Over the past two or three weeks, I have been warning that the Fed's message of "transitory inflation" would be put to the test, and after May's CPI and PPI reports came out, the Fed apparently got the message and indicated that rate hikes may be possible before the next Pres election after all. In reality, rate hikes in the face of supply shortage driven inflation have little effect compared to excess demand driven inflation because it raises the cost of starting new production and does not effect supply as found out in the 1970s oil shortage in the face of Arab embargoes.
The SPX fell somewhat short of my upside target of 4270-80, hitting 4258 Tues, although the O/N FXCM price got to 4267. In any case, the Fed's "hawkish" turn appears to have started the move down to the SPX 4100-25 target and the move last week was eerily similar to the week of the Mar optn exp as a 3-4 day decline of 100 pts was followed by a 62% retrace before another leg down of 100 pts for a 150 pt pullback. This could be a setup for a contrarian play in Sept as most will be looking for a rinse and repeat. There are rumors that after Congress finishes its summer break, the Dems will come back with a budget reconciliation bill that can be used once a year for each subject as a means of passing a larger stimulus/infrastructure package with a simple majority vote. The $2T may come later in Sept-Oct.
In Tech/Other, the Equity P-C indicator is shown to be one cause of the recent decline while the banking sector (borrow ST and lend LT) is getting squeezed as the yield curve flattens as ST rates go up and LT rates go down.
I. Sentiment Indicators
The overall Indicator Scoreboard (INT term, outlook two to four months) bearish sentiment appears to be following he pattern of the Feb-Mar pullbacks with lows around -1.5 SD before a rally back to neutral.
The ST Composite is a ST (1-4 week) indicator includes the NYSE volume ratio indicator (NYDNV/NYUPV & NYDNV/NYDEC) and the VXX $ Vol/SPX Trend. Weights are 80%/20%. Previously, I had pointed out that the string of neutral sentiment was likely similar to mid-2020 before the June pullback, and the sharp pickup in NYDN volume is similar to the first leg down and means a retrace is near. In particular, comparison to late Mar 2021 qtrly optn exp showed a first leg down of SPX 100 pts followed by a 62% retrace before a final leg down of 100 pts for a total of about 150 pts.
Bonds (TNX). Bearish sentiment in bonds fell sharply and as seen in the options OI section, rates may be near a low.
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. Gold fell sharply as the US$ rallied following the Fed's "hawkish" outlook bring the PM stocks down as predicted by ETF sentiment. HUI 240-60 is likely with little support in the options OI.
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 was largely unchanged.
And the sister options Hedge Spread bearish sentiment as a ST/INT indicator (1-3 mns), showed a moderate pullback was forecast similar to those seen in Jan-Mar and is likely not over just yet.
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 Jun 28. Also, this week includes a look at the GDX and TLT for July exp and an additional SPY volume chart.
With Fri close at SPX 4166, options OI for Mon shows moderate put support up to 4190 and call resistance starting at 4200. Look for turnaround Mon/Tue. Call resistance at 4250.
Wed has somewhat smaller OI where SPX shows somewhat stronger put support above 4175 and a Mon close at or above 4175 could test 4200. Strong call resistance at 4275.
For Fri, moderate put support moves up to SPX 4225 with strong call resistance at 4250+.
For EOM, P/C has now risen to 100%, but a retest of the lows near SPX 4115 still likely.
Over the last two years, I have been manually tracking the SPY ETF P/C volume and have found that ATM P/C have been a reliable indicator of market turns. In this weeks updates, I used the SPX OI model to chart the P/C volume. One advantage is that OI is updated O/N while volume is available intraday where I have added a time stamp (CST). The low P/C indicates that the decline is not likely over, but the inflection areas at 417 and 420 are similar to the SPX OI as important resistance for a retrace rally.
Using the GDX as a gold miner proxy closing at 34.1, down about 10% for the week. I was expecting a fall of only about half as much to 37-8 and we could see a retrace rally to that level if int rates and the US$ stabilize, but the low P/C is still worrisome INT as there are no signs of a panic low.
Currently the TLT is 145.7 with the TNX at 1.45%, the OI outlook has changed tremendously where June showed a PC of 350% and almost no call resistance to higher prices. TLT has moved up from below 140 the last week and has rallied up to strong call resistance. Most of the rally is likely over. A look at Sept shows a drop in P/C to 75%, indicating the possibility for a strong reversal by the end of Q3.
IV. Technical / Other
This week I want to take a brief look at the Equity Put-Call spread indicator, which matched the extremes of high P & C last seen at the Mar 2021 top, so a similar outcome is possible.
Everyone is likely aware of the underperformance of the DJIA lately, as it is down over 5% while the SPX is only down 2%. The culprit is mainly the banking sector shown by the BKX index using the 3x ETFs (FAZ/FAS) as sentiment shows a decline so far similar to Sept 2018 has produced almost no reaction. A continued decline is possible INT/LT to the 90-100 area.
Conclusions. The biggest surprise of last week was the Fed announcing that it would not necessarily wait until unemployment reaches its all time lows before raising the Fed funds rate with two possible in 2023 and the second was the bond market reaction as it seemed to start pricing in the next depression. The SPX seems to well on its way to my EOM target of 4100-25, and appears to be following the same playbook as the Mar qtrly optn exp which resulted in a 150 pt ABC decline into the EOM. Sentiment indicators are also showing similarity to late Mar with a sharp rise in NYDN volume pushing the ST indicator to the Buy area, likely indicating a counter trend rally next week.
Weekly Trade Alert. A turnaround is likely Mon/Tue with SPX options OI and Mar comparisons pointing to a possible target of 4210-20 by next Fri. A second decline of similar size is likely to follow. 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
© 2021 SentimentSignals.blogspot.com
No comments:
Post a Comment