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.

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.  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.

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 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.

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.  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.

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 huge spike (last week showed NDX ETF only).

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

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