A Funny Thing Happened on the Way to 5000

In the two weeks leading up to options exp (Nov 19), the vast majority of analysts had upped their year-end target for the SPX to 4900-5000.  At the same time, I had been warning the SPX was likely to top out and retest the Sept highs (4550-600) by early Dec.  Admittedly my INT target of 4650 was easily exceeded with the breakout over 4700 and even the ST target of 4720-30 was briefly exceeded (4744) the 1st hour of trading Mon on the news of the re-nomination of Powell as Fed head.  However, thereafter the SPX wasted no time in reversing as expected, dropping over 80 pts the next 24 hours and dropping below 4600 by Fri close.

Unfortunately, for this weeks update the rapidity of the decline has outrun the INT/LT indicators which show little change and only the ST Indicator reflects the market weakness.  So it is possible the decline will continue with a pause likely at the 50 day SMA (SPX 4630ish), but just as likely is the expected scenario of a bottom the next week or so and a Xmas rally that retests the 4700+ area before a larger decline.  I have no way of predicting the effects of the Omicron coronavirus variant and therefore must allow for greater uncertainty.

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.

We saw a slight bounce in the INT/LT Composite last week, but it remains near record lows.

 

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%.

Sentiment for the ST Composite bounced strongly and appears to be following the Aug-Seot 2020 pattern where a pause was seen before lower lows then a rally to retest recent highs.

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.

The ST/INT Composite may also be following the Aug-Sept 2020 pattern, but remains much weaker at this point.

Compared to Aug-Sept 2020, sentiment is only about 50% as strong, raising questions about the durability of any ST bottom.

Bonds (TNX).  Bearish sentiment in bonds remains below neutral as rates consolidate between 1.5-1.6%.

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 did briefly rally over the 240-260 INT consolidation range as expected, but last week retreated back into the trading range.

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).

Looking at the DM/SM sentiment using EMAs, a slight bounce was seen last week.

And the sister options Hedge Spread bearish sentiment as a ST/INT indicator (outlook 1-3 mns) bounced toward neutral or about 50% of the first leg down in Aug-Sept 2020..

Taking a look at the ETF ratio of the INT term SPX INT (2X) ETFs (outlook 2 to 4 mns) as bearish sentiment, 10 day SMAs are unchanged.

The INT term NDX ST 3x ETFs (outlook 2 to 4 mns) bearish sentiment, 10 day SMAs are slightly lower.

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 3.

With Fri close at SPX 4595, options OI for Mon is moderate and the P/C is very high.  Below 4600, the next level of support is 4575 and the high P/C indicates the likelihood of a rally possibly to 4650 if 4575 holds.

Tue EOM has larger OI where SPX P/C is low, indicating that any rally would be short lived and a range of 4600-25 is likely.

Wed has small OI where SPX P/C is again high and a move to 4650-75 is possible.

For Fri there is large OI, but P/C is near 1.0 shows little directional bias with an inside range of 4600-50 and outside range of 4500-4700.

IV. Technical / Other

N/A

Conclusions.  The biggest surprise last week was the overall volatility.  Last weeks Tech/Other section discussed the weak Adv/Dec volume and Mon was a perfect example of the result when after the initial hour of buying/short covering on news of Powell's continued leadership at the Fed, there was no support when profit taking began and the SPX fell 2% by Tue AM.  A full test of the Sept high breakout (4546) or lower is possible, but a bounce next week could put off lower lows until the following week.

Weekly Trade Alert.  Most of the downside target (4550-600) has been met, and sentiment is showing little support for anything other than a very ST bounce.  Updates @mrktsignals.

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It's Time for Turkey

Last weeks outlook was for more of a trading range with possible lows near SPX 4650 and highs between 4710-30 with a slight pickup in ST volatility.  A surprising strength in bonds (lower rates) helped the NDX (esp AAPL) keeping the SPX above 4670 with weakness concentrated in the DJIA (esp BKX).  The actual high was 4718 or mid-target. 

ST sentiment remains near neutral with SPX options OI showing strong bearish bets before Turkey Day and bullish after, so you know the contrary play is to expect the opposite.

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.

INT/LT Composite sentiment remains firmly near the Sell level.

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%.

ST Composite sentiment remains near neutral and reminds me of Aug 2020 as do other indicators below, prior to the 10% decline in Sept.

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.

Here the ST/INT Composite seems to have bottomed and may also be similar to Aug 2020.

