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

Saturday, May 28, 2022

Are We Still in a Bear Market?

Last week was expected to start out with strength to the upside to 3950+ (act Mon 3982) with weakness into mid-week (Tue 3875) and strength into the EOW (Fri 4158), so an A on that one, Overall, the expectation was for a rally of SPX 200-300 pts from the low (3810) with the caveat that 10%+ was possible with less Fed hawkishness, a change in China lockdowns/tariffs or Russis/Ukraine. It certainly did not take long for the Fed to change as Tue one of the Fed heads floated the idea of ending the rate hikes by Sept, and after this was confirmed on the Wed release of Fed minutes at 2PM by Fri close the SPX rallied 5% from 3930 to 4158 (close to my EOM target). Since the Fed knows economic data several weeks before public releases, the rapid change of heart may be due to weak economic data ahead. There is a minor Bradley turn June 8 that may be a bottom or top. Fri jobs data may be weak, but could be interpreted as more dovish support from the Fed and the following Fri, CPI may still be a problem.

My INT outlook has not really changed for a rally into a Sept-Oct top which now looks to be a "buy the rumor, sell the news" event as the Fed is expected to pause rate hikes just as the full QT is scheduled to start (I think someone already predicted that). We are starting to see signs of economic slowdowns and profit margin squeezes as shown by the 20% price drops of WMT and TGT the previous week on profit outlooks, and a July swoon on EPS releases is likely before a final melt up. Inflation is likely to slow from 8+% to 4.5-5.0% by the Fall, but remain high enough to cause a new rate hike cycle by EOY just as in 2018.

Some have noted a sharp breath thrust last week as the beginning of a sharp move upward. I like to look at the McClellan Osc. Last week it was at 105 which provided strong support from 2010-20, but also gave several false Buys during the late 2008-09 bear market.This weeks Tech/Other section takes a look at the VIX Call indicator that is now showing a Sell as well as a LT options indicator that is showing a lot of similarity to 2000-2002.

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 EMA. Sentiment is dropping slowly but remains near a Buy at 1.5 SD.

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 dropped sharply last week from the Buy level similar to the rally into the June 2020 top, but not yet at the Sell level.

Update EMA. LT(blue) likely to reach 1-1.5 SD before significant downside.

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. Strongest SPX option FOMO since Sept 2018, but composite remains above neutral.

Update EMA. Similar sentiment decline as seen into the June 2020 top with LT (blue) likely to reach -.5 SD before real trouble.

Bonds (TNX). Bearish sentiment in bonds continues to rise with TNX slightly lower than expt at 2.74%, could drop as low as 2.5%.

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 continues to follow bonds higher and should support a trading range 240-280.

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 fell sharply ST, but LT remains near a Buy level.

With the sister options Hedge Spread bearish sentiment as a ST/INT indicator (outlook 1-3 mns), using the 2018-22 as a base, hedging has decreased but remains strong.

Taking a look at the ETF ratio of the INT term SPX INT (2X) ETFs (outlook 2 to 4 mns) as bearish sentiment, ST (gr) rose even as the SPX rallied.

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 modest decline, but remains well above a Buy.

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 June 3 & EOM. 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 plus $ volume.

With Fri close at SPX 4158, options OI for Tue/EOM is large, but with many straddled price levels. The high OI P/C shows a positive bias, but the $OI has a negative bias (BE 3950), so a range of 4150-4200 is expt.

Wed has small OI with low SPX OI and $OI and some retracement 4125-75 is expt.

For Fri (May jobs data) modest OI has a moderate positive OI P/C and negative $OI. As long as SPX is over 4100 a range of 4125-75 is likely, below 4100 shows little support to 4000.

For June EOM strong put support at SPX 4285 is likely to pull prices toward 4300+ by EOM June..

IV. Technical / Other

For the ST, the VIX Call indicator has now gone full circle from a Buy two weeks ago to Sell in a very short time span similar to June and Nov 2020 which saw sharp pullbacks of 50-100 pts over a couple of days but remained in an uptrend.

For the LT, this week I want to look at one of the bear market indicators from Stockcharts which goes back to 1998. In this case I chose the combined option put/call ratio CPC divided by the SKEW (out of the money premiums). Here you can see that for most of 2018-19 the ratio did a good job of indicating the relative importance of tops and bottoms, but in late 2020-21 wqs skewed downward. The next chart shows recent distortion was a result of low CPCE (equity P/C).

