Last weeks outlook was for modestly higher prices with a warning that "SPX prices.could easily reach the 4300-50 area" based mainly on the ST Indicator, SPX ETF sentiment and lack of any Sell signals. The upper ranges were reached easily with support from the bond market as much of the economic data (PMIs) were weaker than expected, but as shown by the CITI Inflation Surprise chart below, inflation remains a real threat and the combo may be pointing to a stagflation outcome.
As a result of the strong rally many indicators are nearing the Sell levels and a continued upside bias into late next week may push them to the Sell level for the third week of July (optn exp) where both CPI and PPI are reported Mon-Tue. Many EW analysts are looking for the end of a large 3rd wave off the Mar 2020 lows and the next pullback could be the 4th wave. The DAX is shown as an example in the conclusion and indicates that the pullback and subsequent 5th wave may be weaker than expected.
I will be replacing the overall INT Indicator Scoreboard in a couple weeks with three time-based indicators, the ST Composite (1-4 weeks) as used for the last few weeks, a ST/INT Composite (1-3 months) still in review but based on the Hedge Spread, and a INT/LT Composite (3-6 months) shown below.
I. Sentiment Indicators
The overall Indicator Scoreboard (INT term outlook two to four months) bearish sentiment has remained at low levels for much of the rally off the Mar 2020 lows and as explained in next weeks Tech/Other section is likely due to heavy weighting of Put/Call ratios. Sentiment last week was mostly unchanged. For the next couple of weeks I will be showing this and the new INT composite below before dropping the old indicator.
The new INT/LT Composite (3-6 months) indicator has three separate components. First is the SPX and ETF put-call indicators (30%), second the SPX 2X ETF INT ratio (40%), and third a volatility indicator (30%) which combines the ratio of the ST SPX options volatility (VIX) to the ST VIX options volatility (VVIX) with the VXX $ volume. Here, we saw a sharp drop in bearish sentiment due to similar behavior in the SPX & NDX ETFs, and is quickly approaching a ST Sell.
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%. Here, the beginning period was extended back to May of 2020 where a similar Buy after a 100 pt drop in the SPX resulted in a 350 pt rally. A sharp drop in bearish sentiment was seen last week that could reach the Sell level in a few days. Note the highest correlations are for weeks 1-3 with last week #2, so next week should also be up (at least to start).
The CITI Surprise Inflation Index for June just came out. With both CPI and PPI due the 3rd week of July (12-13), there will likely be a ST decline beginning by the end of next week. Inflation remains at a high level, but the rate of increase appears to be levelling off.
Bonds (TNX). Bearish sentiment in bonds continues its slow decline as rates fell due to weakness shown in last weeks PMIs.
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. Prices are nearing the support levels at 240-60 that are unlikely to be broken unless int rates breakout over 2% (TNX).
II. Dumb Money/Smart Money Indicators
The option-based Dumb Money/Smart Money Indicator as short/INT term (outlook 1 to 3 mns) bearish sentiment also saw a sharp drop last week, but remains above the Sell level for now.
And the sister options Hedge Spread bearish sentiment as a ST/INT indicator (1-3 mns) continues to consolidate below neutral where a ST pullback could generate a weak Buy as in Mar 2921 or a continued rally will cause a stronger Sell as Aug 2020.
Taking a look at the ETF ratio of the INT term SPX INT (2X) ETFs (outlook two to four mns) as bearish sentiment, a large inflow into SSO last week pushed this ratio to a ST Sell that may mean a pullback starting by the EOW.
The INT term NDX ST 3x ETFs (outlook two to four mns) bearish sentiment has now fallen to the levels of the Apr high with last week's breakout to new ATHs and may end up being a double bottom similar to Jan-Feb 2020
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 9.
With Fri close at SPX 4352, options OI for Tue shows moderate resistance at current levels, but delta hedging may provide support. P/C is high and may provide support.
Wed has somewhat smaller OI where there is little call resistance to higher prices over 4350 and even higher P/C.
For Fri there is larger OI with strong call resistance down to SPX 4275, with the outlook for higher inflation early in the next week a ST pullback of 2-3% is possible over the next several days. Low P/C provides little support.
IV. Technical / Other
This week I will look at the second group of indicators, the SPX and NDX ETFs, that performed well for both the 2015 period and today. The first group, the volatility indicators were discussed over the last couple of weeks, and new week I will look at one group that proved inconsistent, the put/call ratios.
The SPX 2X ETF ratio showed strong Sells at both the Oct 2014 and May 2015 tops and strong buys after both the Aug 2015 flash crash and the Jan 2016 selloff.
Looking at the NDX 3X ETFs, the strong Sell in Apr 2015 was premature, while the Dec Sell was right before the Jan selloff. The strong Buy in Apr 2015 was somewhat early.
Conclusions. As the stock market continues to march higher more and more are being convinced of the power of the Energizer Bunny (Fed) as bearish sentiment levels continue to fall. As discussed in the introduction, I don't rely on price channel charts that much and most of the US index charts are mudded by the rotation in and out the big NDX stocks, but one int'l chart that is showing a clear message is the DAX (a few days old). Here we see almost a textbook diagonal which shows the current wave as a strong 3rd, but implies that both 4th and 5th waves could be fairly weak and might complete over the next 2-3 months. This fits my expectations for the US markets as well where the SPX may only fall below 4158 then rally over 4400. Several indicators that indicate that an INT top may still be months away are the VIX Buy &Sell components with the SKEW too high relative to the VIX/VXV and the LT NYUPV/NYDNV.
Weekly Trade Alert. Options OI for SPX are somewhat mixed for Tue-Wed as the SPX may remain high due to delta hedging, but also increases the risk of a swift reversal. With inflation data that should remain high according to the CITI Surprise Index and stronger OI call resistance over SPX 4300, a pullback that goes below 4300 may start by Fri, but may reverse by optn exp Fri. 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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