Short interest rates mimick three major historical periods
“I continue to see the SPX’s 4,100 mark as a critical level of potential support … it is the level from which a breakout over the upper limit of the channel occurred in April. By the weekend, the lower bound of this channel will be projected to 4,126. The resistance at the beginning of the week is at the upper limit of the channel or in the 4,245 area which happens to be around the intraday highs earlier this month. ”
-Monday morning view, May 24, 2021
As per the chart below, the S&P 500 Index (SPX – 4,204.11) has not tested either the support or resistance levels discussed in last week’s comment. Instead, it continued to trade within the channel lines in place since mid-November after quickly finding support at its rising 50-day moving average and levels six times the closing price earlier in the month after an intraday default for the week below 2009 corresponds to low.
For most of the week, however, the SPX found resistance at the 4,200 century mark, the same area where a bearish “tri-star” Doji pattern formed in late April, strongly indicative of the early May retreat.
As long as the SPX is trading within the mid-November channel that I have been displaying week after week, this is a win for the bulls as the lower and upper bounds of this channel are increasing daily which means support and resistance levels are increasing daily. Even if the SPX breaks below its lower channel limit, another area of impressive support is between 4,050-4,100.
The lower bound of the channel is 4,130 to start the vacation shortened week, which just happens to be around 10% higher than the 2020 close. At the end of the week, 4,145 on the SPX will mark the level of this lower channel line. Meanwhile, a test of the upper channel would cheer the bulls again as it would mark further all-time highs for the SPX.
– Todd Salamone (@toddsalamone) May 25, 2021
The chart I included in my post on Twitter last week is option dates that go back as far as early 2018 or almost 2 1/2 years. It struck me when options speculators recently reached levels of caution or pessimism about the components of the Nasdaq 100 index (NDX – 13,686.51) that was more than a year ago.
In addition, the ratio of put purchases (a bearish speculative bet or a hedge to protect a long position) to call purchases (a bullish speculative bet or a short position hedge) was at the upper limit of this 2-1 / 2- Year period before rolling over.
The rise in this ratio of high levels has historically been bullish, suggesting that this group’s pessimism may have peaked. As a result, the chances that this group could regain leadership after disappointing investors for most of the year have improved.
As shown in the chart below, the index remains technical challenges. The first thing to do is break through the 14,000 year mark that stalled the index in April. Using the buy (to open) put / call volume ratio as an indication of how much money can currently flow into these stocks next to the sideline compared to April, my conclusion is that there is now more money on the verge of the Index to press 14,000 relative by the April period.
If there is a breakout in the near future, I see the 14.175 area as the next resistance level above 14,000 as it is around 10% above the 2020 NDX close.
The short-term sentiment supports higher stock prices, even if the SPX is barely trading below its all-time closing high of 4,232.60. In addition to caution with option buyers, the National Association of Active Investment Managers (NAAIM) stock index was 68 last week, down from 103 in late April and lower than the last quarter’s average of 83.
Additionally, only 36% of respondents to the American Association of Individual Investors (AAII) survey were bullish, the lowest since October 28, 2020 of 35%.
In other words, from observing the actions of option buyers and active investment managers, as well as the opinions of a small group of retail investors, there appears to be significant cash on the sidelines among short-term traders.
Last week I noticed another number. On May 15, the exchange released short interest information and the total short interest on SPX components was 5.2 billion stocks.
According to the table directly below, this is the approximate lows of total short rates in 2007, 2011 and 2012. I don’t need to remind you that 2007 started a bear market during the 2007-2009 financial crisis.
April 2011 and April 2012 were preceded by correction periods for equities, as shown in the graph below the table. If sentiment-based risk currently exists, I think you should have the extremely low short interest of the SPX component on your radar. The other side of this argument, however, is that without a major technical breakdown in the SPX, short interest could fall below the historical lows summarized in the table. In other words, it will likely take some technical deterioration in the market before short positions get bolder and build positions that would create serious headwinds in the months ahead.
Todd Salamone is Schaeffer’s Senior VP of Research