Sentiment Signals for Market Investmentsby Arthur Knopf, Financial Economist and Contrarian: July 2021

Saturday, July 31, 2021

Defying Gravity

Last weeks outlook was for a slowing of the SPX upward trend with the potential for a pullback toward the 4350 area, but Tue low only reached 4372. Wed update indicated strong support from the hedge spread indicator and as a result Thur made it to the minimum target of 4430. The late week rally resulted in the hedge spread and other ST/INT indicators moving back to neutral.

APPLs outlook was a bust and strong EPS results were offset by weaker forward guidance. This may indicate that a longer topping period is required. As long as the TNX remains below 1.5%, low rates should continue to support the market. The Tech/Other section looks at the int rate sensitivity using the TNX for the NDX, SPX and BKX sectors.

I. Sentiment Indicators

The INT/LT Composite indicator (outlook 3 to 6+ months) has three separate components. 1st is the SPX and ETF put-call indicators (30%), 2nd the SPX 2X ETF INT ratio (40%), and 3rd a volatility indicator (30%) which combines the options volatility ratio of the ST SPX (VIX) to the ST VIX (VVIX) with the VXX $ volume.

The previous weeks rally to new highs after the two week pullback did little to reset the low bearish sentiment and comparing to the Dec 2019-Feb 2020 period seems to indicate more decline is likely to set up a final rally.

The ST Composite as 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%.

Last started with slightly bearish tilt bounced back above neutral, retreated with Thur ATH and bounced back at EOW. Close to neutral.

The ST/INT Composite indicator (outlook 1 to 3 months) is based on the Hedge Spread (48%) and includes ST Composite (12%) and three options FOMO indicators using SPX (12%), ETF (12%), and Equity (12%) calls compared to the NY ADV/DEC issues (inverted). FOMO is shown when strong call volume is combined with strong NY ADV/DEC. See Investment Diary addition for full discussion.

Bearish sentiment rose early in the week then retreated to end the week near neutral.

Tue pullback caused a brief spike in sentiment but is now below neutral.

Bonds (TNX). Bearish sentiment in bonds continues to decline, increasing the potential for a surprise upward reversal in rates, possibly starting by Sept.

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.

Lower rates seem to be helping support a modest rally in the PM stocks.

II. Dumb Money/Smart Money Indicators

This is a new hybrid option/ETF Dumb Money/Smart Money Indicator as a INT/LT term (outlook 2-6 mns) bearish sentiment indicator. The use of ETFs increases the duration (term).

Unlike the INT Composite and other ST indicators, the DM/SM indicator shows a fairly strong reversal in bearish sentiment and may limit the depth of any pullback ST.

And the sister options Hedge Spread bearish sentiment as a ST/INT indicator (outlook 1-3 mns). A sharp spike in hedging was seen with the pullback Tue, but reversed sharply with Thur rally to an ATH and is now close to neutral.

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 July 16. Also, this week includes a look at the GDX for Dec exp.

With Fri close at SPX 4395, options OI for Mon is small with fairly strong call resistance at 4400 although some positive influence intra-day may be seen by the calls at 4410. Put support starts at 4375 and likely range is 4375-4410 and a weak close.

Wed has somewhat smaller OI where SPX call resistance moves up to 4425 and the overall P/C to 174% which should support a rally toward the 4425 level..

For Fri stronger call resistance at SPX 4400 and above is likely going to cause a reversal of any mid-week rally and currently the put support levels are showing at the 4350-60 area.

IV. Technical / Other

This week I wanted to take a look at the interest rate sensitivity of different market sectors to int rates (TNX) using the format currently used with the HUI combining the short/long ETF ratio with the inverted TNX. The results should show that lower rates support higher index prices and vice versa. Longer term the question is that if rates do eventually rise, how will index prices be affected?

The first index is the NDX and the rapid decline in int rates after the Mar 2020 crash certainly seemed to contribute to its strength with periods of weakness coinciding in strength in rates.

Next is the SPX appears very similar except that much stronger bearish sentiment was seen at the Mar 2020 lows.

And finally the BKX which seems to have a more complicated response to int rate trends as the BKX was mostly in a sideways trend as rates first rose then fell thru 2018-19 prices rose sharply starting in late 2020 as int rates rose..

The following table summarizes the results including the HUI+TNX listed in the main section. For the HUI, the ETF component has a very low to negative correlation while int rates have only a mild positive correlation ST/INT - I guess this explains why my PM outlook has mixed results.

