Sentiment Signals for Market Investmentsby Arthur Knopf, Financial Economist and Contrarian: March 2022

Saturday, March 26, 2022

The Crash No One is Talking About

Last week started out as expected with a carry over of upside momentum into Mon/Tue carrying the SPX up to the 4522 level, but the mid-week pullback only lasted thru Wed to 4466 (-66pts vs expt -100+ pts). The reason primarily was a sharper than expected selloff in bonds with money flowing into stocks for inflation protection. This weeks Tech/Other section takes a closer look at the SPX/TNX trends from late 2017-18 and rates are running well ahead of that period. If the current trend continues (which seems likely based on higher CPI comparisons), a continued rise in rates (TNX) toward 3.5% (current 2.5%) could cause a dislocation in stocks of 15-20% similar to Jan-Feb 2018, where 3.5% is twice the DJIA div yield and may cause reverse asset allocation. Ultimately TNX rates are likely to reach 4-4.5% over the next 12-18 mns based on inflation comparisons.

Looking at the performance of INT bonds using the 20 yr TLT ETF, prices are down 10% in the month of Mar and 17% since Dec. Currently at 128 vs Dec 155, a 12-18 mn target of 100 or par seems reasonable, especially considering the TBT/TLT ETF sentiment indicator which shows a drop in bearish sentiment as BTFD is strong in the retail bond sector.

Current sentiment outlook is for several more weeks of higher prices with ST trends likely influenced by int rates (TNX). One EW analyst with a good ST record expects SPX 4700+ by mid Apr.

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 UVXY $ volume.

Update. Bearish sentiment continues to drop, but remains well above neutral.

The ST Composite as a ST (1-4 week) indicator includes the NYSE volume ratio indicator (NYDNV/NYUPV & NYDNV/NYDEC) and the UVXY $ Vol/SPX Trend. Weights are 80%/20%.

Update. Bearish sentiment has dropped below neutral which may result in some consolidation similar to June 2020 before a 200 pt run up and a more serious correction.

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.

Update. Bearish sentiment remains slightly above neutral, similar to early June 2020.

Update EMA. Bearish sentiment is coming off a similar high as seen in June 2020.

Bonds (TNX). Bearish sentiment in bonds surprisingly has dropped as rates rose as BTFD is strong. It's hard to tell if the threat of sanctions has caused China to dump US bonds, or if FED hiking rhetoric has scared fund managers, but the retail sector seems oblivious.

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. Bearish sentiment overall is unchanged as ETF sentiment is offset by higher int rates with prices consolidating near the recent highs.

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).

Update. Bearish sentiment has fallen sharply but remains well above neutral.

And the sister options Hedge Spread bearish sentiment as a ST/INT indicator (outlook 1-3 mns) remains very strong, indicating that pullbacks will be limited and likely short-lived.

Taking a look at the ETF ratio of the INT term SPX INT (2X) ETFs (outlook 2 to 4 mns), bearish sentiment has declined from extremely high to the Buy level.

The INT term NDX ST 3x ETFs (outlook 2 to 4 mns) bearish sentiment remains well above neutral and the tech sector may continue to be held back by higher rates until the FED decides to pause, resulting in the last vertical phase for markets.

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 Apr 1. A text overlay is used for extreme OI to improve readability, P/C is not changed.

With Fri close at SPX 4543, options OI for Mon is very small and the verall high P/C and huge Thur put positions at 4510 and 20 may provide enough support to keep prices near current levels.

Wed has smaller OI where SPX price levels are likely to be influenced by EOM positions.

For Thur Mar EOM strong OI has now been about 50% hedged (straddles) where ther is not a lot of call resistance over 4500 to 4600, but not much put support over 4510-20. SPX 4600 is possible.

For Fri (Mar jobs/payroll data) moderate OI shows strong call resistance at 4550 and over and if 4500 is broken to the downside, there is little put support until 4450.

