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.

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 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.

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 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.

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 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

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