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

Saturday, June 25, 2022

Fed Euphoria, Round Two

Fedphoria. The last time Wall St was this optimistic about the Fed ("the Sept pause") was the Feb-Mar lows at SPX 4100+ before a two and a half week rally of 500+ pts to 4640, but soon after, the Fed heads starting backtracking and so did the SPX all the way to the June lows of 3640. What seemed to kick off the rally Tue was likely oversold ST sentiment indicated by the ST Composite and VIX call indicator into the target SPX 3750-800 area, but a double whammy of weaker than expected PMIs and UMich consumer confidence Thur/Fri lead Wall St to conclude that the Fed may end rate hikes by Sept and start lowering rates early 2023. What seemed to be glossed over was that the UMich inflation expectations, which dropped from 5.4% to 5.3% annualized, still much too high for the Fed to assume that inflation is over.

As the SPX consolidated Tue/Thur in the 3750-800 area ST bearish sentiment remained very high as shown by the ST Composite and VIX call indicators with strong Buys. Even Fri leap to SPX 3900+ left the indicators in Buy mode and I am raising my VST targets (June 30 EOM) to 4100+. After that a pullback to the May lows around SPX 3810 seems likely before a move higher into mid-July (possible 4300+). The next Bradley turn date (major) is July 15, so that is likely to be a high +/- a couple days.

The Tech/Other takes a look at the options CPCRevised (Equity+SPX+ETF) and Vix call indicator.

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 2X ETFs. Bearish sentiment has backed off recent highs, but still at a Buy.

Update 3X ETFs. In this case the SPX 2X ETF INT ratio (SDS/SSO) is replaced by thr 3X ETF INT ratio (SPXU/UPRO). Bearish sentiment more closely reflects price action since Jan and now is at similar levels as the Mar and May 2022 lows.

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 remains very strong, mainly from NYSE vol data as UVXY $ vol has dropped sharply and may indicate some pickup in volatility ahead.

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 EMA (base data 2018-22). Bearish sentiment fell sharply last week and is now near neutral.

Bonds (TNX). The spike in bearish sentiment in bonds was followed by a sharp drop in rates last week Tue-Thur with the TNX falling from 3.5% to 3.0% before reversing on Fri.

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 remains low and the HUI is likely to be range bound,

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 back to neutral and 3/4 positive days may send sentiment back to recent lows that could lead to a ST pullback.

With the sister options Hedge Spread bearish sentiment as a ST/INT indicator (outlook 1-3 mns), bearish sentiment has fallen sharply and may also support a ST pullback in a few days.

This week switching to 3X ETFs. Taking a look at the ETF ratio of the INT term SPX INT (3X) ETFs (outlook 2 to 4 mns), bearish sentiment has moved to the highest level since Jan drop began, reaching an INT Buy so more upside is likely after any pullback.

Using the TNX plus ETF sentiment 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 continued strength is likely over the INT term.

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 1. 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 JUly exp. A new addition is added for OI $ amounts with breakeven pts (BE) where call & put $ amounts cross plus $ volume.

Fri AM, SPX options OI showed fairly strong call resistance over 3800 with a fairly low P/C and a BE at 3800 so the move to 3900+ was unexpected although supported by other sentiment..

With Fri close at SPX 3912, options OI for Mon is small and a pullback towards the 3875 level is possible. Put support is near 3700 and call resistance is 3875+.

Wed has very small OI where SPX is likely to be driven by the very large Thur EOM OI.

For Thur EOM strong P/C and $600B net ITM puts are likely to spur a dealer driven meltup, but given the current price level, SPX 4100, or the first noticeable call resistance, is the expected target.

For Fri strong call resistance over SPX 4050 is likely to start a possible strong pullback where 4000-50 is the expected target.

Using the GDX as a gold miner proxy closing at 29.7, there could be positive bias toward the 32 level..

Currently the TLT is 112.6 with the TNX at 3.12%, the large amount of calls over TLT 115 (TNX 3.0%) may limit upside and put support is at 108 (TNX 3.5%) so prices may stay range bound (108-115).

IV. Technical / Other

This week I wanted to take a brief look at the Combined Put-Call Revised indicator (Equity + ETF + SPX), call buying is down sharply showing less speculation, mainly from less equity call buying, but low put buying indicates low fear levels.

While the ST VIX call indicator remained high thru Thur, however, the move to SPX 3900 caused a sharp reversal, but still a long way to go for a Sell.

Conclusions. The expected summer rally got off to a bang last week with the SPX up almost 6% and the NDX up 10%. ST and INT bearish sentiment are in position to support more rally ST before a pullback with SPX 4100 the likely target ST (50 SMA is 4060). July 15 now looks like a probable top for a swing high at the Bradley turn date (major). I think there may be a cycle inversion as a major breakdown was seen at the June 7 turn (med) so a higher low may occur at the next low (major). For the INT outlook the preferred rally into a Sept-Oct high is looking more likely with several macro factors influencing how high.

