Will More Stimulus for EU Energy and US Student Loans Increase Inflation?

The news of an EU bailout of consumers and energy companies of $300B+ for the ongoing energy crisis somewhat distorted Mon markets.  Bonds tumbled in anticipation of greater supply and stocks tumbled into the SPX upper 3800s before a late recovery, but the rest of the week went as expected with a push to and above the SPX 4100-50 target at 4170.  Sentiment remains mixed so that a limited move higher is possible (SPX 4200+), but a direct move above the previous high at 4320 is not expected ST.

The overall sentiment picture is mixed with moderate hedging and improving inflation keeping prices near last weeks highs, while continued upward pressure on interest rates will limit advances.

A look at the very LT NYUPV/NYDNV shows similar outlooks to late 2007 and mid-2015 in Tech/Other.

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 bounced during the latest pullback and seems to be following late 2021.

Update Alt EMA.  Same as above.

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 never reached a Buy and should limit any advance (SPX 4200s possible).

Update EMA.  Sentiment may be following the pattern of late 2021.

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.  Sentiment is somewhat less negative than the ST composite due to moderate/high hedging that is likely to limit any declines.

CITI Surprise Inflation Index for Sept shows across the board pullbacks and moderating inflation may support stocks for the next few months.

Bonds (TNX).  Bearish sentiment in bonds remained subdued given the sharp rise in rates, so the tug of war with stocks may be good news from inflation and the economy vs higher rates until something breaks.

This week a LT view from 2015, 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.  Its been a couple years since I showed LT sentiment, but the stimulus induced (lower rates) has been reversed, bringing prices back to the level of late 2017.  Prices need to fall at least to the 140 level or more likely the low 100s to give an ETF sentiment Buy.

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.  Sentiment reversed off the extreme lows, but remains near a Sell.

With the sister options Hedge Spread bearish sentiment as a ST/INT indicator (outlook 1-3 mns), the early Sept SPX lows generated a ST Buy and remains supportive of higher prices (SPX 4200s).

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, extreme option sentiment continues to hold combined sentiment to levels similar to 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.

Update.  High ETF options bearishness (hedging) plus ETF sentiment has pushed NDX sentiment back to 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 Sept 16. 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 4067, options OI for Mon is very small and positive delta hedging may keep SPX over 4050, but more likely call resistance between 4025-50 will cause the close to be below 4050.

Wed has somewhat larger OI where SPX call resistance between 4025-4100 will pressure prices lower toward 4025.

For Fri AM straddled positions are difficult to interpret, but the large net $OI call amount ($3B) should pressure prices toward 4000.

For Fri PM strong OI shows call resistance at SPX 4050 wilth small net put support starting at 4000.  A drop below 4000 is possible.

For Fri EOM Sept 30, the very large call position is likely from the JPM Hedged ETF set up at the June lows and is likely to keep prices at/below SPX 4000 at the close.

IV. Technical / Other

This week I am taking a look at the very long term view of the LT NYUPV to NYDNV, the two periods that appear most similar to the current one are late 2007 and mid 2015.  The first saw much lower lows while the second resulted only in a lower retest.  Which is more likely will depend on how volume levels hold up over the medium term.

Conclusions.  SPX options OI which showed support for an advance off of the Sept lows are now showing strong resistance thru the EOM at the 4000 level, particularly the 45K calls at 4000 most likely as a result of the JP Morgan Hedged ETF (JHEQX) discussed several weeks ago.  The most likely range thru EOM is SPX 3900-4100.

Weekly Trade Alert.  Next week appears to have little upside potential and a decline to SPX 4000 or lower is 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
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