Special Holiday Edition Dec 24, 2021

I forgot about this Xmas being on Sat, so here is a special Friday edition as a Xmas present. I also left out the trading range parameters last week, but hopefully everyone knew it was SPX 4500-4750+.

Last weeks outlook was that the decline into the opt exp Fri was not the beginning of a downtrend and compared to 2015 could see new highs over the next couple of weeks.  Indeed, the next three days after Mon's follow thru to an SPX 4531 low was followed by a three day bonanza to a new closing high at 4726, missing the intra-day high by 4 pts.  Now, however, I am seeing the same analysts who were predicting an SPX drop to the 4300's last weekend predicting a move to 4900-5000 over the next couple of weeks.  So don't be surprised if we see a drop below SPX 4531 early Jan, before a move to 4750 or higher later in the month.

Overall ST/INT sentiment is near neutral and next week is likely to be a consolidation week between SPX 4675 and 4725.

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 appears to have completed its rally matching the Jan 2020 decline and we may not see a lower low before the final top.

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 SPX surge moved the 10 day SMAs to neutral with several more days of consolidation in the 4700+ range likely before any pullback.

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 be following the pattern of Sept-Oct 2020 where a decline in the LT EMA (blue) to -0.5 to -1.0 is needed before a retest of the Dec lows.

The faster moving EMAs are more reflective of a fast moving market and show that sentiment may reach the Oct 2020 levels in a few days.

Bonds (TNX).  Bearish sentiment in bonds continues to fall even as rates have flattened out.

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.

A downturn in bearish sentiment may limit rallies to the 260 resistance level.

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).

Here, the faster moving EMAs were used to reflect the fast moving prices and we see that bearish sentiment peaked near the same level as the Jan 2020 pullback and has reversed sharply.

And the sister options Hedge Spread bearish sentiment as a ST/INT indicator (outlook 1-3 mns) has turned down, but remains positive (>0).  This should limit ST downside.

Taking a look at the ETF ratio of the INT term SPX INT (2X) ETFs (outlook 2 to 4 mns) as bearish sentiment, sentiment remains at extremely low bearish levels.

The INT term NDX ST 3x ETFs (outlook 2 to 4 mns) bearish sentiment remains largely unchanged even though the NDX is showing a pattern of lower lows and lower highs.

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 30.

With Fri close at SPX 4726, options OI for Mon is small, but the overall P/C is high.  Most of the put support is far OTM with 4700 a hedge with +400 puts. Some negative bias toward 4700 is possible with call resistance at 4750.

Wed has somewhat larger OI where SPX shows very little put support below 4650 and a move toward 4675 is possible with call resistance above 4700.

For Fri, also EOM, put support is somewhat stronger up to 4675 with moderate call resistance at 4700 and above.  A weekly close near 4700 is likely.

IV. Technical / Other N/A


Conclusions.  The SPX goes down 200 pts and everyone thinks it will go down another 200 pts, then we go up 200 pts and everyone thinks it will go up another 200 pts.  At some point there will be a breakout / breakdown, but possibly not until everyone thinks otherwise.

Weekly Trade Alert.  With ST sentiment near neutral the outlook for next week is for a consolidation near recent highs. If we continue to see a sharp decline in bearish sentiment, the there may be another shape decline to test recent lows before a final rally in Jan to INT highs. Another possibility remains an ED in the SPX stretching over the next two to three weeks.  Updates @mrktsignals.

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 update 2020.02.07 Data Mining Indicators,
 update 2019.04.27 Stock Buybacks,
 update 2018.03.28 Dumb Money/Smart Money Indicators

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Trading Range Confirmed

Last week was expected to show a positive bias thru mid-week with a fizzle by opt exp Fri. The actual result was more volatile than expected with a Tue selloff before a very strong late Wed and early Thur rally to new ATHs and then a strong fizzle thru late Fri with an overall loss of 1%. As noted for several months, I have been expecting more of a rounded top similar to mid-2015 rather than the blow off tops seen since early 2018 and so far Nov & Dec have been a good example with prices ranging between SPX 4500-750. With the recent weakness in retail sales for Nov and the concurrent weakness in the large cap techs leading the NDX, the surprise for 2022 Q1 may be weak EPS that hits the market leaders disproportionately. This fits my outlook for weakness in the averages starting with the mid-Jan earnings season.

Sentiment indicators are starting to turn down but remain well above the Sell level, so several more weeks of directionless trading are likely ahead. The implications of last weeks late selloff are unclear, but in Tech/Other a chart of the SPX for 2015 Q4 shows similar behavior before the Jan selloff. A look at the VIX Buy&Sell components is included.

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 a pattern somewhat similar to early 2020 where a modest uptick in bearish sentiment occurred with the Jan pullback and a higher low in sentiment was seen before a larger top.