EMAs tell the same story.

Bonds (TNX).  Bearish sentiment in bonds actually is rising, even as rates decline.  As discussed last week, the outlook for slower growth and higher inflation has bond bears betting that inflation will win out, while investors are betting on slower 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.

Similar to bond sentiment, gold bugs are betting on higher inflation, even as prices fell about 4% last week.

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).

The Dumb Money/Smart Money Indicator as a INT/LT sentiment remains near the lowest levels of the last three years.

And the sister options Hedge Spread bearish sentiment as a ST/INT indicator (outlook 1-3 mns) is another indicator that may be following the Aug 2020 pattern.  A moderate drop in SPX to 4600 or lower with an Xmas rally to follow could see a sharp drop in sentiment before a larger correction.

Taking a look at the ETF ratio of the INT term SPX INT (2X) ETFs (outlook 2 to 4 mns) as bearish sentiment, it has now fallen to the official Sell level following the strong Buy of Mar 2020.

The INT term NDX ST 3x ETFs (outlook 2 to 4 mns) bearish sentiment has not declined as much as the SPX and may mean higher prices before a larger top.

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 Nov 26.

With Fri close at SPX 4698, options OI for Mon is moderate with put support up to 4700 that could push prices toward 4725 with a reversal likely by the close toward 4710.

Wed has somewhat smaller OI where SPX could retrace back to 4700 with put support starting at 4680.

For Fri strong call resistance is likely to push closing SPX prices below 4700, possibly as low as 4675.

For EOM, Nov 30 strong put support appears at SPX 4600 and call resistance should push price to 4650 or lower.  The very low P/C currently is worrisome for the bulls.

IV. Technical / Other

This week I wanted to review the ST and LT NYSE Adv/Dec volume and take a look at AAPL.  First the LT volume is declining, but not near the Sell level.

ST, the Adv/Dec volume has fallen sharply to levels that generally see a ST pullback in SPX.

The ED was used as  warning before the Sept pullback and now APPL is near resistance again.  A modest pullback is likely before  "throw over" to cause capitulation by the bears.

Conclusions.  So far the INT outlook remains the same as a few days of range trading of SPX high 4600s to low 4700s is likely with a decline to 4600 or lower by early Dec followed by a final Xmas rally believe a more significant decline (15%+).

Weekly Trade Alert.  Upside target may be raised to SPX 4720-30 given the increase of bearish support for SPX options OI.  A pullback should start by late Fri with possible whipsaw the following Mon (CyberMon).  Updates @mrktsignals.

Investment Diary,  Indicator Primer,
 update 2021.07.xx  Data Mining Indicators - Update, Summer 2021 (in progress),
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Will Optimism Carry All Boats?

The SPX continues to act as expected after considering the LT sentiment indicators and ST options OI, as last week a pullback was expected to the 4625-50 support level (act 4630, Wed).  Then the SPX bounced to over 4680 by Friday. Continued weakness in the hedging indicator and an overly bullish options OI both indicate that the decline is not over, and I am expecting a b-wave high around SPX 4710-30 sometime next week with a continued decline below 4600 (4550-600) into late Nov - early Dec.

For a macro-economic view of potential problems in early 2022 and beyond, I recommend two recent articles from John Mauldin (Oct 29, Nov 12) where he points out the potential for 8% YOY CPI for 2022 Q1 combined with 1-2% growth in GDP.

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 INT/LT Composite indicator continues to work its way lower.

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 did move the ST Composite to a positive sentiment position, but not enough for a sustained rally.

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.

A drop in the hedge spread late in the week moved this indicator to a less positive position.

The ST EMAs showed some improvement, but remain near the lows of the last two years.

Bonds (TNX).  Bearish sentiment in bonds was little changed as rates were volatile but in the end relatively unchanged.

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 has now reached the top of its expected range of 240-60, but following the reversal from a ST breakdown below 240 could move somewhat higher.  A sustained downtrend is not expected until 2022.

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).

The DM/SM indicator remains near recent lows and is consistent with an INT top.

And the sister options Hedge Spread bearish sentiment as a ST/INT indicator (outlook 1-3 mns) bounced off the Sell level seen the prior week, but remains at very low levels.

Taking a look at the ETF ratio of the INT term SPX INT (2X) ETFs (outlook 2 to 4 mns, using 10Dy SMAs) as bearish sentiment, this indicator has now moved to the lowest levels seen in over 3 yrs.