IV. Technical / Other

Looking for some way to estimate the outllook for Apr, I decided to look at VIX options. First, the VIX call indicator continues to look more bearish, but notice for Mar & Oct 2021 there was a 4-6 week lead before a market downturn.

So next, I looked at the VIX options OI for Apr 20 which looks bearish based on # of contracts, but then I noticed that ATM call prices were 3x ATM puts which shows strong call resistance at 25 and a very low P/C $. Therefore the bias is likely for a lower VIX thru mid-Apr which means higher stock prices. (Note at 100 units/contract, $ amnts are x 100)

Turning to the SPX vs TNX rate outlook, I noticed that from late 2020 thru mid 2021 SPX rose with int rates, but from mid 2021 thru early 2022 they moved in opposite directions after rates hit the DJIA div yield at 1.7%. Now, in Mar, they are again moving together.

Looking only at the SPX during the melt up phase from Sept 2017 thru Jan 2018, all of the declines were 1-2% and were immediately BTFD which may explain the smaller than expt decline last week.

Looking at the SPX vs TNX rate performance for 2017-18, rates started at a lower level in Mar 2022 at 1.7% vs 2% in Sept 2020, but last week rose to the same 2.5% in the first month. There may be a consolidation at 2.5% as in 2017, but I expect rates to continue to rise over the next few weeks. If rates continue to rise toward 3.4% (2x DJIA div yld), we could see a dislocation (crash) similar to the Jan-Feb 2021 decline (at 2.7%) to test the SPX lows at 4100 or lower.

Conclusions. The early comparison of SPX ETF sentiment to the pre-melt up period of late 2017 has been proven correct so far, and if anything the rise in both int rates and stock prices have been stronger than expected. As noted in the Tech/Other section, the rapid rise in rates may create a more serious problem if we see a more immediate rise to TNX 3%+.

Weekly Trade Alert. Prices seem likely to rise with the SPX possibly approaching 4700 or higher by mid-Apr. Pullbacks may be limited to the 1-2% variety and are likely to reverse quickly. I have noticed a strong correlation each day between the direction of int rates and stock prices with rates usually leading. Updates @mrktsignals.

Investment Diary, Indicator Primer,
update 2021.07.xx Data Mining Indicators - Update, Summer 2021,
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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Article Index 2017 by Topic
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Saturday, March 19, 2022

Let the Melt-Up Begin

A rally was expected last week after some initial weakness and Mon saw a drop from an opening high at SPX 4250 down to the previous weeks low for a double bottom at 4160. I expected a rally to 4350+, possibly to match the early Mar high at 4420, but extreme sentiment continued to push prices higher to 4460. The positive VIX call indicator was prescient, but is now warning of a turn down by mid-week. The huge SPX put OI for EOM Mar 31 at 4500+ probably means that the Bradley turn for Mar 28 will be a top in the 4500-600 range.

Much of last weeks rally of 7% occurred during Tue/Wed (200 pts) and much of the rally was likely short covering as the bears apparently expected rate increases to crash the market. The Bank of England is about 4 months ahead of the US Fed in its tightening cycle, and after raising its ST int rate to 0.75%, indicated that it may be time for a pause due to economic weakness. Afterwards, the FTSE soared and has now recuperated 2/3s of the loss since early Jan. This is the same outlook I have for the US Fed.

Due to the blowup of Barclay's VXX ETN last week when they announced the suspension of adding new shares which forced a frenzy of short covering pushing prices above NAV, I have decided to replace the VXX with the UVXY ETF. This may effect both the INT/LT Composite indicator and ST Composite indicator.

Update. Bearish sentiment retreated back to the Buy level, but remains INT bullish.

The ST Composite as a ST (1-4 week) indicator includes the NYSE volume ratio indicator (NYDNV/NYUPV & NYDNV/NYDEC) and the UVXY $ Vol/SPX Trend. Weights are 80%/20%.

Update. Bearish sentiment pulled back to the neutral level that could lead to some range trading, but not a change in general direction.

Update. Bearish sentiment has moved slightly below the Buy level, notably weakness in SPX Call FOMO that lead to a pickup in volatility in Feb.