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%.

Here, a sharp drop in ST sentiment occurred thru Wed before rallying back above neutral Thur-Fri.

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, bearish sentiment remains elevated (due to FOMO and hedging), and indicates several weeks of positive bias are likely before a larger decline.

The faster EMAs are showing weakening sentiment.

Bonds (TNX).  Bearish sentiment in bonds continues its modest decline.

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.

As expected, the HUI bounced from just below the 240 support level, and a modest increase in bearish sentiment supports more gains.

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).

Similar to the INT/LT Composite, sentiment may be following the path seen in early 2020 where the extreme lows were seen several months before the final top with the recent rise similar to the Jan 2020 pullback.  This favors several weeks more of positive bias.

And the sister options Hedge Spread bearish sentiment as a ST/INT indicator (outlook 1-3 mns) remains elevated which should limit declines until sentiment drops to lower levels. 

ETFs remain the strongest sign of weak LT bearish sentiment.  Taking a look at the ETF ratio of the INT term SPX INT (2X) ETFs (outlook 2 to 4 mns) as bearish sentiment, only a modest uptick could limit gains to 4750 + 1%.

The INT term NDX ST 3x ETFs (outlook 2 to 4 mns) bearish sentiment remains near AT lows and will likely contribute to the rotation from growth to value.

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 23 and EOM.

With Fri close at SPX 4621, options OI for Mon is very small and put support up to 4700 could contribute to a rally back toward the SPX 4675-4700 area.

Wed also has small OI where SPX has more call resistance at 4700 and above and put support drops to 4600, so a wide range is possible.

For Thur strong call resistance at 4650 and 4750 are likely to limit any advances, but the exceptionally large positions may be smart money or some type of call spread that may keep prices between the high OI levels.

For EOM large OI at lower levels below 4500 may be skewing the overall P/C and should be ignored unless the SPX drops below 4550.  Otherwise, the range of 4650-4700 seems most likely.

IV. Technical / Other

Typically, EOQ or quad-witch options exp are considered accumulation when down and distribution when up (as Sept 2018) due to high volume, but occasionally they are not, eg, Dec 18, 2015. In 2015, we also saw a (lower) high in Nov that had a failed retest opt exp week with a sharp two day selloff into exp Fri, then a slightly higher high two weeks later before a larger selloff.

Otherwise, I wanted to take a look at some of the volatility measures, starting with the VIX Buy&Sell.  The lows may be in during July-Aug several months before the top as seen in late 2019-early 2020.

Looking at VIX components as diffs, the positive spread between the sentiment for the SKEW vs VIX/VXV has dropped sharply and is nearing levels seen before the Sept selloff.

Conclusions.   As someone once said, "bottoms are an event and tops are a process." The question remains for many as to whether the markets are building a base for further upside as many were expecting in 2015, or is market behavior indicating distribution as smart money sells to the less knowledgable. As now the worlds richest man and likely one of the smartest, E. Musk has recently sold over $10B in Tesla shares, so I think the vote is in.

Weekly Trade Alert.   I haven't given much directional advice recently and the markets recent behavior of turning on a dime shows why. About all I'm willing to say is enjoy the holidays and wait for a better opportunity.  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

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Snapback on Steroids

Last week was expected to start strong with a snapback rally to about the SPX 4625 level due to high ST bearish sentiment (about a 50% retrace), but Tue strength in the EU on the weakness of Omicron symptoms spilled over into US markets resulting in a 4% rally in two days.  The rest of the week was only mildly bullish.  ST SPX options OI indicates more upside is likely next week, but may fizzle by Fri optn exp.  INT high bearish sentiment is little changed, leaving the door open to higher prices ahead or at least a few weeks of high level consolidation before a top is formed.

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.

A modest increase in bearish INT/LT sentiment opens the possibility to a Feb 2020 type rally to new highs before a larger decline.

 

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 bearish sentiment has backed off the recent extreme highs, but remains elevated, and could support a modest advance.

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.

ST/INT bearish sentiment remains high.

The faster moving EMAs showed support for a very ST strong advance last week, but LT sentiment does not support a continued LT strong advance.

Bonds (TNX).  Bearish sentiment in bonds has dropped sharply and may indicate somewhat higher 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.

An increase in bearish sentiment as the HUI approaches the bottom of the 240-60 trading range may mean a ST rally is close.

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).

An increase in bearish sentiment could support a modest rally to ATHs as seen in Feb 2020.

And the sister options Hedge Spread bearish sentiment as a ST/INT indicator (outlook 1-3 mns) remains at modestly high sentiment levels. 

Taking a look at the ETF ratio of the INT term SPX INT (2X) ETFs (outlook 2 to 4 mns) as bearish sentiment, a slight up tick was seen last week from extreme levels.

