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

Saturday, July 30, 2022

Goldilocks and the Three Bears

My biggest mistake last week was expecting AAPL earnings to effect Thurs SPX price levels since it occurred after hours and combined with AMZN sent tech stocks soaring Fri. Once the huge SPX call resistance at 4100 was exceeded, delta hedging kicked in forcing the option writers to buy SPX futures to hedge their losses and the result pushed the SPX to 4140, well above my target range of 3925 to 4075.

ST indicators (ST Composite and VIX calls in Tech/Other) are now on official Sells for the next two to four weeks, but the NDX ETF indicator remains on a Buy. The most likely outcome is a ST top next week with a decline beginning with stronger than expected job/wage gains on Fri continuing through the mid month CPI/PPI inflation data that is likely to remain "sticky" as oil continues to hover around $100/bbl. The decline is expected to be only to the low-mid 3900s. With the next FOMC mid-Sept, this may provide an INT higher top with a final rally for the NDX.

The Tech/Other section looks at a recession indicator developed by the Chicago Fed that has shown an 86% accuracy level based on the input of 500 variables.

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 Alt. In this case the wts for the SPX 2X ETF ratio (SDS/SSO) and SPX puts & calls spread are adj to equal as in the DM/SM section for SPX ETFs. Volatility measures were little changed just below a Buy, while a sharp decrease in SPX ETF sentiment was partially offset by rising options sentiment. Overall, bearish sentiment dropped to below neutral, nearing the level of the SPX June top.

Update Alt EMA. Almost identical to the SPX June highs, a partial retrace of the rally from the June lows is expected.

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 A sharp decline in sentiment has reached the Sell level of excess bullishness.

Update EMA. Sentiment remains similar to the June SPX highs.

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. Hedging continues to provide some support, but a ST pullback is likely.

Bonds (TNX). Bearish sentiment in bonds fell sharply last week as the expected move below the 38% retracement (2.75%) based on TLT options OI and stronger sentiment proved accurate with rates falling to 2.65%.

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. Strength in bearish sentiment helped reverse the fall below the important 200 level as the HUI rallied about 3% last week and rising sentiment should contribute to some follow thru.

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. This indicator is usually early at predicting tops as seen in mid-2018 and 2021 and early 2020, but is a strong indicator that the current rally is only a bear market rally, so the question is when, not if, the decline continues.

With the sister options Hedge Spread bearish sentiment as a ST/INT indicator (outlook 1-3 mns), hedging remains mildly supportive as measures remain near +1SD.

For the SPX, I am switching to hybrid 2X ETFs plus SPX options. Taking a look at the INT term composite (outlook 2 to 4 mns) as bearish sentiment, it fell sharply with the pullback in ETF sentiment while options sentiment improved slightly.

For the NDX combining the hybird ETF options plus NDX 3X ETF sentiment with the interest rate effect, (outlook 2 to 4 mns) bearish sentiment shows similar extremes between ETF and options as in late 2020 which resulted in a choppy market until options sentiment rose. Note QQQ options are optimal, but are N/A and are included in ETF options. Sentiment remains near the Buy level, even with the 2000 pt rally off the June lows, and a move to about 14000 is expected before the next strong leg down.

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 Aug 5. 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 for Dec exp. A new addition is added for OI $ amounts with breakeven pts (BE) where call & put $ amounts cross.

With Fri close at SPX 4130, options OI for Mon is very small with possible support at 4100 due to delta hedging and call resistance at 4150.

Wed has even smaller OI where SPX has overhead call resistance at 4200.

For Fri strong call resistance down to 4100 may indicate the potential for a decline down to or below that level.

For optn exp Fri shows a setup consistent for my 2-4 week SPX outlook where there is strong resistance at 4200 with the potential to drop down to the 4000-50 level or lower and strong support t at 3900.

IV. Technical / Other

First, a look at the VIX Call indicator has now moved to a full Sell for the next 2 to 4 weeks, although not as strong as the Buy at the June SPX lows. Only a partial retracement of the current rally is expected.

Next, a look at possibly the most accurate model for predicting recessions since the 1960s. The BBK Index developed by the Chicago Fed has been shown to be 86% accurate at predicting recessions and uses 500 variables for inputs. Other than early 2020, it stands at the lowest level since 1980 and is a strong indication that a serious recession is ahead.

Conclusions. Last week proved to be somewhat stronger than expected with the pop over SPX 4100, although upside momentum was expected to carry thru early Aug. ST indicators show that a downturn is expected on schedule and may start by EOW. Fri unemployment and wage data may provide the initial catalyst for the decline in bonds and stocks if continued economic strength supports a more hawkish Fed. EW analysts are calling this a 4th wave rally with Trader Joe having a target of 4200-400 and Pretzel Logic a similar target at 4371 the 62% retracement level, but a pullback is likely ST before a top in Sept-Oct.