Update ema. Bearish sentiment shows a pickup in ST weakness that may mean a small pullback of 100+ SPX pts next week before further gains.

Bonds (TNX). Bearish sentiment in bonds has fallen back to neutral following last weeks jump in rates from 2% to a high of 2.25% Wed before a weekly closing at 2.15%.

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. Bearish sentiment remains a low levels as the HUI briefly fell back to the 300 level before rebounding.

Update. Bearish sentiment remains very high with the EMAs now near the Buy level.

And the sister options Hedge Spread bearish sentiment as a ST/INT indicator (outlook 1-3 mns). Bearish sentiment is also still near the Buy level.

Taking a look at the ETF ratio of the INT term SPX INT (2X) ETFs (outlook 2 to 4 mns) as bearish sentiment, EMAs remain well above the Buy level after a sharp pullback.

The INT term NDX ST 3x ETFs (outlook 2 to 4 mns) bearish sentiment is relatively unchanged, possibly due to fear of previous reactions to higher rates.

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 Mar 25 and EOM. A text overlay is used for extreme OI to improve readability, P/C is not changed. Also, this week includes a look at the GDX and TLT for June exp.

With Fri close at SPX 4463, options OI for Fri PM optn exp showed a lot a lot of strength pushing thru 10k+ net calls and will likely mean continued strength Mon/Tue toward 4500.

Options OI for Mon is very small and the positive momentum is likely to hold any pullback to 4450 with the next significant call resistance at 4500.

Wed has somewhat larger OI where SPX has almost no put support until 4300 with fairly strong call resistance from 4425-500 and is likely to start a pullback if 4500 is reached.

For Fri strong call resistance at 4450 down to 4400 and little put support is likely to push prices to 4350 or lower.

For EOM very strong put support at SPX 4510 and 4520 is likely to push prices up to 4550 or stronger call resistance at 4600.

Using the GDX as a gold miner proxy closing at 37.2 is right below strong call resistance at 38, while there is very little put support if market direction changes although prices did push well above resistance for Mar at 35.

Currently the TLT is 133.4 with the TNX at 2.15%, large positions of calls at 134 and puts at 135 may keep a tight range between133 to 135 (TNX 2-2.15%) with a bias to higher rates (low P/C).

IV. Technical / Other

Last weeks weak Buy from the VIX Call indicator worked well, but a pickup in call buying as prices rose is now warning of a ST turn over the next few days, probably SPX 100+ pts.

Conclusions. Late Feb, and early Mar, I pointed out the similarities to sentiment in late 2017 in a period when the Fed was beginning an int rate increase cycle that resulted in a 20% melt-up in 5 months to the Jan 2018 high. Last week was a good beginning, but as shown last week, in other periods when the markets reacted positively after a "death cross" in the SPX (2011 and 2015 ), sharp rallies may be followed by retests for several months. The big rally may be postponed until the Fed reaches the same point as the Bank of England last week and decides to pause rate hikes (possibly June/July).

Weekly Trade Alert. The SPX may continue to push higher Mon/Tue on positive momentum, but by mid-week should begin a pullback of 100+ pts to 4350-4400 before a rally into the EOM to 4500-4600. A pullback is more likely on high VIX call vol, 400-500k/day on Mon/Tue. 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

© 2022 SentimentSignals.blogspot.com

Saturday, March 12, 2022

A War within a War

Last week I mentioned that US/NATO sanctions against Russia could create more problems than expected, and Mon 15% opening spike in oil and increases in other commodity prices certainly supported that idea. Looking at the BIG picture, I think that we may be on the cusp of a decade(s) long global trade war between the producers (China for goods, and Russia and ME for commodities) and the consumers (US, Japan and EU). Since the 1980s, the consumers have controlled global finances with the US$ as a reserve currency and have accrued a disproportionate share of the wealth while keeping producers prices and profits low. Trump fired the first salvo at China in 2017, but he fired only blanks as tariffs announced were quickly rescinded or delayed as soon as the SPX dropped 2%+ and the trade deficits were larger at the end of his term than before. Sanctions against Russia are likely to be much more effective and have much more adverse effects on global trade and be longer lasting. The US started the last global trade war with the introduction of the Smoot-Hawley tariff act in May 1929 (passed Mar 1930), I guess you could say we won but only after a 10 year depression and a world war. Then we were the #1 goods and commodity producer, but now our main production is just US$.

