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+.

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.  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.

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.  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.

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.  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

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