The Equity P/C was much lower in the post-Covid period due to more tech demand from at-home usage driving prices and profits beyond the norm.

The breakdown of CPC did not begin until 2004, but the abnormally low CPC during the dotcom bubble of 1998-99 was likely due to low CPCE as well and similarities to 2020-21 are high. It is interesting that unlike 1998-99 and 2020-21, 2007-08 saw high CPC before the 2008-09 crash that may support the adage that "in a bear market, the bears are right"; if so this may explain the strong bearish position in SPX and NDX ETFs in expecting a less volatile, but longer lasting bear market as seen in 2000-02 compared to 2008-09. In a final note, the current level of the CPC/SKEW is just above that seen in the first leg down in Mar 2001 (one of the DeMark Buys from last week), but also about the same as Oct 1998.

Conclusions. INT/LT sentiment remains consistent with a multi-month rally, likely into the Fall. ST/INT sentiment indicates that several weeks of upside is likely, but will likely be followed by a sizable pullback. probably with Q2 EPS in July. Very ST the VIX Call indicator is now showing a Sell, following a Buy two weeks ago, but the Buy was followed by a lower low in week 1 before a strong rally. Combine this with a minor Bradley turn date June 8 and the SPX may remain higher (4125-4200) next week before a possible 100-200 pt pullback (low 4000s possible), then a rally into EOM.

Weekly Trade Alert. Some negative news is likely this week on the employment front and may see a drop in SPX to low 4100s with the Wed ADP preview, then rally back to upper 4100s on Fri NFP report as "bad news is good 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, May 21, 2022

Too Late to be Bearish, but Too Early to be Bullish

Last weeks outlook was a bust as an early week pullback to SPX 3950 was expected to lead to a rally over 4100 for optn exp and instead an early rally to the 4090 saw a sharp reversal following negative results and outlook from Walmart and Target Tue/Wed that pushed the SPX back down to 4000. Once SPX 4000 gave way the strong put support gave way to option dealers negative delta hedging (selling futures) to cover losses pushing the SPX to 3900 by Thur close and then 3810 late Fri before a late rebound to 3900.

Last weeks selloff did produce several ST/INT buys from a variety of sources. First, the Demark TA signal gave a ST buy with an SPX target of ~4450 as discussed in Forbes and MW Thur/Fri, but the results since 2000 are not that impressive if you exclude the 2009 and 2011 Fed QE induced effects (unlikely with current tightening). From a macro perspective, Nomura thinks that the Fed may back off on rate hikes when QT is implemented June-Sept, and D.Tokic started a tactical buy with a target of SPY 450 (about the same as the low SPX 4500s mentioned last week) based on expectations of Biden cancelling the tarriffs on imported goods from China as a means of relieving supply shortages. I wonder what happened to "supply-side" economics, it always seems to be used by the GOP to prop up corp profits but why not use it to actually incentivize production.

Last FOMC week, I noted a "special" Tues SPXW option OI, but as it turns out that was a trial run by the CBOE to add Tue/Thur SPXW options. In late 2005, the CBOE starting adding M/W/F options for SPX, but wide usage was delayed until 2010. Currently, Tue/Thur SPXW options trade with lighter volume and wider bid/ask and will not be included in the options section until usage widens.

Update. Not much change from last week with overall bearish sentiment just below the Buy level mainly due to the decrease in ETF hedging for SPX in favor of NDX (see below).

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. Extreme buying of UVXY pushed sentiment to a Buy, but previous extremes lead to lower SPX prices on a retest.

Update EMA. As mentioned last week, similar Buy spikes in June and Sept 2021 saw a short rally then a lower low (although not called very well), and now the ST Sell mid-week seems to be lining up with Sept-Oct 2021 which was followed by a rally of several months.

Update LT EMA. Although significantly higher than the last two years, comparison to the pre-Covid period shows similar sentiment to July-Aug 2018 and not a major bear market bottom.

Bonds (TNX). Bearish sentiment in bonds surprisingly rose last week even as int rates pulled back from the 3.2% area which supports the expected range trade of 2.75-3.25%.

