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

Long term forecasts

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