For the other Indices, the NDX has the weakest correlation for the ETFs while SPX has the strongest. For interest rate sensitivity, NDX and SPX are the strongest overall with NDX stronger ST and SPX stronger LT. BKX is weakest ST and strongest LT.

Conclusions. With most of the ST/INT indicators near the neutral, the SPX appears to have reached the point of suspension in orbit, but for how long? I still think the biggest risk to the market is a rise in rates and the above index comparison shows that the highest risk for ST rise is in the NDX, the risk is equally high for all indices (I'll give the HUI a ?).

Weekly Trade Alert. The SPX OI for next week indicates the possibility for some early week weakness with a possible ATH retest (4425+) mid-week and a potential late week fade to 4375 or lower. Updates @mrktsignals.

Investment Diary, Indicator Primer,
update 2021.07.xx Data Mining Indicators - Update, Summer 2021 (in progress),
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

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© 2021 SentimentSignals.blogspot.com

Saturday, July 24, 2021

Bezos Takes the SPX into Orbit

As has happened many times before my target for a pullback of SPX 4240 (50 SMA) was reached much faster than expected (naughty algos), breaking many of the EW support zones, thereby forcing many swing traders to switch to short with many expecting 4160 or the 23% retrace at 4060. As often happens, however, once everyone goes short the smallest spark can set off a wildfire of short covering with the result of new highs by the EOW. From here the direction is unclear, options OI is indicating the potential for a pullback into EOM toward 4300, while the options Hedge Spread is showing strong hedging that may cushion any fall. In the Tech/Other I will look at two charts, the daily shows channel highs around 4412, supporting a pullback, while the 4 hr still shows the potential of an expanding wedge with a possible breakout to 4430-40 to complete w4.

I apologize for the lack of updates last week but Mon aft I got an unsolicited letter to sell my house for "all cash, as is" as the rental conglomerates are gobbling up my neighborhood. The biggest surprise was that it was 25% above the tax assessors appraised value received a few weeks before. After checking for alternative housing on Zillow, I saw that all the prices were crazy within an hours drive of where I live and when I told the offering broker my lack of succes they upped the offer by 5% to 30% over the appraised value.

The remainder of my spare time was spent preparing a new ST/INT composite indicator shown below for what I am calling call option FOMO Indicators by comparing the level of call option buying to the level of the NYADV/NYDEC, ie, stronger option buying in a strong market indicates chasing prices higher or FOMO. A new section was added to the Investment Diary for this indicator with component charts and price correlations.

The sharp pullback to the SPX 4240 area into the Mon low was not long enough to appreciably improve bearish sentiment and a retest or lower is possible. This could be due to a rise in int rates after mid-Aug looking at the TLT options OI.

The ST Composite as 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%.

A ST Buy was generated on Mon, then fell sharply during the week only to rebound to slightly above neutral by Fri close. Currently, no directional bias.

This chart is somewhat busy, but what stands out is that for most of the significant pullbacks over the last year at least one of the components had previously reached the Sell level with last weeks pullback to SPX 4240 preceded by extreme FOMO for SPX calls (lt blue). Currently slightly above neutral.

For the shorter term view using EMAs, Mon decline created a weak Buy, consistent with a move to ATHs, but not likely enough for a sustained rally. Currently near neutral.

Bonds (TNX). Bearish sentiment in bonds continued to fall, although the TLT was flat for the 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.

ETF sentiment remains near recent lows although the int rate pullback has increased combined sentiment. Support at HUI 260 continues to hold.

Similar to the INT Composite the swiftness of the turnaround from last weeks lows only resulted in a small increase in bearish sentiment.

The sister options Hedge Spread bearish sentiment as a ST/INT indicator (outlook 1-3 mns) did, however, see a sharp increase in hedging similar to the sharp drop in June of 2020 which was eventually followed by a retest a few weeks later.

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 July 30.

With Fri close at SPX 4412, options OI for Mon is small, but is showing call resisance above 4400 ro 4425 with put support beginning at 4375. A small pullback toward 4375 is probable.

Wed has even smaller OI where SPX shows call resistance above 4350 with put support beginning at 4300. A pullback toward 4300 is possible.

For Fri strong put support at SPX 4100 is likely irrevelant, therefore lowering the P/C and call resistance at 4300 and above still makes 4300 a target,.