Weekly Trade Alert. The expected trading range should probably be extended to SPX 3950-4150. Mon-Wed may be consolidation days, while downside risk increases late Thur thru the inflation reports mid-month that are likely to dampen the "Goldilocks" economic outlook. 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, July 23, 2022

Summer Rally Nearing a Close

A continuation of the summer rally was expected last week after some initial weakness and more or less followed expectations with up then down days Mon & Fri, while Tue-Thur rallied with a gain of about 3% for the week. Other CBs are following the Fed with the EU making a "surprise" 0.5% hike (now 0% after being negative for 8 yrs) that seemed to spark a rally in risk assets as the US $ fell. Next weeks FOMC may see a similar positive response as markets seem to be on an "Alice in Wonderland" mood where higher rates now mean lower rates later.

Overall sentiment seems to be moving toward the Sell side, but the recent move in the SPX above the 50D SMA (3920) is likely to provide ST support and similar occurrences in Feb and June saw two week trading ranges.of about 150 pts (Feb/above, June below) before a continuation of the decline. Two important considerations for the INT are the concerns over capitulation and recession. This week in the Tech/Other section, I examine a couple of very LT indicators that show capitulation may be high compared to the "easy money" period of 2018-22 but not to normal periods since 2000. An update of the ST VIX call indicator is included. Next week, I will examine some recession possibilities.

Update Alt. In this case the wts for the SPX 2X ETF ratio (SDS/SSO) and SPX puts & calls spread are adj to equal as in the DM/SM section for SPX ETFs. Volatility sentiment continues to be modestly positive, while SPX ETF vs options sentiment remains at opposite extremes.

Update Alt EMA. Sentiment continues to drop toward neutral and lower levels are likely before a sizable pullback.

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 dropped to the early June level where a two week consolidation was seen before continuation of the decline.

Update EMA. A sharp decline in sentiment Wed/Thur on the SPX move over 3950 may be following the pattern of early June.

Update EMA. This indicator is quickly approaching levels seen at the Apr-May and June SPX highs.

Bonds (TNX). Bearish sentiment in bonds rose sharply this week and may be preparing for a break below the 38% retracement level at 2.75%. If so, this weeks Sept TLT OI represents "smart money".

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 rise.

Update. Easily the most bearish INT indicator, this indicator is quickly approaching the Sell level, now at the lowest level since the Jan decline.

With the sister options Hedge Spread bearish sentiment as a ST/INT indicator (outlook 1-3 mns), sentiment is modestly above neutral.

For the SPX, I am switching to hybrid 2X ETFs plus SPX options. Taking a look at the INT term composite (outlook 2 to 4 mns) as bearish sentiment, components remain at extreme opposites with the composite slightly above neutral.

Update. Bearish sentiment rose with the late pullback, now nearing 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 July 29. 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 for Aug exp & TLT for Sept. A new addition is added for OI $ amounts with breakeven pts (BE) where call & put $ amounts cross plus $ volume.

With Fri close at SPX 3962, options OI for Mon is very small and straddles at 3925 and 3950 may contain prices.

Wed has smaller OI where SPX with most of the puts and calls far OTM, possibly to hedge huge price moves with the FOMC decision and direction is likely to align with the much larger Fri OI.

For Fri strong OI with huge put support at SPX 3910. Hedges at 3950 and 4000 net out much of the call resistance to higher prices and a move over 4000 is possible intraday. Close is likely near 4000.

Using the GDX as a gold miner proxy closing at 25.4, there is strong put support at 25 and the large straddle at 28 may attract prices to the 27-8 area..

Currently the TLT is 118.5 with the TNX at 2.78%, early in the year I noted that large put positions contra to ETF sentiment may be "smart" money and this may be the same for calls. TLT 120 is about TNX 2.75% and 125 about 2.5%.

IV. Technical / Other

First a quick update of the ST VIX call indicator shows continued movement toward the Sell level and volatility may continue to rise.

Next, I use the NY down volume/declining issues as a measure of capitulation (NYDNV/NYDEC). and looking at the last 5 years, it matched the highs seen in early 2018, but when compared to the period since 2000, we see that it also matches the SPX 2001 low about half way thru the 2000-02 bear market. In both cases, there is also a larger trend upwards from the mid 1990s and mid 2010s.

A second LT indicator of positive money. flows is the NYUPV/NYDEC or NY volume advancing to declining. Here, we strong money flows similar to that off the Dec 2018 lows. However, from a historical perspective the more relevant comparison may be the first half of 2008. In this case after surviving the Covid pandemic and the resulting stock market performance, retail investors feel invincible (with most not even aware of what it was like during the inflationary 1970s), while in the first half of 2008, investors had lived thru the dot-com crash and 2002s 09/11 terrorist attack and also felt invincible.

