Is Inflation Still a Problem?

Last weeks outlook was somewhat hit and miss.  The broad outlook for Tue/Wed weakness to low SPX 4100s (act 4075) followed by Thu/Fri strength to upper 4100s (4075) was met on Thu with a 100pt rally on ADP job outlook weakness.  Much of the volatility during the week can be attributed by Fed heads questioning the "Sept pause in rate hikes" and Fri strong NFP jobs for May reinforced that outlook and resulted in the SPX backtracking to 4100.  Its still not clear if the Bradley turn (Tue +/-) will be a top or bottom and the SPX OI indicates a bottom is possible, but my preference is a top to retest SPX 4150-75 before a pullback into the FOMC June 14/15.  (See Tech/Other for 2018 comparison.)

Also last week, I missed the start of QT with about $12B of bonds being sold every week until Sep ($47B/mn).  According to Google, the avg maturity of the Feds portfolio is 8 yrs, meaning more pressure on INT maturities and 10 yr rates did rise more than 20 yr (TLT).

Next weeks CPI release on Fri may be the key to ST outlook.

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.  Still showing positive sentiment for the INT/LT.

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 sentiment briefly rose early in the week, but has turned down again.

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.  Overall ST/INT sentiment is near neutral, but while hedging remains positive, options FOMO is showing some extreme readings that may encourage ST volatility.

Update.  EMA from 2020 is dropping toward neutral, but LT (bl) remains positive.

Bonds (TNX).  Bearish sentiment in bonds has now risen to the level of early 2019 when rates were about 0.5% lower which possibly indicates rates of 3.5-3.75% before an INT top in rates.

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.  As expected, the rise in bearish sentiment saw a rebound in prices, but they may be nearing the top of a range.

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 still falling, but low risk for several more weeks.

With the sister options Hedge Spread, bearish sentiment as a ST/INT indicator (outlook 1-3 mns) has also started to fall but remains well above levels indicating a serious downturn is expected.

Taking a look at the ETF ratio of the INT term SPX INT (2X) ETFs (outlook 2 to 4 mns), bearish sentiment remains extremely high, but a possibility of smart money positioning remains.

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 high extreme that could be smart money.

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 10. 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.

As Thur close at SPX 4160, Fri options OI appeared somewhat bullish based on P/C, but $OI told a different story with the result a drop toward 4100.

With Fri close at SPX 4109, options OI for Mon is small with little directional bias and a potential range of 4050-4150.

Wed has very small OI where SPX has straddles at 4000 and 4100 that may cause some volatility in that range, but put support at 4050 should keep any weakness to 4050-75 at close.

For Fri stronger OI shows strong put support at 3975-4000 with little call resistance until 4150.

For Fri optn exp week strong ITM values for both puts and calls might strength the effects of delta hedging, which favors the bulls with BE at SPX 4230, likely targeting 4150+.

IV. Technical / Other

This week I wanted to take a brief look at the Combined Put-Call Revised indicator (Equity + ETF + SPX), typically Equity P&C is smart money, ETF P&C is hedging and SPX P&C is dumb money.  SPX (purple) is now showing extreme bullish speculation, a sign of approaching danger.
 

Although not a close correlation, the general comparisong to 2018 still seems to hold, where a mostly range bound market is likely to hold for a couple of more weeks with a possible breakdown/reversal around the FOMC June 14/15.

Conclusions.  Last week saw a couple of 50-100 pt down moves that quickly reversed as predicted by the VIX call indicator Sell which still remains in effect.  The target of the low SPX 4000s was tested twice.at 4075 Tue/Wed without a breakdown and still seems likely over the next two weeks.  A trading range as in May 2018 seems likely ST with the FOMC June 14/15 and quarterly optn exp June 17 seen as the most likely time for a breakdown/breakout.

Weekly Trade Alert.  A trading range of SPX 4075-4175 seems likely for most of the week, but a strong CPI on Fri may set the stage for a sharper decline into FOMC results.  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
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