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,
 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
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