We strive to bring you our thoughts each day, presented consistently in a way that assists your trading, short, medium and long term. One of these approaches utilizes institutional sentiment, which we know drives the market. What “they” are doing matters, as we watch market internals and price action.
Summary
The Yield Spread and Institutional Sentiment
The BofA Merrill Lynch Option-Adjusted Spreads are the calculated spreads between a computed index of all bonds in a given rating category, typically below investment grade/junk (risky) and a spot Treasury curve (safe).
The yield spread indicates the likelihood of a recession or recovery one year forward. When the yield spread is trending lower, this indicates optimism in the bond market. If the bond market is 2.5 times the size of the equities market, it pays to note when this trend is bullish (currently) or bearish as it was in November through January.
Given the institutional outlook and the yield curve we can project that the markets are heading higher, albeit not in a straight line. As we know, pessimism leads to optimism, which leads to euphoria. With mom and pop still on the sidelines, we have yet to witness euphoric buying. That said, we are currently watching the put call ratio, which tagged levels not seen in over a year. The close yesterday was below that of April and July, suggesting we could see a pivot high in the indices, sooner rather than later.
With the FED confirming a hike in interest rates today (2PM), my feeling is we should be prepared for a small pullback. If we do not inflect at highs, we will reassess later this evening.
The SPY 60 Minute Chart
We see price above the 9/20ema on this time frame, therefore we are still bullish until price tells us otherwise. A drop below would start the process of a short term bias shift. Fibonacci levels are below. Use these levels, with blocks that have traded recently for support and resistance. Consult the block trade channel in the Trading Room. 226.50 to 226.20 is the largest zone near SPY gap yesterday. This also aligns with a 23.6 Fibonacci level from the December 2nd lows.
Note RSI is embedded, Stochastic is trending lower and MACD showing a slight bearish divergence. TICK cumulative shows institutions were still net buyers into the close.
COMPQ has been strong, with tech leaders appreciating handsomely over this week. Oscillators are pointing lower on this time frame. Apple, Amazon, Facebook, Netflix and Google, among others will have an affect on COMPQ. Watch them closely. Fibonacci levels and blocks are in focus as targets for today into Friday.
IWM is trading below its 9/20ema. Since the Russell 2000 is viewed as the “risk on” index, we will watch for further depreciation short term. If selling becomes persistent we would position for a more significant pullback. For now we are anticipating the previous breakout level to hold as support, 133.00 to 134.50 (+/-) the 23.6 Fibonacci level.
As with any rally, we cannot expect price action to continue without a respite. Since we have no crystal ball view of market direction, we can only monitor the charts referenced above, to assist in planning for short term directional changes.
Long term, we believe we are in for a wonderful holiday rally. Sentiment suggests as much. Institutions are buying.
Happy Wednesday
Vinny
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