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

Saturday, April 30, 2022

Returning to a Pre-Covid Fed

Last week started out much as expected with a strong rally in SPX, but from a lower low of 4201 to a high of 4300, before a washout on Tue to a close at 4175. From a low Wed AM around 4160, the SPX rallied almost 150 pts to 4300+ Thur, but a weak EPS surprise from AMZN led to another washout Fri into the close to the 4120s or a full retest of the Feb lows. Looking forward, the next major Bradley turn date is May 14 (close to the mid-May low discussed last week). The last major Bradley turn date was Mar 28, one day before the high at SPX 4640, so May 14 (a Saturday) should be a low +/- a day or two.

Avi shows a possible EW count in his Wed update where we may be seeing a large ABC decline with the A being an SPX 700 pt drop from the Jan 4820 high to 4115 in Feb, B a 500+ pt rally to the Mar high at 4640, and C a 5 wave drop of 700 pts to about 3940 where each decline is 400 pts, the w3 from 4512. Next should be a 200+ pt rally to 4300+ before the final wave down into the mid-late May time frame.

Sentiment wise, LT sentiment remains well below that seen at the Feb lows meaning more downside is likely, while ST sentiment is near the Buy level where many ST rallies have occurred in the past, while ST/INT sentiment is high relative to the post-Covid period where the Fed has been "all-in", but still somewhat low relative to the pre-Covid period of a normal Fed and may mean more trouble ahead.

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. Sentoment remains well below that seen at the Feb lows and could mean significantly lower lows if B as a flat aka Oct-Nov 2018, or more retest/lows as Feb-May 2018.

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. Sentiment near a Buy, could mean a ST rally or more downside before bigger 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.

Update. Sentiment is boosted by very high Hedge Spread that may be ST bullish, but looking at LT EMAs could be effect of sentiment shifting to pre-Covid period of normal Fed.

Update EMAs. Sentiment may be ST bullish.

Update EMA LT. There is a very noticable shift in hedging pre (2018-19) and post (2020-21) Covid, most likely due to super accommodative Fed, and higher sentiment to generate Buys and Sells is likely.

Bonds (TNX). Bearish sentiment in bonds is back above neutral and could mean a range in rates (2.7-3.0%) for the summer similar to 2019 summer.

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. With increase in volatility, switching to EMAs.

Update. Sentiment remains at the Sell level with little change given the 15% drop in prices, somewhat reminds me of sentiment for the NDX which remained near lows at the end of Feb.

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. Sentiment is high by historical comparison, but still well below that of the Feb lows and is most similar to Nov 2018 where Dec lows produced equal sentiment levels before an INT bottom.

With the sister options Hedge Spread bearish sentiment as a ST/INT indicator (outlook 1-3 mns), appears very bullish for the post-Covid period, but may not reflect current Fed policy.

While the LT view of the Hedge Spread bearish sentiment indicates a much weaker bullish sentiment compared to the pre-Covid Fed. For the future I will be using this as main outlook.

Taking a look at the ETF ratio of the INT term SPX INT (2X) ETFs (outlook 2 to 4 mns), bearish sentiment is above the Buy level. but well below the Feb price lows. A ST rally is possible but INT bottom is unlikely.

Using the NDX sentiment with the interest rate effect, the INT term NDX ST 3x ETFs + TNX (outlook 2 to 4 mns) bearish sentiment using the faster EMAs has matched the Buy level of the Feb NDX lows and prices should at least match SPX performance.

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 May 6. A new addition is added for OI $ amounts with breakeven pts (BE) where call & put $ amounts crossand $ volume. A special Tue option OI is added and may mean unusual volatility.

With Fri close at SPX 4132, options OI for Mon has moderate put support at 4100 and 4125 and weak support up to 4190. Some support at current levels but little upside bias may mean a tight trading range.

Again we have a "special" Tue opt exp for FOMC Day 1 of 2. Since last Tue proved to be "smart" money, I am assuming the same here, so the large concentration of calls in the SPX 4320-50 area may indicate an expected rally toward the 4300 area, but small OI may limit effectiveness..

Wed has small OI where SPX shows support at 4200 but otherwise little directional bias. Prices could drop toward 4200.

For Fri moderate OI shows strong put support at SPX 4200 with call resistance at 4400 and mainly hedges in between. Should remain above 4200.

IV. Technical / Other - N/A

Conclusions. ST sentiment indicates that a moderate SPX rally of 200+ pts can occur, but INT/LT sentiment indicate that an INT bottom is not likely (ATH). The most likely INT outlooks seem to be a continued decline of 5 waves (EW) to SPX 4000 or lower, but a wider trading range (4100-4600) remains a possibility into the mid-term election. The May 14 major Bradley turn date should provide an INT/swing low +/- a couple days.

Weekly Trade Alert. Next week should have an upside bias and may reach the SPX 4300 level or higher. The Tue SPX OI could indicate unusual volatility, probably to the upside. Updates @mrktsignals.

Investment Diary, Indicator Primer, Tech/Other Refs,
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
Article Index 2018 by Topic
Article Index 2017 by Topic
Article Index 2016 by Topic

Long term forecasts

© 2022 SentimentSignals.blogspot.com

Saturday, April 23, 2022

Will Sentiment Save the Day, or Will "Sell in May" Prevail?