Currently the TLT is 148.5 with the TNX at 1.29%, compared to Aug P/C of 248%, Sept is showing a sharp drop, indicating that int rates may support stocks thru mid-Aug at current rates, but by mid-Sept rates could rise back over 1.5% (TNX) where put support at TLT 140 is about TNX 1.6%.

IV. Technical / Other

This chart since May shows the SPX following a clearly defined channel (possibly bear flag) with Fri high at 4412 stopping right at resistance with a slight selloff A/H. As I pointed out last week, however, it can be dangerous to expect much of a decline with AAPLs EPS out last week after what happened after the July 2020 EPS. So this may be a false flag.

On the 4-hr chart the expanding wedge may still be in play. In this case a breakout of he above channel may be seen after AAPLs EPS that could target the 4430-40 area by mid-Aug and if the couns as a 4th wave, the w5 could go below 4200 into mid-Sept. This seems to align better with current sentiment and the TLT options OI outlook for an up move in int rates.

Conclusions. Last weeks sudden moves were enough to catch everyone off guard. My price targets of a low near SPX 4240 then back to test the ATH were correct but I was not expecting a completed journey in the time it Bezos and Musk to travel into outer space. Things are likely to slow down with the increase in hedging and the most likely scenario is for a high the next two weeks. Continued high inflation may begin to take its toll on the bond market if the TLT options OI is correct. Currently both yields on the TNX and SPX are about 1.3%, but if TNX yields rise over 1.5% this may start to pressure markets, especially NDX. Next week I hope to do a special section on int rate sensitivity similar to the HUI across other markets.

Weekly Trade Alert. It all depends on APPL. Some weakness is possible early Mon/Tue but APPLs EPS late Wed will likely determine the larger direction. Updates @mrktsignals.

Investment Diary, Indicator Primer,
update 2021.07.xx Data Mining Indicators - Update, Summer 2021 (in progress),
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

Saturday, July 17, 2021

Summer Blues

It seems like every month I get thrown off during options exp week. Typically, during a topping process you will see a higher volume Fri exp as distribution when prices are at/near a top, while accumulation occurs at price lows. So this weeks action indicates that a sharp move downward as many are expecting is probably several months away. I still believe a pullback of about 4% is likely in the month of Aug to test the SPX 50 SMA with an INT top expected Sept-Oct (2018 deja vu?). Several indicators in the main section are indicating similarity to Dec 2019-Jan 2020 where a 4% pullback preceded a runup into the Feb high.

One of the large cap tech stocks I have been watching for clues as to market direction is APPL. I am not sure how this would "count" in EW terms, but similar to the DAX, AAPL has a nearly perfect diagonal price pattern which looks like an "expanded flat" for a 3rd wave. From the Sept 2019 and Feb 2020 the top TL is increasing at about $0.50/wk. Notice that July opt exp started a small pullback in APPL but after the EPS release at EOM the stock went up 50% in Aug. EPS this July is on the 28th and at that time the top TL projects to about $154.30. We could see an ST top for SPX/NDX by early Aug if AAPL tops.

The Investment Diary has been updated to provide info for the Composie Put-Call Indicator covered in this weeks Tech/Other section.

The extreme lows seen last week produced a pickup in volatility and could be a duplication of the end of Dec 2019 which saw a slightly higher high early Jan 2020 before a 4% pullback and a move to an INT high in Feb. Several other indicators are also similar to this period.

The ST Composite as 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%.

Last weeks pullback/volatility pushed the ST Composite back to a weak Buy, suggesting that a rally to test/best the ATH may be seen by EOM.

Bonds (TNX). Bearish sentiment in bonds is slowly declining as rates continued to fall in spite of higher inflation as the covid "rebound" seems to be faltering in economic growth indicators.

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.

The HUI 260 area continues to hold with sentiment mostly unchanged.

The DM/SM Indicator made a new multi-year low before a slight rebound where each of the last three INT tops saw increasingly lower sentiment 1-3 months before the top, then increasingly larger declines. This may be signaling a decline larger than the Mar 2020 decline.

And the sister options Hedge Spread bearish sentiment as a ST/INT indicator (outlook 1-3 mns) also moved up strongly last week nearing the level seen at the recent SPX Feb lows.

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 July 23. Also, this week includes a look at the GDX and TLT for Aug monthly exp.