The INT term NDX ST 3x ETFs (outlook 2 to 4 mns) bearish sentiment continues to work its way lower even as prices are starting to lag the SPX an may be an early warning of a turn lower in prices.

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 18.

With Fri close at SPX 4712, options OI for Mon is very small, but the overall P/C is high with put  support at 4675 and call resistance at 4700 and 4750.  Small positive bias as long as 4700 holds due to delta hedging,

Wed has smaller OI but higher P/C where SPX has put support at 4700 and call resistance at 4725.

For Fri larger OI and weak P/C could limit gains with strong call resistance at 4750 and above while put support at 4675 and 4725 may keep prices between 4700-25.

IV. Technical / Other

N/A

Conclusions.   With the Nov decline pushing the VIX well over 30 it is likely that a period of cooling down is seen before any further declines and is much of the reason for my pushing a possible turn date to mid-Jan.  The rally of last week looks much like a distribution setup for next weeks optn exp for Mn/Qtr, but there are little signs of a ST top of any importance.

There is a lot of talk about the Fed becoming more hawkish due to the persistently high inflation, but it is unlikely any changes will be enacted until Jan 2022.

Weekly Trade Alert.  Limited gains are likely, but a breakout over SPX 4750 is not.  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

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Stretching A Rubber Band

Last week managed to exceed my expections for a pullback to test the Sept highs (SPX 4530-50) with a decline down to 4495, but signs of panic are starting to appear with many now expecting the 4300s, and similar to the recent highs which exceeded my upside expectations temporarily, this is likely to produce a snapback similar to the stretching of a rubber band.

Sentiment measures are somewhat of a mixed bag with ST/INT (options based) nearing levels where a rally should occur while INT/LT (ETF based) are becoming even more extreme for low bearishness. The most likely outcome still appears to be a Xmas rally (60% prob) before an even larger decline starting early 2022. This week John Mauldin discusses one possible reason for continued strength in the ETFs.

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.

There has been a modest increase in bearish sentiment in the INT/LT Composite which was largely unchanged by the late Sept decline, but still remains 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%.

The ST Composite has reached a strong Buy level similar to June 2020, but it remain elevated in June for a couple of weeks before a multi-week rally began.

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 sentiment has reached the highest level of the past year, but similar to June and Sept of 2020 and May 2021 may not see an immediate response.

FOMO sentiment has also jumped strongly.

The longer term EMA (blue) is likely to rise to 1.0 SD before a rally begins.

CITI Surprise Inflation Index for Dec shows a modest pickup for the US, but is much stronger outside of US and CA which use shale oil as a buffer to the current energy shock in the EU.

Bonds (TNX).  Bearish sentiment in bonds remains largely 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.

Update as expected, the HUI fell into the 240-60 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).

There was a modest pickup in bearish sentiment for the DM/SM indicator, but it remains below that seen in the Sept decline.

And the sister options Hedge Spread bearish sentiment as a ST/INT indicator (outlook 1-3 mns) saw a very sharp pickup late in the week and is likely to limit any further downside.

Taking a look at the ETF ratio of the INT term SPX INT (2X) ETFs (outlook 2 to 4 mns) as bearish sentiment, ETF sentiment remains the most perplexing as $ volume (price x volume) continues to increase and I view this as very bearish LT. If Mauldin is correct, this could be positive ST.

The INT term NDX ST 3x ETFs (outlook 2 to 4 mns) bearish sentiment is same as SPX ETF.

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 10.

With Fri close at SPX 4538, options OI for Mon is very small, but if prices go over light call resistance at SPX 4575 then 4625+ seems likely.

Wed has somewhat smaller OI where SPX shows put support up to 4600+.

For Fri stronger OI shows put support at 4550 and call resistance at 4700 with neutral straddles in between and neutral P/C that may provide aimless trading.

IV. Technical / Other

This week I wanted to take a brief look at the Combined Put-Call Revised indicator (Equity + ETF + SPX), sentiment is very similar to the INT/LT composite with a modest move off Sept lows,.

The VIX Buy&Sell components (VIX/VXV & SKEW) difference is the same as late June where I mentioned that the high SKEW (low sentiment) relative to the VIX term structure was more bullish than bearish.

Conclusions.  Overall, sentiment is somewhat of a mixed bag with the strongest case for a ST/INT rally from the Hedge Spread and the VIX Buy&Sell components, options indicators are supportive of the bulls case but may require another week or two to support a rally.  The SPX and NDX ETFs are somewhat of a mystery as inflows relative to outflows are increasing, but may be explained by pension fund investing and is likely to be a LT negative.

Weekly Trade Alert.  The next week or two are likely to be a basing period, or consolidation near recent lows (4500-4600+) with an Xmas rally possibly from mid-Dec to mid-Jan before the onset of a longer term bear market.  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