Stagflation Anyone?

Last weeks outlook was for a "Sell in May" fakeout, and that was certainly what happened with a 2%+ drop thru Tue AM after a Mon rally to SPX 4200+ capped the expected early week strength.  Fri jobs report was expected to produce fireworks, but the weaker than expected outcome sent int rates tumbling and that began a short covering rally in Techs and the rest of the market followed as the FOMO crowd chimed in.  Oddly rates ended up slightly for the day.

Bearish sentiment remains near extreme lows indicating that an important top is near, but an increase in options P/C ratios may provide ST support.  A revision to the ST volume indicator presented last week is covered in Tech/Other that shows moderate/strong correlations for up to three weeks.   The indication is that a Jan 2021 type decline is possible into optn exp week where an initial decline was followed by a new high, a consolidation, and then a new low.

Recent economic data showing strengthening inflation, and waning growth may be pointing to a 1970's style stagflation.  This could prove to be an anathema for the Fed who would be loathe to raise rates that could cause an economic downturn, but is then left with limited tools to fight inflation.

I. Sentiment Indicators

The overall Indicator Scoreboard (INT term, outlook two to four months) bearish sentiment remains at extreme lows, warning that an important top is near.

The INT view of the Short Term Indicator (VXX $ volume and Smart Beta P/C [ETF Puts/Equity Calls], outlook two to four months) bearish sentiment has increased modestly with a moderate pickup in volatility increasing VXX $ volume.

CITI Surprise Inflation Index for Apr sows a strong global pickup in inflation, except Canada.  China's catchup is probably due more to unreliable reporting than anything else.

Bonds (TNX).  Bearish sentiment in bonds continues to fall with mixed signs of economic growth.

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.  Falling ETF bearish sentiment has been more than offset but low options call speculation, but that may reverse soon.

II. Dumb Money/Smart Money Indicators

The option-based Dumb Money/Smart Money Indicator as short/INT term (outlook 2 to 4 mns/weeks) bearish sentiment rose slightly for the week and may be forming a rounded bottom similar to Jan-Feb 2020.

And the sister options Hedge Ratio bearish sentiment also rose slightly but not to a level that would support a sustained rally.

Since the ETF ratios have performed as well or better than the individual data mining equivalents, I am using a ratio composite of the INT term SPX LT (2X) and the SPX ST (3X) ETFs (outlook two to four mns) as bearish sentiment.  This is an INT to LT indicator and has continued to work its way lower, now considerably lower than before the Mar 2020 selloff.

The INT term NDX ST Term 3x ETF (outlook two to four mns) bearish sentiment has now completely reversed the Buy from a couple of months ago and is now in a similar position to the Jan 2020 highs.

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 Dec 11. Also, this week includes a look at the GDX for Dec exp. 

With Fri close at SPX 4233, options OI for Mon only small call resistance over 4200 until 4250 with a high P/C that may keep prices elevated.  Strong put support at 4175.

Wed has somewhat smaller OI where SPX could see downward pressure toward 4200 with put support at 4150.

For Fri larger OI also shows call resistance down to 4200 with put support starting at 4175.

For Fri optn exp week SPX options OI is similar to this Fri with call resistance down to 4200 and put support starting at 4150.

For EOQ June 30 the large call position at SPX 4115 may result in a test of that area late June.

Using the GDX as a gold miner proxy closing at 37.4, the last update Apr 16 showed little call resistance until 37 with a price at 36.  But strong call resistance at 35 & 36 could result in lower prices to the 35 level.

Currently the TLT is 139.2 with the TNX at 1.6%, prices are little changed since the Apr 16 update when the outlook was for a consolidation, but now a modest increase in puts 138 to 140 may pressure prices slightly higher and rates lower.

IV. Technical / Other

Last week, I looked at some of the components of the NYAD ($NYAD = $NYADV - $NYDEC) and NYUD ($NYUD = $NYUPV - $NYDNV), specifically the $NYDNV/$NYDEC as a capitulation indicator and the $NYUPV/$NYADV as a high risk indicator. Today I want to focus on two other ratios, especially the $NYUPV/$NYDNV, or the LT volume indicator (as an inverse for sentiment purpose). The table below shows the various components with ratios and their "fit" to future SPX returns from July 1, 2020 thru last Fri. The last two are new. The first portion of the table shows that the LT volume indicator provides a better fit than the capitulation indicator, while the second part show the result of the composite for the capitulation indicator and LT volume indicators .  The result is a 40-50% better "fit" with strong correlation thru week 3 and a moderate fit thru 5 months (100 trade days).

The chart below shows the composite results as a std var.  I will be watching this closely as a possible replacement for the ST Composite.  Two previous periods showed a similar sentiment setup.  The first was Oct 2020, where the first leg down was followed by a partial replacement then a strong leg down, and the second was Jan 2021 where the first leg down was followed by a new high, a consolidation for a week and then a second leg down to lower lows.  We may see a repeat of Jan 2021.

Conclusions.   I mentioned in the updates that the extension of the FIT tax deadline to May 17 could be an important factor for the "seasonality factor" or "Sell in May" due to the fact that many individuals contribute to 401Ks and IRAs up to that date and that the positive inflows will support the markets.  With the "Sell" from the ST NY volume indicator extending to three weeks, this could imply a very interesting option exp setup for May, the week of Mon 17th.  Above the SPX 4200 level, the SPX is in positive delta hedging which means at expiration there will be pressure down to at least 4200 and possibly to strong put support at 4100.

Weekly Trade Alert.  Next week may be a consolidation week near the ATHs if the SPX is following the Jan 2021 pattern with the potential for new ST lows near 4100 by May 21.  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
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