Conclusions. The summer rally may be nearing a close with the possibility of extending thru early Aug. Its now looking like the following correction may extend into Sept with the expected relief from lower inflation being delayed. ST accelerated inflation likely in food supplies due to recent drought and extreme heat extending into the Fall may offset the effects of lower fuel prices. ST/INT sentiment is aligning for a sizeable pullback, possibly to retest the June lows (SPX 3640), but a couple of weeks of upside momentum is likely to persist as long as the SPX remains above the 50D SMA at 3920.

Weekly Trade Alert. A trading range of about 150 SPX pts (3925-4075) is expected thru the first week Aug. Some weakness to SPX 3925-3950 may be seen early in the week but a test of 4000+ is likely by Fri. FOMC on Wed and APPL EPS on Thur may result in large moves. 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, July 16, 2022

Does Draghi's Demise Signal the End of CBs Largesse

Last weeks Bradley turn date on the 15th turned out to be a bust as a major turn as neither top or bottom were indicated after several months of correct calls, Some weakness was expected early as "weak" Sells were indicated by the ST and ST/INT composites and a sizable decline was indicated by the DM/SM indicator, but the continued strength in inflation was a surprise and caused a drop into the mid SPX 3700s before a late rebound. With ST & INT indicators back to neutral, a move back to SPX 3950 by EOW is possible, but a brewing Sell from the VIX Call indicator (Tech/Other) indicates another pullback is likely later.

The hybrid SPX ETF/option indicator is included in the INT/LT Composite indicator by setting both to equal wts, and in the DM/SM section a hybrid indicator for the NDX is introduced using the ETF options as a proxy for QQQ options.

Update Alt. In this case the wts for the SPX 2X ETF ratio (SDS/SSO) and SPX puts & calls spread are adj to equal as in the DM/SM section for SPX ETFs. Here, the extremes between the SPX options and 2X ETFs offset, resulting in a near-neutral sentiment reading and likely to result in a choppy market with limited upside and downside.

Update Alt EMA. A brief drop in sentiment reversed back with the mid-week decline to the mid-3700s.

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. 10 day SMA is near neutral.

Update EMA. Last weeks weak Sell generated a larger than expected decline aided by the surprise CPI on Wed, but now has a slightly stronger "weak" Buy that may mean a vst move over 3900 (3950 by Fri with SPX options OI).

Update EMA. The negative reading from last week has reversed back to neutral.

Bonds (TNX). Bearish sentiment in bonds dropped sharply as rates remained near 3%, probably due to weakness in stocks. A trading range is expected as long as the 2.75% low holds, with more upside likely later.

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. Component view shows bearish ETF sentiment continuing to rise and may result in an extended trading range similar to the last half of 2019. HUI is about 8X GDX.

Update. This indicator warned of a possible sizable drop last week, but now back to neutral.

With the sister options Hedge Spread bearish sentiment as a ST/INT indicator (outlook 1-3 mns), sentiment has reversed from below neutral to above neutral..

For the SPX, I am switching to hybrid 2X ETFs plus SPX options. Taking a look at the INT term composite (outlook 2 to 4 mns) as bearish sentiment, sentiment remains somewhat positive.

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 2. 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 3863, options OI for Mon is very small with no real put support to 3800. The straddle at 3850 has a negative bias. so some weakness is expected with the close likely between 3840-60.

Wed has smaller OI where SPX has a slight positive bias with put support at 3825 and ITM puts (3600 & above). A move over 3850 could go to 3875-3900.

For Fri strong OI also has large ITM puts at 4000&4025 and overlapped hadges below 3900. A move to first strong call resistance at 3950 is possible.

For Fri 29th EOM strong put support extends up to SPX 3910, above that is uncertain.

IV. Technical / Other

This week I wanted to take a brief look at the VIX Call indicator which is approaching but not quite at a Sell. .

Conclusions. Already many of the Wall St banks are talking about the Fed reversing course by the EOY and possibly cutting rates by mid-2023 mostly due to a slow down in consumer spending and the resultant weakness in GDP (70%& consumer spending). But as I have discussed before consumer behavior the last two years has been anything but normal due to the trillions in government handouts that have probably inflated GDP by 10% or more, and I don't think the Fed is willing to "do whatever it takes" to keep the party going as long as inflation is rampant. A monumental hangover is more likely.

Weekly Trade Alert. Some EW analysts are looking for a ST move over SPX 3950 before a retest of the June lows at 3640, but with most indicators at or above neutral, the summer doldrums, or a trading range, seems more likely. 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