OOPS!

Last week closed at the top of the expected SPX range of 3950-4150, but the expected pullback was limited to a retest of the 100D SMA at 4110 Tue.  I had been expecting some type of meltup, but likely in Sept-Oct, however, the Wed CPI report showing a slight decrease in inflation from 9% to 8.5% sent stocks and bonds soaring.  Surprisingly, bonds (TNX) reversed most of the gains by the end of the day as it appeared that getting only 2.5% in interest did not look much better when you are only losing 6.0% a year rather than 6.5% in real dollars.  The breakout appeared to be short covering, rather than a flood of buying due to low volumes.

Perhaps we didn't really have a bear market as a recent study by BofA Global shows that US household.equity 2-year avg flows never turned negative and are now at the highest since the 1990s.  Perhaps, Avi is right and a push to new highs is necessary to suck in every last retail dollar before a real scary bear market begins.  One indicator that supports this view is the LT NYSE UP vol/DN vol ratio shown in the Tech/Other section and mentioned several weeks ago.  We are now in a very similar pattern to that following the Dec 2018 20% decline.

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.  This indicator continued to decline with the biggest decline in the volatility component as ETFs were unchanged.

Update Alt EMA.  The very ST spike lower is likely to produce a SPX 50-100 pt 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.  This indicator remains near a Sell.

Update EMA.  The very ST spike to the Sell level may indicate a 1-3 day pullback is near.

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.  Here also, a spike low may preceed a very ST pullback.

Bonds (TNX).  Bearish sentiment in bonds remains in a modestly positive trading range.

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.  The HUI finally started to move up, reflecting an improvent in sentiment, but gains may be limited to low 220s.

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 may be several months early but sentiment has now matched the Sell level of the Dec 2021 SPX highs.

With the sister options Hedge Spread bearish sentiment as a ST/INT indicator (outlook 1-3 mns), sentiment remains supportive of higher prices as hedging remains slightly 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, ETF sentiment was little changed while options sentiment is testing earlier lows, pulling the composite downward.

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.

The combined options/ETF sentiment remains unchanged with strong options hedging offsetting declining ETF sentiment.

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 19. 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.

With Fri close at SPX 4280, options OI for Mon is very small and the 4250 and 4275 may provide oppty for delta hedging, but it could be pos or neg.

Wed has very small OI where SPX is likely to be more influenced by Fri OI.

For Fri optn exp AM are mostly hedged straddles, but the OI $ amount provides an almost $3.5B incentive for dealers to try to move prices to the downside.

For Fri optn exp PM strong put support is at SPX 4100-25, while the 4125-50 area is an important support resistance level.  Upper call resistance resides at 4400-25.

IV. Technical / Other

This week I want to look at the LT NYUPV/NYDNV ratio, where a strong move in up vol relative to down vol has been indicative of sustained rallies since 2018.  The current move looks a lot like the move off of the Dec 2018 lows.  There may be a pause at the current level as seen in May-Oct 2018.

Conclusions.  After the last Bradley turn failed, I decided not to mention the next one, but there is a major Bradlye turn on Mon Aug 15, so this may indicate a high.  Looking at the overall sentiment picture, however, I doubt that the final highs are in.  Following the 2018 example, the markets may continue to trade in a range, supported by weaker inflation that still remains high, and forces the Fed to continue to raise rates.  A final blowoff could follow a Fed pause in rate hikes.

Weekly Trade Alert.  Very difficult to call with options exp week, but a pullback of 50-100pts seems more likely that a continued rally.  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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