential round-number levels, too -- a hesitation or short-term pullback to the 80-day moving average around $198 is a potential scenario in the immediate days ahead. In the absence of a strong negative catalyst that generates a pullback to this level, a decline to this area should be bought.
"…short-term market sentiment is suggesting an extreme in fear that has marked bottoms in the past, leaving bears vulnerable to sharp, short-covering rallies. For example, the 10-day, all-equity, buy-to-open put/call volume ratio reached a multi-year high late last week, nearing the levels that marked the bottom of the bear market during the financial crisis and surpassing the level reached last fall."
-- Monday Morning Outlook, February 16, 2016
If you are a bull, you like what you are seeing in several sentiment-based charts. First, the roll-over from the 10-day, equity-only, buy-to-open put/call volume ratio. As we mentioned last month, this ratio was up at levels last seen at the bear market trough in 2009. At the time, the technical backdrop was in question, but we still felt bears were vulnerable to sharp, short-term, short-covering rallies, as we might be experiencing now. In the absence of a catalyst that knocks the rally off course, the ratio indicates there is still a lot of potential unwinding of pessimism that could still occur, driving equities higher.
Another sentiment note of interest is from the weekly Investors Intelligence (II) poll, which measures sentiment among newsletter advisors on a weekly basis. The bullish percentage in the survey minus the bearish percentage just moved back above zero.
Investors Intelligence survey -- There are more bulls than bears again, which is a bullish signal
Our Senior Quantitative Analyst Rocky White produced a study a few weeks ago, discussing
the historical implications for the market if the number of II bulls exceeds bears, following the rare instances that bears are more plentiful than bulls in this survey.
The SPY advance from the September bottom was 12.1%. Going into this week's trading, the SPY is 9.6% above its February low. There was more pessimism at the time of the February trough relative to the September bottom, suggesting an even bigger rebound is possible.
But, short-term resistance levels do linger just above, including whether or not the SPY can sustain the move above the round $200 level in the immediate days ahead. For example, $201.19 is a round 10% area above this year's closing low, and could prove pivotal. Moreover, $203.87 could be a challenge, as it's the site of the SPY's 2015 close.
Finally, we are in that two-week window within standard option expiration -- Friday, March 18 -- in which the option open interest on equity and index options may influence the market's movements and exaggerate reactions to macro news more than normal. We mention this with
the European Central Bank (ECB) meeting scheduled for later this week and the Federal Open Market Committee (FOMC) and Bank of Japan (BOJ) meetings scheduled for next week.
In past months, the SPY was near heavy put open interest, which we argued could act as magnets during sell-offs, and indeed occurred around January and February expirations. Now, we are trading near heavy call open interest levels -- although the bigger call strikes aren't as big as the heavier put strikes, suggesting less influence. Nonetheless, if the market experiences sizable moves in the coming weeks, the 195 put strike and 205 call strike could act as support or resistance areas.
The 205 strike could be a magnet as those who sold 205-strike calls are forced to buy more and more S&P futures if this strike comes into play. On the downside, the 195 put strike could come into play if negative news hits the market -- and long positions related to heavy open interest at call strikes around current levels are decreased. If long positions are unwound, the put-heavy 195 strike
could become a magnet and be in play by expiration day.
SPY Open Interest Configuration for Options Expiring March 11 and March 18
The bottom line is, with three major central bank meetings on the calendar in the next two weeks and standard March options expiration looming in that same window of time, strong directional moves are more apt to occur beginning later in the week, even after the strong directional move we have experienced since mid-February.
Plus, a pattern that looks like August-October amid an unwinding of a multi-year extreme in negative sentiment favors the bulls looking out over the next few weeks. But in the immediate term, multiple indexes trading around potential round-number resistance could spur some profit taking ahead of central bank meetings this week and next.
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