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. Somewhat similar to bonds, a modest rally off the 240 support area saw a sharp increase in bearish ETF sentiment back to neutral, indicating fairly strong support in that area.

Update. We now have a double top Buy that looks like a fractal of the Oct-Dec 2018 selloff of about 20%. This is the only INT/LT indicator (not ETFs) that would support a new ATH.

With the sister options Hedge Spread bearish sentiment as a ST/INT indicator (outlook 1-3 mns), bearish sentiment is the highest since Mar 2020 with the current sentiment similar to July-Aug 2018.

Update ST EMA

Taking a look at the ETF ratio of the INT term SPX INT (2X) ETFs (outlook 2 to 4 mns) as bearish sentiment, remained mostly unchanged for the week.

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 27 & 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 & TLT for June exp. A new addition is added for OI $ amounts with breakeven pts (BE) where call & put $ amounts cross and $ volume.

With Fri close at SPX 3901, options OI for Mon is very small but shows strong put support at 3875 and 39003. A positive bias toward SPX 3950 or higher is expected.

Wed has somewhat larger OI where SPX has smaller OI where put support is weaker and call resistance relatively stronger at 4050 and 4150. Some weakness is expected.

For Fri strong put support over a wide range should cause a positive bias with call resistance starting at 4050. SPX 4000-50 is possible.

For EOM stronger put support should continue to support higher prices where 4100+ looks possible.

Using the GDX as a gold miner proxy closing at 32 appears to be in a wide trading range with put support at 30 and call resistance at 35.

Currently the TLT is 118.5 with the TNX at 2.89%, and could stay in a range of 118-120 (TNX 2.75-3%).

IV. Technical / Other - N/A

Conclusions. Over sold indicators have reached an extreme where stocks may begin to bounce, but macro and fundamentals show little support for more that a 5-6% rally (SPX 200-300 pts from low) until there is change. Possible "game changers" that could spur a 10-15% rally include less Fed hawkishness (.25% rate hikes), Biden's elimination of tariffs with China to ease supply pressures, China's dropping covid lockdowns and reopening economy, and conclusion of the Russia/Ukraine conflict. All together may result in ATH, but unlikely. Otherwise a trading range 3825-4125 seems likely.

Weekly Trade Alert. Bearish SPX OI sentiment for Mon should produce higher prices by the close with a reversal by mid-week and strength thru EOW with 4000-50 possible. With next Mon a holiday, EOM could see 4100+. 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, May 14, 2022

Bears are Likely to Hibernate until the Fall

Last week I was looking for a rally to SPX 4100 before a washout decline to the low 4000s by the Bradley turn date on May 14, but instead news of economic weakness in China pushed prices down directly, bottoming late Thur at 3860 almost an exact 20% decline from the Jan 4820 top. This was stronger and longer than the Q1 decline of 15-18% forecast in Dec 2021, but is more supportive of what you would expect for an SC4. So I want to further outline my LT expectations based on what has happened so far. First there was an excellent article last week outlining the three phases of a bear market and why we were likely close to the end of the liquidity shock phase.

Over the past few weeks, I have mentioned that after the current bear phase I expected a rally into the mid-term elections, roughly following 2018. The primary difference so far is that the May 2018 retest was not a lower low. This would indicate a modest rally into late June, a pullback, then a melt up into Sept-Oct. As discussed below, the June EOQ SPX options OI is showing a similar setup to before the Mar rally. Anyway, given the size of the Jan-May decline of SPX 960 pts, the next bear phase (C wave) is likely to be the panic phase with a 1.62 extension of wave A, and if the rally phase extends to 4500-4550 this would be SPX 3000+/- with the panic coming on a break of the Jan 2020 highs of 3400. Since 2000 there have been four SPX declines of 20%+ before 2022, with 2000-02 lasting 2.5 years, 2008-09 1.5 years, Oct-Dec 2018 5 months and Mar 2020 5 weeks. This time I am expecting at least 2.5 years or possibly even 3-5 years before a final bottom.