With Fri close at SPX 4327, options OI for Mon has small call OI with particularly high put OI at the round numbers 4100 & 200 and high P/C overall. Significant put support at 4335 should keep prices above that level while there is little call resistance until 4400. Fri SPX P/C was 220% so Fri closing OI is likely higher.

With Fri options volume for Mon exp is probably more indicative of put support for Fri close and sows strong support at 4300-50 and neutral up to 4365, so a move to 4350 or higher is possible.

Wed has somewhat smaller OI where SPX shows put support at 4325 and call resistance at 4350, so an early week rally may retest the recent lows.

For Fri much of the area between 4300-50 is straddled with no direction bias, but the Fri volume P/C was huge at 244% and put support at 4300 & 4350 may indicate stronger support than shown.

For EOM the first significant call resistance is 4350, while put support starts at 4320 with continuation of current range likely.

Using the GDX as a gold miner proxy closing at 33.9, the straddle at 35 represents neutrality, while call resistance is at 36 and little put support exists until 30.

Currently the TLT is 148.2 with the TNX at 1.3%, call resistance at 150 should keep rates from falling much farther with most puts are far OTM and not likely to offer support.

IV. Technical / Other

This week I wanted to take a brief look at the Combined Put-Call Revised indicator (Equity + ETF + SPX), as it has recently fallen to a new 2107-21 low. Yes, the Equity put-calls do provide some distortion, but still you wonder how long this can go on.

Backing out the Equity p&c shows a lot of similarity to Dec 2017 and 2019 about 3 mns before an INT top. In both cases, there was a second spike down in bearish sentiment before the INT top, but Oct-Dec 2018 was somewhat different.

Conclusions. As I warned last week ST indicators were somewhat positive which pushed the SPX to ATHs early in the week, but the increasingly extreme weak bearish sentiment for the INT/LT indicators led to weakness later in the weak. Next week is much the same only ST indicators are even more supportive and may allow for one more rally to test/best the ATHs before a larger pullback, possibly to the SPX 50 day SMA (current 4240). With APPLs EPS scheduled for July 28th that may be an important date to start watching for a ST top.

Weekly Trade Alert. Next week may consist mostly of backing and filling from SPX 4320-75 before a potential breakout near the EOM. Updates @mrktsignals.

Investment Diary, Indicator Primer,
update 2021.07.xx Data Mining Indicators - Update, Summer 2021 (in progress),
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

Saturday, July 10, 2021

Markets are on Fire

Last week's outlook was for an upward bias with the possibility of sharp reversals due to delta hedging and we certainly got that. If you were lucky enough to read the Wed update before the close, the options setup pointed to a reversal to below SPX 4300 then a rally back to 4350-70 and the low Thur AM was 4289 with a close Fri at 4370. I misread the CPI/PPI release dates next week and they are Tue/Wed for CPI/PPI not Mon/Tue so cancel Fri update. Will try to do an update Mon an hour before the close. Currently the Wed SPX options OI shows a similar setup where a gap fill at 4320 could occur Tue/Wed with a likely rally back to ATH by Fri close. We may be setting up an expanding wedge pointing to lower 4200s by mid-Aug. If int rates (TNX) stays below 1.5% that may be as low as we go for ST.

This week I am replacing the ST/INT options Smart/Dumb Money indicator with a hybrid INT/LT options/ETF indicator. This is based on the past few weeks of comparison of indicators compared to 2015 and this weeks options P/C analysis in the Tech/Other section.

The first installment of the Investment Diary update Data Mining Indicators - Summer 2021 is available, but only covers the new INT/LT Composite and ST Composite as well as the new INT/LT options/ETF indicator. .

I. Sentiment Indicators

The overall Indicator Scoreboard (INT term, outlook two to four months) bearish sentiment will be dropped next week to be replaced by more time sensitive (ST, ST/INT, INT/LT) and less dependent on distortions from P/C ratios (see Tech/Other) which comprise about 60% of the active overall sentiment.

The INT/LT Composite indicator (outlook 3 to 6+ months) has three separate components. 1st is the SPX and ETF put-call indicators (30%), 2nd the SPX 2X ETF INT ratio (40%), and 3rd a volatility indicator (30%) which combines the options volatility ratio of the ST SPX (VIX) to the ST VIX (VVIX) with the VXX $ volume.