Last weeks outlook was somewhat indecisive as my crystal ball for bonds has not been working very well lately, but predicated on interest rates, the outlook was for a range of SPX 4400-500 if rates stabilized, but 4300-400 if rates rose. As it turned out an early week pullback in TNX from 2.9% to 2.8% sent stocks flying from 4393 to 4488 by late Wed, but a jump in rates to 2.95% Thur after more hawkish comments from Powell sent stocks tumbling from an early high of 4513 to 4272 by late Fri. This is slightly below the expected pullback range of SPX 4300-50 given after the early Mar high of 4640. Sentiment is now showing that SPX should be close to an INT low.

In the options OI section there is an unusual Tue exp (except after Mon holidays & EOM). With the French Pres runoff between Macron and the Trump-like Le Pen, a right-wing conservative, this weekend, a win by Macron may send EU stocks soaring and pull the US market along for the ride on Mon. Is the Tue opt exp a setup for a final washout to the put support at SPX 4200? ST & INT sentiment indicate that markets are at/near an early Mar type low that could see a "turnaround Tue" to a Fri EOM support level of SPX 4450+.

Update. After a move down to neutral on the ST EMA, we are now back to a level comparable to the Oct 2018 pullback.

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. Early in the week a drop below neutral was showing a caution sign, but reversed Thur-Fri.

Update. The ST EMA (grn) saw a sharp spike above 1.5 SD that usually sees at least a ST reversal. Previous lows were Dec early 2021, and late Jan & Feb where bounces of SPX 200+ pts were seen.

Update. After a pullback in sentiment to below neutral at the Mar SPX highs, sentiment has now rebounded to the same level as the early Mar lows and the Sept 2020 lows.

Update. ST EMAs moved to the highest levels since mid-2020 and should see a strong reversal the next few days.

Bonds (TNX). Bearish sentiment in bonds retreated sharply last week as rates stabilized, indicating more pain ahead for bond investors.

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. Last weeks GDX options OI for May indicated a BE of 35 and this week GDX fell over 10% with the HUI to 37, and sentiment fell to new two year lows, indicating strong possibility of an INT top.

Update. After falling below neutral ST at the Mar SPX highs, sentiment has now turned mildly positive.

With the sister options Hedge Spread bearish sentiment as a ST/INT indicator (outlook 1-3 mns), exploded to the highest level since May of 2020 with the LT EMA (blu) just below the levels of FEB-Mar. A move back to the SPX 4600+ level seems likely in the next 1-3 mns.

Taking a look at the ETF ratio of the INT term SPX INT (2X) ETFs (outlook 2 to 4 mns) as bearish sentiment, the move to the Buy level has reversed by the same amount.

Using the TNX plus ETF sentiment shown for the HUI as the NDX sentiment with the interest rate effect. The INT term NDX ST 3x ETFs + TNX (outlook 2 to 4 mns) bearish sentiment using the faster EMAs also shows a strong bounce back to the Buy level, but below that of the Mar level. NDX may continue to underperform SPX.

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 July 16. 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 for Dec exp. A new addition is added for OI $ amounts with breakeven pts (BE) where call & put $ amounts cross and $ volume. Last weeks selloff pushed the 600 pt range down to 4000-600.

With Fri close at SPX 4272, options OI for Mon is small with few calls below 4500. Main put support is at 4200 and 4300. Close may push prices to 4300+.

Unusual, but Tue has very small OI where SPX put support is mainly 4200.

Wed has small OI where SPX has staggered put support below 4300 that should provide a floor between 4200 and 4300.

For Fri strong OI with twice as many puts and calls as the rest of the week shows firm put support up to SPX 4450 that supports a strong bounce of 200+ pts similar to the early Mar reversal, although below 4200 there is little support until 4100.

IV. Technical / Other - N/A

Conclusions. Last week saw a considerable improvement in the overall sentiment picture with many of the ST/INT bearish sentiment levels matching or exceeding that of the Mar lows. This should allow prices to regain the post-selloff 2022 highs between SPX 4600-4700, but the strength of last weeks selloff does raise questions regarding the durability of the rally. One possibility I see emerging is an extended period of a trading range between SPX 4200-4700 into the mid-term election similar to the Nov 2018 range. Remember that bearish sentiment can be reversed either by time or price

Weekly Trade Alert. A swing low (4-6 wks) is likely Mon/Tue, possibly near SPX 4200. A sharp reversal to SPX 4450+ is possible by EOW and may follow the move off the late Feb low where an initial strong bounce was followed by a week-or-longer retest (into mid-May) then a stronger bounce for several weeks (weaker inflation news ?). Updates @mrktsignals.

Investment Diary, Indicator Primer, Tech/Other Refs,
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
Article Index 2018 by Topic
Article Index 2017 by Topic
Article Index 2016 by Topic

Long term forecasts

© 2022 SentimentSignals.blogspot.com

Saturday, April 16, 2022

Will Feds QT be Sell the Rumor, Buy the News for Bonds - II?