The INT term NDX ST 3x ETFs (outlook 2 to 4 mns, using 10Dy SMAs) as bearish sentiment, this indicator has also now moved to the lowest levels seen in over 3 yrs.

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 Nov 19.
With Fri close at SPX 4683, options OI for Mon is small with moderate put support starting at 4630.  An early to/over 4700 is possible, perhaps due to optimism over the XI/Biden online conference, but a late fade to 4680 or lower is likely.

Wed has similar OI with less put support where SPX is likely to be trapped in the fully hedged range of 4650-700.

For Fri very low P/C is currently not supportive of a strong close, but the weakness/volatility outlined for Mon-Wed may improve sentiment enough for a final push higher into optn exp..

For EOM, Nov 30, very strong bullish sentiment currently shows the potential to move down to/below last weeks low of 4630.

IV. Technical / Other

N/A


Conclusions.  Overall outlook remains the same with the reversal of off last weeks lows expected to bring a test of the ATHs next week before a move down to test the early Sept highs of 4550 (4550-600) into late Nov early Dec.  Bigger problems seem to be in store for 2022.


Conclusions.  Next week could be volatile with several whipsaws likely to create enough bearish support for an ending optn exp rally.

Weekly Trade Alert.  .  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,
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All Price Targets Have Been Met

Essentially all price objectives since the mid-Oct lows have been met.  The SPX exceeded the price target of 4650, reaching 4720 last week before a pullback below 4700.  The DJIA also reached the 36k target and the DJTA exceeded its prior high on Tue with a 2000 pt jump on Tue (close +1000) with a huge move of +200% intraday in Avis (CAR).  Even as the Fed committed to a QE taper program of 15 B/mn, int rates (TNX) fell as economic data, outside of the lagging jobs data, points to a slowing economy.  A slowdown that negatively effects EPS may be the source of trouble in early 2022.

Timing, however, still seems to point to several weeks before serious problems emerge as the ST Indicator remains near neutral, while the major support for the market, the hedging activity as measured by the hedge spread, is recently showing much weaker support.  The period around mid-Dec still remains the most likely time for an important top and may be a lower high as in Dec 2015.  There is likely to be at least one test of the Sept highs at SPX 4550 (below 4600) in the interim.

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.

New lows were made last week for the INT/LT Composite.

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%.

Nothing happened after the early Oct Sell which could simply be early as in early May.

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.

Continurd low levels of bearish sentiment are a warning of trouble ahead.

The sharp decline in the ST EMAs (grn) indicate that a pickup in volatility is likely.

CITI Surprise Inflation Index for Nov shows a peak in inflation surprise in Sept, although it remains at multi-year highs.

Bonds (TNX).  Bearish sentiment in bonds remains near recent highs and combined with declining inflation expectations could mean a modest pullback in rates ahead.

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 continued narrow range of sentiment likely means more of the narrow price range seen recently.

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).

Lows in bearish sentiment appears to be in several months before the final INT top as was seen Aug 2018 and Dec 2019.

And the sister options Hedge Spread bearish sentiment as a ST/INT indicator (outlook 1-3 mns) saw a sharp decline last week with the INT (blue) EMA nearing the warning level of -1.0 SD.

Taking a look at the ETF ratio of the INT term SPX INT (2X) ETFs (outlook 2 to 4 mns) as bearish sentiment, this measure is testing the lows of the last three years.

The INT term NDX ST 3x ETFs (outlook 2 to 4 mns) bearish sentiment is at its lows of the last three years similar to Aug 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 Nov 12.

 
With Fri close at SPX 4370, options OI for Mon is very small, but shows extreme bullish sentiment with weakness possible toward the SPX 4650 level.

Wed has similar size OI with strong put support at SPX 4625 and a likely range of 4625-4680.

For Fri strong call resistance at SPX 4700 is likely to keep the SPX below that level.

IV. Technical / Other
N/A

Conclusions.   SPX prices have risen somewhat.farther and certainly faster than expected, but sentiment is indicating that an important top may be only a few weeks away.  Currently, I am expecting that top mid to late Dec with no further upside targets.

Weekly Trade Alert.  Next week looks like it will be the typical ST pullback before a run higher into optn exp Nov 19th.  Lows will likely be limited to SPX 4625-50, while a larger pullback to test the breakout level of 4550 may occur late Nov-early Dec.   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
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