No major changes in sentiment this week. Tech/Other takes a look at the performance of the SPX during mid-term election years since 1950 and a ST indicator that indicates a bounce is likely next week.

I Just wanted to briefly mention two other analysts views that point to a low soon in the SPX 4000-4100 area with an ED. The first is Trader Joe who uses SPX closes and the second is Simon M of iSPYETF. With the next Bradley turn date on Mar 28, a rally this week may be a "false flag" with a lower low the following week.

Update. INT/LT sentiment remains high but is not likely to cause a strong bounce until some resolution of the Ukraine/Russian invasion.

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%.

Update. Sentiment still positive.

Update. The ST/INT Composite indicator remains near the Buy level.

Update ema. Also little change.

Bonds (TNX). Bearish sentiment in bonds fell back to neutral as rates bounced back to 2%.

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. The spike in oil and ag commodities has provided an unexpected bounce in the gold miners, but also a sharp drop in sentiment that could lead to a sharp drop in prices if conditions change in Ukraine.

Update. Sentiment remains near high extremes.

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

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 dropped from recent extremes but well above a Buy.

The INT term NDX ST 3x ETFs (outlook 2 to 4 mns) bearish sentiment remains near recent 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 Mar 18. A text overlay is used for extreme OI to improve readability, P/C is not changed.

With Fri close at SPX 4204, options OI for last Fri shows that OI alone was not able to hold up prices. The small net call OI at 4290 stopped the rally while the late selloff to 4200 easily went thru the 2k net put support at 4225 - a sign of ST weakness.

Options OI for Mon is small, but overall P/C is positive. Put support exists up to SPX 4250, but given Fri weakness, a drop below 4200 could drop to 4150 but is likely to bounce back to 4200+.

Wed is smaller OI where SPX shows weak P/C and some support at 4150 and 4200. There is no real call resistance until 4425 and 4500, so late squaring for Fri triple witch may push prices over 4250 toward 4300.

For Fri moderate OI and strong put support at 4300 and 4350 and little call resistance may push prices to 4425-50+.

IV. Technical / Other

First,I want to repost something I saw on Twitter about mid-term election years since 1950. here He has incorrectly included 2022, but the results indicated an avg decline of 17% over the previous 18 periods with an average low in month 10 (Aug). The conclusion being that the decline may continue for a few more months before a final bottom (Fed pauses rate hikes), but the expected rally after is ~30%.

One ST indicator I have been watching is the VIX Calls and NYDec/Advs. It seems to work better when VIX is high (30+) and indicates a ST bounce is likely.

Conclusions. With the SPX 200 SMA at 4467 and 50 SMA at 4476 the SPX is very likely to see a "death cross" next week as the 50 goes below the 200, but how deadly is it? Since 2008, I found 4 times the DC occurred from a multi-year high with the Dec 2007 and 2018 disasters, while Aug 2011 and 2015 occurred near lows that were retested several months later. This one looks like it will be near a low, and a retest in several months seems to square better with the mid-term cycle.

Weekly Trade Alert. Traditionally, optn exp week has started off weak with a rally starting Tue/Wed and extending into Fri close. Given the uncertainty of world events, however, nothing has been traditional for over 2 years, but options OI is indicating this is what is likely with no outside surprises. That said Mon-Wed is showing firm put support at SPX 4150-200 and FOMC results may be a dud since results are already indicated by Powell. With Fri showing large put positions up to 4400, a rally may start late Wed to 4250-300 with continuation to 4400-50 on Fri. 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

© 2022 SentimentSignals.blogspot.com