Weekly Trade Alert. Although not as high as expected several weeks ago (SPX 4300), a strong rally is expected to continue into EOM June 30 to about SPX 4100 with a short but sharp decline to follow. 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

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© 2022 SentimentSignals.blogspot.com

Saturday, June 18, 2022

Is It Time for a Summer Rally?

Last week I had warned of a top the previous week near SPX 4170 and a decline into FOMC Tue/Wed with Thur a med Bradley turn date or essentially a reversal of the prior week. However, int rates (TNX) screamed higher Mon-Wed creating a much larger drop than expected, bottoming near 3640 on Thur that was retested again on Fri. Much of the late decline in the SPX was due to the larger than expected rate hike of .75% which increased the possibility a recession. Bonds did settle down with the TNX dropping to 3.24% on Fri from an earlier high of 3.48%, and this may set up another rally over the next few weeks, especially in the NDX.

ST sentiment has also turned supportive of a rally, possibly to SPX 4000-100 by mid-July when recent weakness in oil prices may lead to an improvement in next months CPI. In Tech/Other a look at the 10yr/20yr T-bond ratio indicates that higher rates are still likely by the EOY, and an update of the VIX call indicator is now showing the strongest Buy of the last two years.

Update. There is a wide dispersion between component indicators where ETF and volatility are bullish while options are bearish.

Update EMA. Overall, EMAs show strong bearishness, but weaker than the Mar lows. A rally to about SPX 4000 is possible.

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 bearish sentiment has reached an extreme matching the Dec 2018 selloff and almost a reverse of the Jan Sell. A strong ST rally is likely, possibly thru mid-July.

Update EMA. Options FOMO remains a drag, but composite sentiment has reached a ST Buy at the highest level of the last two years.

Bonds (TNX). Bearish sentiment in bonds jumped sharply early in the week, reaching a ST Buy. Following the IHS, this may mean a consolidation for a couple of months as in early 2019.

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 retreated slightly as prices consolidated near recent lows.

Update. Weakness in options sentiment shows here as lower bearish sentiment than either the Mar or May price lows.

With the sister options Hedge Spread bearish sentiment as a ST/INT indicator (outlook 1-3 mns) has reached the highest level since mid-2020, but remains well below the levels of previous INT lows. Any rally is likely to be only a bear market rally.

Taking a look at the ETF ratio of the INT term SPX (2X) ETFs (outlook 2 to 4 mns) as bearish sentiment, sentiment increased strongly, but remains below that seen in early Mar.

Taking a look at the ETF ratio of the ST term SPX (3X) ETFs (outlook 2 to 4 mns) as bearish sentiment, sentiment here seems to be a more accurate gauge of ST sentiment which does show stronger ST outlook than the 2X ETFs.

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 24. 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 3675, options OI for Tue is very small with put support at 3600 and call resistance at 3800. A move to 3750 looks possible.

Wed has somewhat smaller OI where SPX shows strong put support at 3400 and call resistance at 3850, but Fri puts from 3600-3700 are likely to provide support.

For Fri stronger put support between 3600-700 shows a move to 3750-800 is likely.

For EOM strong put support from SPX 3600-700 is likely to limit downside, and there is little call resistance so 3800 or higher is possible.

IV. Technical / Other

After the surprisingly strong (.75%) hike by the Fed which seemed to catch most by surprise (including me) given the Feds propensity to support stock markets since Greenspan in the late 1990s, Thur decline (into Bradley turn) seemed to be a recognition of the new reality. Bonds appeared happy, after a scorching run up to 3.48% (TNX) Mon-Wed, rates settled back to 3.24% by Fri. Below is a chart of the 10/20 year T-bond yield curve ratio (YCR). Last week I showed the YCR back to 1990 where int rate cycles seemed to continue up until the 10/20 YCR reached 98%+. Last week only reached 94%, so higher rates are still likely.

Last week was the first .75% rate hike since late 1994, rates were much higher then and over an 18 mn period of rising rates the TNX rose from 5%+ to 7%+. It is possible that we are at the Apr 1994 rate peak which consolidated into Sept-Oct before a year-end push higher to the 98%+ level.

Below is the SPX over the same 1994-95 period where the SPX was mostly positive from Apr-Sept 1994 while rates consolidated, then made a final low near the 10/20 YCR peak in Dec 1994. More significant is the 40% rally in the SPX during 1995 after the 10/20 YCR peaked .

The following is an update for the VIX call indicator which has now moved to its strongest Buy of the last two years.

Conclusions. As was apparently the case for many, I had my personal doubts about the Feds resolve to "do whatever it takes" to fight inflation given its history of the last 25-years to take the side of supporting the wealth effect whenever the stock market dropped more than 10%. In this case higher rates really don't even make sense since they dampen demand and in this case inflation is due mostly from supply-side constraints, not excess demand.

