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.

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.  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.

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.  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.

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.  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