Last week interest rates (TNX) looked liked they would follow late 2017 with a consolidation between 2.5% and 2.3%, but this week started off with a bang with rates back to a new recovery high Tue at 2.6% and continued to 2.7% Fri. In Jan 2018, 2.7% was enough to break the stock market. A couple of weeks ago (Mar 26 Tech/Other), I indicated that I expected the important level this time would be 3.4%, matching the Sept-Oct 2018 level before a 20% SPX correction thru Dec 2018. If rates continue to rise sharply, the downside risk for INT 2022 is 20-25% or SPX 3700-4000, on the other hand if rates stabilize below 3% into the FOMC May 4, a strong move to fight inflation by the Fed may reverse the upward trend in rates.
For the SPX, ST trends continue to follow the 2011 analog from last week. Musk's $9B purchase of TWTR stock led to a 2% rise in the NDX on Mon with the SPX modestly exceeding my upside target of 4550-75 (act 4593) before giving it all back on hawkish Fed talk Tue with a double bottom in SPX at the lower target of 4450-75 (act 4450) on Tue & Wed. Next week may see a consolidation in the middle for opt exp week before further downside with a lower target of SPX 4300-50 early May with FOMC on May 4.
In the Tech/Other section, I discuss a new feature added to the options OI chart showing the notational value ($ amount) with $ B/E. I started following this for Mar 31 EOM exp and the last hour drop in SPX saved the dealers (call writers) over $1B in exposure, probably due to a flood of SPX futures selling. The deviation from $ OI vs contract OI may explain why contract OI only is sometimes less reliable.
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. Longer term sentiment continues to decline with higher risk as the LT (blue) EMA approaches neutral.
Update. ST sentiment showed considerable improvement and may mean a ST bounce is likely.
Update ema. I noticed that ST (1 yr) period EMAs have a high correlation (50%) with price moves and are also pointing toward a bounce.
Update. ST/INT sentiment has moved back to positive with the pullback of the last two weeks
Update ema. A modest rally of perhaps half of the decline from the lows or SPX 4550+ seems likely.
Update. Combined sentiment is now the lowest in 4 yrs and ETF sentiment is not far behind, but prices continue to inch upwards on the inflation outlook.
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. The sharp decline just below neutral has reversed somewhat, but is unlikely to support a sustained rally.
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 14, markets are closed for Good Fri. A text overlay is used for extreme OI to improve readability, P/C is not changed. A new addition is added for OI $ amounts with breakeven pts (BE) where call & put $ amounts cross and $ volume.
With Fri close at SPX 4488, options OI for Mon is small with strong support at 4490 (BE) with a move over 4525 likely intra-day (OI P/C & Vol) with a close 4500-25.
For Thur PM moderate OI with neutral P/C and strong put support at 4500 and call resistance at 4575 may rally to 4550-75 then fade into close due to low BE to 4525-50.
For Apr EOM strong OI with high P/Cs indicate strength but most of the puts are in the 4200s and time decay is likely to be vicious, so only a guess for now for close SPX at 4500.
IV. Technical / Other
This week I want to look at the difference between options OI contracts and notational value ($ amounts). After following the Mar EOM massive put contracts at 4510 & 20 for over a month as a basis for a move in SPX to 4500-600 while most were looking lower, I wanted to measure the sustainability of the move to 4640 by looking at the OI $ amounts.
Here you can see at Wed (Mar 30) high, the OI contracts showed a neutral position, but the $ amounts showed an extreme bias for calls. Since the dealers/call writers are on the hook for $2.4B ($000), a reversal was likely.
By the close Thru with much of the drop in the last hour fueled by futures selling, the dealers/options writers had lobbed $1.1B off the call value and only gave up $100M in put value for a total savings of $1B. Note put support at 4550 was broken
On a smaller scale, I decided to look at last Fri weekly exp also adding the call/put breakeven $ amount (BE). Here is a look at the OI 1 hr after the open. OI looks bullish with P/C of 138% and little resistance until 4550, but the OI $ is the opposite.
By noon EST at SPX 4511 (hi 4520) the OI $ was even more extreme.
By the close, the OI$ predicted weakness won out and the decline would have been sharper except for the high $ volume traded at a P/C of 429%. In conclusion, the OI $ amounts do seem to add value to the OI interpretation with the BE lending some directional bias.
Conclusions. The bond market has presented the biggest problem for the INT outlook for the SPX over the last few weeks. An accelerated move to the upside for rates presents a problem for stocks especially techs. A back and for rise as seen in late 2017 will encourage the flow of funds from bonds to stocks and may result in a blow off stage for the SPX. The current rally in rates may last until the May 4 FOMC where a strong stand against inflation may temporarily appease bond investors. As long as the TNX rate (now 2.7%) stays below 3%, the SPX may continue to rise after a likely correction into early Mar (target 4350 or lower), but a move over 3% raises the likelihood of a more serious decline to 4000 or lower.
Weekly Trade Alert. Opt exp week is expected to br relatively mild with a potential range of SPX 4475-4575 and lows early in the week and highs Thur. 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
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Interesting new view on the market with BE calculations. Keep up the good work Arthur!
ReplyDeleteGreat update again Arthur. So far we are getting the lows early on and I too think we go up into the close this Thursday for the 3 day holiday weekend. I've noticed many times in the past "they" love to make surprise turns happen over a holiday, so reaching maybe 4600 by the end of this week would scare most bears out and lure in bulls. Then the following week or two we can see a drop into the 4200-4300 I think.
ReplyDeleteBut after the FOMC on May 4th I think we rally hard to the upside for several months as we've spent more then enough time rangebound between the highs and current lows to reset any over bullish sentiment to over bearish I think, and they did it all without crashing like 2020 (which current sentiment looks very similar to back then).
On a different note, I (and others that read your weekend updates) would love to see you do a few tweets from time on time on Twitter so we'll know if anything has changed during any given week.