Markets Remain in Limbo

Two weeks ago I indicated that a Fall rally was unlikely due to weak sentiment and that a range of SPX 3800-4100 was expected for the next several weeks from the current 3920.  Since then we hit a high last Mon at SPX 4120 and a low Fri at 3840.  The decline was so rapid, especially Tue with the disappointment from core CPI and a 200 pt drop in SPX, that sentiment measures (10 day avg) do not fully reflect price trends.  However, options OI show that lower prices are still likely thru EOM and probably for the next 2-3 weeks before any sustained rally can begin.  If the potential IHS continues to hold RS at SPX 3800, it may support a C wave rally matching the 700 SPX pt rally from the June lows of 3620 that would target SPX 4500.

Much of the decline in SPX was due to the rapid collapse on the bond market much like the June FOMC and the start of QT at 50% which will be doubled next week.  This is an example of front-running by banks and other financial inst which sell bonds lowering prices before the Fed sells and then buys them back at lower prices when the Fed sells.  As a result TNX rose from 2.5% early Aug to 3.5% last week.  We saw the same thing in reverse with QE.  The Fed accepts this as a way of funneling money into the financial sector, but it can roil the markets ST.  TLT options OI for Dec shows the potential for TNX to fall back to 3% after the runup is over and this will likely support stocks.

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.  Sentiment still seems to be following the pattern of the last half of 2021.

Update Alt EMA.  Sentiment improved marginally back to neutral ST.

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 is still moderately negative, so any bounce may be temporary and more backing and filling is likely.

Update EMA.  Tue saw an extreme Sell matching the SPX 4300 high that probably contributed to the sharp selloff.  Sorry, I have been too busy to do daily updates.

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.  A sharp increase in hedging helped the medium term sentiment improve to near the levels of the May low, but lower than the June price lows.

Bonds (TNX).  Bearish sentiment in bonds surprisingly continued to fall as rates rose and will likely limit any retracement.

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.  Both sentiment and prices are near the levels of early 2018 where a consolidation around the 180 level was seen before a final flush lower after bearish sentiment fell back to neutral.

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.  We finally saw what the dumb money was capable of last week as a gush of optimism pushed prices higher in anticipation of lower inflation with the CPI release only to have price hammered lower when inflation proved to be much harder to tame as I have been saying all along.

With the sister options Hedge Spread bearish sentiment as a ST/INT indicator (outlook 1-3 mns), rose sharply last week pushing sentiment to levels of the May SPX low and just below the June low.  This will likely limit any downside.

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, a moderate improvement was seen, but still looking like late 2021.

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.  NDX sentiment is similar to the May and June lows.

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 Sept 23. 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 Oct exp and TLT for Dec qtrly exp.   A new addition is added for OI $ amounts with breakeven pts (BE) where call & put $ amounts cross.

With Fri close at SPX 3873, options OI for Mon is small with moderate put support at 3800 extending up to SPX 4000.  A VST rally to 3900+ is likely.

Wed has somewhat larger OI where SPX has weaker put support over 3925 that may limit any rally to 3925.

For Fri strong put support extends up to SPX 4000 and a rally to that level is expected.

For Sept 30 EOM, very strong call resistance still exists at SPX 4000 with put support at 3800 and 3900, so EOM is expected to be in the range of 3950-4000.

Using the GDX as a gold miner proxy closing at 24 has strong put support at 23.5 with call resistance from 25.5 to 26.5 so some limited upside is likely.

Currently the TLT is 107 with the TNX at 3.45%, negative delta hedging may keep prices depressed, but similar to the June QT, front-running has likely pushed prices below equilibrium and some upside to about 113 (TNX 3%) is likely.

IV. Technical / Other - N/A


Conclusions.  So far at least, the SPX has followed the expected path of a 3800-4100 trading range similar to May, but I certainly can't rule out lower prices.  Hedging does indicate that downside should be limited, while ST indicators are still somewhat negative and some backing and filling between SPX 3800-4000 is likely.

Weekly Trade Alert.  Options OI indicates that a rally to SPX 4000+ is likely by Fri, but FOMC Tue-Wed may limit gains early in the week.  EOM call resistance at SPX 4000 will likely limit any gains before EOM.  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

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