Although most of the LT bearish sentiment does not indicate a bear market bottom, INT/ST sentiment is equal to or higher than the sentiment seen at the Feb lows that produced an SPX rally from 4120 to 4640. If this is the end of phase 1 of a bear market, as much as a 70% retracement of the entire decline is normal and indicates a target in the 4530s. This weeks options OI section includes a look at the EOQ June SPX OI that shows a similar setup to that shown in late Feb. Then a large put position of about 75k puts between 4500-50 were used to project a rally from the low SPX 4100s to 4500+ by the end of Mar and the SPX actually rallied to 4640 before closing EOM at 4550. This time a slightly smaller amount of June puts are between 4300-50, giving that or higher as a target by EOQ June.

Update. Sentiment remains near the Buy level but below that of the Feb SPX bottom, mainly due to SPX ETF sentiment, but extreme NDX sentiment may more than offset the difference. See SM/DM section.

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 matched the highest levels of the last two years at last weeks lows.

Update ST EMAs. Last weeks sentiment remains mostly unchanged with a very ST pullback.

Update. From the LT perspective, sentiment remains below levels seen at important bottoms from 2018-20.

Update ST/INT EMAs. Sentiment is stronger than that seen at the SPX Feb lows a may mean a stronger and/or longer rally than late Mar.

Bonds (TNX). Bearish sentiment in bonds retreated somewhat. Since QT will not be started until June at a 50% rate and Sept at 100%, there may continue to be some selling pressure from front-running. QT light until Sept may coincide with a stock market top.

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. Using the separate indicators, we see that ETF bearish sentiment has started to increase, but remains very weak.

Update. Bearish sentiment has reached the level of Feb 2022, supporting a rally similar to Mar.

With the sister options Hedge Spread bearish sentiment as a ST/INT indicator (outlook 1-3 mns), it remains below the pre-Covid Buy level for an INT/LT bottom.

Update INT, shows a strong increase in hedging relative to the Feb lows.

Taking a look at the ETF ratio of the INT term SPX INT (2X) ETFs (outlook 2 to 4 mns) as bearish sentiment, it remains below that seen at the Feb lows.

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 20. 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 for EOD Fri.

With Fri close at SPX 4124, a look at Fri options OI showed SPX remains weak relative to sentiment, barely closing over 4000 support level of 4k net puts.

With Fri close at SPX 4124, options OI for Mon is very small and in a strong market a push up to put support at 4150 seems likely, but a weak market is more likely to find support at 3950 with call resistance at 4200. A decline to 3950 is likely, but a close near 4000 is possible.

Wed has very small OI where SPX has strong support at 3925 and resistance at 4050. A slight bias for a range 0f 4000-50, but most likely influenced more by Fri opt exp OI.

For Fri AM strong OI shows a huge dealer net put exposure of $3.5B and with minimal call exposure up to SPX 4150, that would seem to be a minimal target.

For Fri PM moderate OI show a similar picture where the first call resistance level is SPX 4150. Put support extends up to 4100 then 4175-200 that could push the SPX above 4150.

Similar to late Feb when I called for a "Buy the News" rally into the end of Mar after Russia invaded Ukraine based on high put OI for the EOM Mar, we see a similar setup for the end of June where the SPX is likely to rise to 4300-50.

IV. Technical / Other

This week I just want to look at a couple of volatility indicators, the INT/LT VIX Buy&Sell indicator (SKEW & VIX/VXV) and the ST VIX call indicator. The VIX Buy&Sell indicator remains well below previous INT lows in Feb and Dec 2018 and Mar 2020, but about the same as the Feb 2022 low, meaning a several hundred pt rally is likely, but only as a pause in a larger bear market.

The VIX call indicator is showing a strong Buy, reversing the strong Sell of early Apr.

Conclusions. Last week may have been the end of phase 1 of a larger bear market that could last for several years. Dropping from a peak of SPX peak of 4820 the Thur low at 3860 was similar to the Oct-Dec 2018 decline of 20%, but too many structural problems exist such as supply-chain shortages, a move from off-shoring to on-shoring, and a Fed tightening cycle, to assume that this is more than the beginning of economic problems. The only solution that could quickly turn things around is a resolution to the Russia/Ukraine conflict, but that seems unlikely.

Weekly Trade Alert. Next week could start out with some weakness with a drop to SPX 3950ish, but a rally to SPX 4150 by Fri optn exp close is likely. Another pullback may occur into the EOM, but a strong rally to 4300-50 is expected by EOM June. 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