Last week I raised the opinion that bonds may be facing a situation of "sell the rumor, buy the news" regarding the Fed's QT expected for the May 4 FOMC, and in fact both Mon and Thur saw stong rises in int rates with the TNX reaching 2.8%. The rise in rates over powered the modestly positive sentiment. The SPX was contained in a smaller range of 100 pts only downward from about 4390-4490. I continue to feel that a 3% TNX is likely to cause the SPX to fall to 4300-4350, while a larger increase to 3.4-3.5% may result in SPX 4000 or lower (with 3700-800 possible). Trying to rationalize the current rise in rates, I remembered a trend seen in the QE programs of 2010-20 where rates fell before the QE started and rose after. The reason was front-running by fin institutions (banks & insc cos) who bought govt bonds at lower prices before QE then sold to the Fed at higher prices after rates fell. Now may be a similar front-running only selling before the Fed, expecting to buy back at lower prices when the Fed sells bonds.

From a longer-term perspective, bonds have now crossed the Rubicon by breaking out of a long-term channel going back to the 1980s with a view from the early 1990s below. What is noticeable is that the recent sharp rise was only seen twice in 1993-4 and 1999-2000.

Update. INT/LT sentiment remains relatively unchanged with last weeks drop to SPX 4400

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. ST sentiment surprisingly fell back to neutral with last weeks decline.

UVXY $ Vol only. Sentiment seems to be rising in a choppy pattern that may mean a spike upward similar to July-Aug 2021 is near, meaning a price breakdown for SPX.

Update VST ema. A spike lower in sentiment earlier in the week has now moved to neutral.

Update. ST/INT sentiment remains modestly positive, consistent with the choppy up trends in the SPX from July-Oct 2021 and Dec 2021 thu Jan 2022.

Update ema. ST sentiment surprising fell late in the week that could lead to continued weakness ST.

Bonds (TNX). Bearish sentiment in bonds remained relatively constant with the retail buyers showing no panic yet, meaning INT trend is still higher rates.

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. Weak bearish sentiment continues to have little effect with the strong inflation outlook.

Update. INT/LT sentiment has returned to mildly positive.

With the sister options Hedge Spread bearish sentiment as a ST/INT indicator (outlook 1-3 mns) remains elevated and should provide support for any sharp declines.

Taking a look at the ETF ratio of the INT term SPX INT (2X) ETFs (outlook 2 to 4 mns) as bearish sentiment, here sentiment did improve last week, moving back to the Buy level.

Using the TNX plus ETF sentiment shown for the HUI as the NDX sentiment with the interest rate effect. The INT term NDX ST 3x ETFs + TNX (outlook 2 to 4 mns) bearish sentiment using the faster EMAs also shows a move back to the Buy level similar to Feb-Mar 2021.

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 22 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 May exp. A new addition is added for OI $ amounts with breakeven pts (BE) where call & put $ amounts cross.

With Fri close at SPX 4393, options OI for Mon is small, but shows moderate support at SPX 4400 and 4350, then strong support at 4200. Price range could be 4400-4450. A notable difference compared to the last few weeks are few calls below 4400 that should reduce selling pressure as shown by the high BE.

Wed has smaller OI where SPX puts are concentrated between 4225 and 4400 with slightly less call resistance between 4450-75 and could extend a rally.

For Fri strong put support at SPX 4400 and a large straddle at 4450 increases upside bias with the first level of strong call resistance at 4500. Note more calls at lower levels lowers BE and upward bias.

For Apr EOM strong OI shows strong put support around SPX 4300 and at 4400 making these likely inflection pts with some upward bias to 4500+ and call resistance at 4500 and 4550.

Using the GDX as a gold miner proxy closing at 40.9, there should be some downward pressure due to low OI P/C and $ BE, but high inflation numbers add support. (Date is May 20).

Currently the TLT is 120.8 with the TNX at 2.83%, There may be some support from the calls at 120 and if "front-running" the Fed is a strong source of selling, a reversal to 125 or higher is likely after May 4. (Date is May 20).

IV. Technical / Other - N/A

Conclusions. As noted over the last several weeks after the late Mar high at SPX 4600+, int rates were likely to be a dominant factor with an expected decline to SPX 4300-50 before a continuation of the rally. The sharpness of the rise was unexpected and will probably continue into early May. If rates (TNX) stop at 3% then SPX 4300-50 may be the low as sentiment (particularly SPX & NDX) are becoming more supportive, but a move of TNX over 3%, especially near 3.5%, increases the possibility of a washout to SPX 4000 or lower (possibly 3700-800). Since I expect int rates to continue to rise into the May 4 FOMC, expect more volatility, lower prices into early May, especially in the NDX.

Weekly Trade Alert. ST/INT sentiment is only mildly positive so a period rangebound volatility is likely between SPX 4400-500 if rates stabilize and 4300-4400 if rates rise mildly. Updates @mrktsignals.

Investment Diary, Indicator Primer, Tech/Other Refs,
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
Article Index 2018 by Topic
Article Index 2017 by Topic
Article Index 2016 by Topic

Long term forecasts

© 2022 SentimentSignals.blogspot.com