The sharper than expected decline has now increased bearish sentiment to the point where a greater than expected 200-300 pt rally is likely although a rounded bottom seems more likely than a v-bottom and may depend on a consolidation in int rates (TNX) between 3-3.5%. A potential target is SPX 4000-100 around mid-July when another bout of weakness may occur due to earnings.

Weekly Trade Alert. Any rally next week is likely to see considerable backing and filling with a target in the SPX 3750-800 area. 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, June 11, 2022

Fed Hike, "Sell the Rumor, Buy the News?"

Last weeks outlook was for a trading range for most of the week between SPX 4075-4175 (act 4080-4169 thru Thur mid-day) with a Bradley turn (med) Tue that saw the closing high of 4160. The CPI release Fri was expected to be high and Wall St warnings led to a SPX 100 pt selloff late Thur that continued Fri down to 3900. The selloff was more rapid than expected and we may now see a consolidation near the lows thru FOMC before a turn around. Another med Bradley turn is on Thur/16th which coincides with the expected bottom before a sizable rally into the EOM.

At the May lows when many were calling for INT lows and a 10-15% rally, I indicated that a 200-300 rally was more likely without some changes in outlook from the Fed, China, or Russia/ Ukraine. A couple of Fed heads did cause some excitement with views of a Sept rate hike pause, but they quickly recanted pulling support from the market. Of more concern is the current trajectory of int rates (TNX) as a new high in rates quickly brought the SPX down toward the May lows. As discussed last week and in this weeks Tech/Other, the TNX seems headed to 3.5%+ and a rise to that level over the next few weeks could pressure SPX lower regardless of sentiment.

Update. The INT/LT bearish sentiment remains high, but has seen relatively little change over the past month.

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 bearish sentiment remained in the weak Sell area for most of the week before a sharp turn around late in the week. A few more days of negative sentiment are likely before a rally.

Update. ST/INT bearish sentiment did not reach a full Sell, so the beginning of a major downturn is not expected at this time.

Update. EMAs rebounded to positive late in the week.

Bonds (TNX). Bearish sentiment in bonds remains well below the Buy levels seen at the highs in rates seen in 2018. A LT look back to the 1990s is discussed in Tech/Other.

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. A late week rally pushed prices back to the low 260s, but also caused a decline in bearish sentiment.

Update. Options indicators (ST) were one of the more bearish indicators before last weeks decline and there was little sign of improvement in bearish sentiment.

With the sister options Hedge Spread bearish sentiment as a ST/INT indicator (outlook 1-3 mns), there seems to be only a very modest decline in hedging support that may tend to offset weakness in other options bearish sentiment.

Taking a look at the ETF ratio of the INT term SPX INT (2X) ETFs (outlook 2 to 4 mns), bearish sentiment saw a sharp rise last 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 sharp rise.

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 17. 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 3901, options OI for Mon is small with most calls now far OTM. Strong put support appears at 3850 and a positive close near 3950 seems likely.

Wed (FOMC) also has small OI where SPX has strong support near the May lows from 3790-3820) with some put support near 4000, but no call resistance until 4100. A wide range from 3800-4100 is possible.

For Fri AM (Wed noon), P/Cs were fairly balanced on Wed at SPX 4127.

For Fri AM by Fri close SPX calls for the given range had lost $7.5B while puts gained about $4B. A move back to SPX 4000-50 by Fri open would probably reduce the dealers exposure by about $8B by adding $2B to calls and decreasing puts by $8B. Expect a futures driven rally to drive prices toward SPX 4000-50.

For Fri PM strong OI shows put support up to SPX 4000-50 with little call resistance until 4150. If AM opens to 4000-50, 4100+ is possible by the close.

For EOM strong put OI near SPX 4300 can pull prices higher.

IV. Technical / Other

Last week when comparing the current bond ETF sentiment TLT/TBT to the int rate peak in 2018, I indicated the potential for a continued rise in rates (TNX) to 3.5-.75% for an INT top. In looking at a longer historical period of 30+ years back to 1990 using the 10Yr/20Yr US bond rate comparison, I noticed a fairly consistent top when the ratio hit 98% (.98). Currently at 91%, Fri TNX increase of 10BP (.12%) to 3.16% increased the ratio by 2% and implies that 3.5 more rises of 10BP to reach a 98% ratio. This would put the TNX at 3.5%+. Note 2000 saw a ratio of 100%+, so somewhat higher rates are possible.

Conclusions. The higher CPI came in as expected, but the markets reaction was somewhat stronger than expected, although predicted by the VIX call indicator. ST sentiment has reset back to neutral and a reversal of last week with a consolidation within a SPX 100 pt range Mon-Wed is likely before a turnaround late Wed or Thur AM (med Bradley turn). If int rates (TNX) consolidate, a continued move up toward SPX 4300 by EOM is expected, but higher rates could dampen any rally.

Weekly Trade Alert. FOMC Tue/Wed is likely to contribute to the same kind of volatility seen intraday last week. A 50BP rate hike for the Fed funds is expected and a move to the lower trading range after is likely a Buy with a rally of 200-300 pts expected to start by Thur AM. 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