Last weeks outlook was for strength in stocks and bonds, but weakness in the PMs , mostly due to a "cooling" for the outlook in inflation. The SPX rose 1% on Mon then traded sideways between 4180 and 4220 for most of the week, closing at 4204. Int rates fell thru Wed, then rose at the EOW, while the PMs traded in a narrow range. The spike in bearish sentiment for the SPX has reversed to neutral and is likely to limit any further gains. Similar sentiment in the past was followed by modestly higher prices before a mild pullback of about 2%.
I have noticed a significant change in the options OI for further out time periods. For much of the past year further out time periods showed mostly calls with much of the put OI being added for the very short time, this turned out to be smart money taking the LT call positions. Now I am seeing the exact opposite as the LT options OI is mostly puts and this is showing up as a sharp increase in the $SKEW. See Conclusion for chart and discussion.
An additional change to the indicators is made this week, replacing the Hedge Ratio with the std var format Hedge Spread since this format shows about a 20-30% increase in the "fit" to future returns as discussed in Tech/Other.
I. Sentiment Indicators
The overall Indicator Scoreboard (INT term, outlook two to four months) bearish sentiment fell sharply last week after the rebound from the early May pullback of 4%, following a pattern similar to Aug-Sept 2018 and Jan-Feb 2020.
The ST Composite as a ST (1-4 weeks) indicator includes the NYSE volume ratio indicator (NYDNV/NYUPV & NYDNV/NYDEC) and the VXX $ Vol/SPX Trend. Weights are 80%/20%. This indicator remains near the neutral area similar to July-Aug 2020 that was followed by a sizable decline.
Bonds (TNX). Bearish sentiment in bonds seems to have leveled off as rates consolidated last week.
For the INT outlook with LT still negative, the gold miners (HUI) bearish sentiment is presented in a new format using the data mining software to add the inverse TNX rate to the ETF ratio. Bearish ETF sentiment continued to fall as prices consolidated below the GDX 40 level indicated by last weeks options OI.
II. Dumb Money/Smart Money Indicators
The option-based Dumb Money/Smart Money Indicator as ST/INT term (outlook 2 to 4 mns/weeks) bearish sentiment fell sharply last week.
And the sister options Hedge Ratio bearish sentiment will be replaced by the std var version this week as the Hedge Spread. Using the same underlying components, std var version increases the fit to future returns (shown in Tech/Other) by 20-30% and is an excellent ST/INT indicator (1-3 mns). Here, the sharp spike in hedging mid-May provided the impetus for a strong rebound, but is now approaching neutral. Similarity to early Mar may mean another ST pullback of about 2% shortly.
III. Options Open Interest
Using Thur closing OI, remember that further out time frames are more likely to change over time, and that closing prices are more likely to be effected. Delta hedging may occur as reinforcement, negative when put support is broken or positive when call resistance is exceeded. This week I will look out thru June 4.
With Fri close at SPX 4204, options OI for Tue is small with increasing call resistance up to SPX 4255, but put support is minor down to 4150. Could remain range bound 4185-4215.
Wed has somewhat larger OI where SPX has stronger near term support and little resisance up to 4225 that may allow prices to drift higher.
For Fri there is much stronger call resistance at SPX 4200 and above that could reverse any gains seen early in the week. There is no strong put support until 4150.
IV. Technical / Other
The previous Hedge Ratio is shown below with components.
The new Hedge Spread is shown below with components. The most obvious difference is a less bearish outlook than the Hedge Ratio for May which proved to be correct.
Looking at the future returns table, the Hedge Spread has a stronger correlation, particularly in the 1-3 month time period (20-60 days) in the order of 12-20%.
Conclusions. Overall bearish sentiment has reversed much of the gains seen during the mid-May pullback. The strongest support for the rally into month end was from hedging (Hedge Spread) and that now has fallen to neutral.
From a longer term perspective and not having any better place to discuss it, the $SKEW 5 day EMA has now risen to 150 with the last occurrence Aug-Sept 2018 which fits my expectations of a similar INT decline as Oct-Dec 2018 in the not too distant future. There have been several instances of SPX tops near $SKEW 145 before the Jan 2018 and Mar 2020 INT tops as well as the ST Oct 2020 and Jan 2021 tops.
Weekly Trade Alert. SPX options OI, Hedge Spread and ST Composite are indicating a possible ST top next week near SPX 4225 before a 2% decline to about 4150. Updates @mrktsignals.
Investment Diary, Indicator Primer,
update 2020.02.07 Data Mining Indicators,
update 2019.04.27 Stock Buybacks,
update 2018.03.28 Dumb Money/Smart Money Indicators
Article Index 2019 by Topic, completed thru EOY 2020.02.04
Article Index 2018 by Topic
Article Index 2017 by Topic
Article Index 2016 by Topic
Long term forecasts
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