This indicator has bounced back from the recent Sell levels but is warning of an INT top likely in the next 3 months.

The ST Composite as 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%.

The recent decline below SPX 4300 on Thur has pushed the ST Composite to a mildly positive position and is likely to elevate prices thru optn exp Fri before further pullback.

Bonds (TNX). Bearish sentiment in bonds remains at low, but not extreme levels. Next weeks CPi/PPI may test bond holders resolve if levels are as high as last month.

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.

Sentiment remains at low levels. As pointed ot last the 240-60 level is likely to provide strong support as long as int rates (TNX) remain below 2% and strong bounce from 260ish was seen last week.

II. Dumb Money/Smart Money Indicators

This week I am replacing the option-based Dumb Money/Smart Money Indicator with a new hybrid option/ETF as a INT/LT term (outlook 2-6 mns) bearish sentiment indicator. In a large part this is based on the current option sentiment distortions discussed in the Tech/Other section. The use of ETFs increases the duration (term). More thorough discussion and correlation with future returns is in the Investment Diary update.

This indicator is warning of an approaching INT top, having reached levels comparable to those seen before the last three INT tops. Lead times can be 3-4 months as seen before the Jan 2018 and Mar 2020 tops, or as short as 1 month as in Sept 2018.

And the sister options Hedge Spread bearish sentiment as a ST/INT indicator (outlook 1-3 mns). Hedging picked up last week with the increase in volatility and may support prices ST.

Wed has somewhat larger OI where SPX has strong call resistance at 4350 and put support at 4325. I had incorrectly reported this weeks CPI/PPI as Mon/Tue where it is actually Tue/Wed at 8:30AM EST so this is where delta hedging may reverse below 4350, possibly to fill The Fri gap at 4320.

For Fri strong put support at SPX 4300 and lesser at 4325 and only small call resistance at 4350 and above indicates a Wed BTFD for an optn exp rally back to 4375 or higher.

IV. Technical / Other

This week I wanted to take at the various Put/Call ratios from mid-2014 to today. Previously, I used the period from mid-2014 to mid-2016 as a base period to set up the older indicators I was using, but recently since Mar 2020 they were not working as well. Previously I had shown that the ETF short/long ratios and volatility measures remained consistent, so today I want to look at the options starting with the Combined Put-Call Revised indicator (Equity + ETF + SPX).

As you can see below, the volume of puts and calls and the P/C ratio were in a similar range from late 2016 to late 2019 after a brief spike the 2nd half of 2015. The avg P/C remained about 1.0. After Mar 2020 something strange happened, however, and since then the avg P/C has dropped to 0.70.

Most would probably say that this was due to the equity options trading and you would be right. Prior to Mar 2020, the equity P/C avg was about 0.65 and has since dropped to 0.45. The amazing thing is that since Dec 2015 the level of equity call volume has a very high correlation with the level of SPX prices. If the SPX rises to 6000 as some are saying, does this mean the equity P/Cs will drop to 0.25?

The ETF options also saw a sharp drop in volume, however, and even more surprising the volatility of the ETF P/C has gone down by more than 50%.

The SPX options seem to be the only market that has maintained some semblance of normality. Other than mid-2016 to mid-2017, which saw a high level of puts and calls, the volume of calls has remained in a similar range while there has been a lower levels of puts which lowered the P/C ratio. There also seems to be an increase in put volume prior to INT tops with current levels similar to May and Dec 2015, Dec 2017, and Sept 2018.

It's hard to tell the what reasons are for the changes since Mar 2020, possibility its just increased speculation as a combination of zero commission trading with a population that is tired of sitting around watching TV with excess of funds from gov't support from the pandemic?

Conclusions. Speculation is rampant, but until someone yells "Fire" the party goes on. The recent collapse of a Miami Surfside condo should provide a warning of what happens when a high rise or market is not built on a solid foundation. Sentiment ST is pointing to continued upside momentum, while INT/LT sentiment is looking more and more worrisome. Sleep with one eye open and have a parachute handy.

Weekly Trade Alert. Weak options sentiment thru mid-week shows the potential for a move down to fill Fri opening gap at SPX 4320 by Wed, probably due to Tue/Wed CPI/PPI, while a more bullish outcome is possible by EOW. Updates @mrktsignals.

Investment Diary, Indicator Primer,
update 2021.07.xx Data Mining Indicators - Update, Summer 2021 (in progress),
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