Everyone is Buying Bonds

The SPX remained in the expected trading range of 3900-4000+ for Mon-Tue as int rates (TNX) remained near 3.9%, but Thur a sharp drop in rates to 3.7% pushed the SPX to 4030 and it remained near that level thru Fri.  Wall Street is certainly pushing bonds with the recent report by GS recommending buying gold and bonds and selling stocks and oil.  The feeling that inflation has peaked seems to be the rationale, but a look at other inflation surges in 1974 and 1980 shown in the chart below indicates that the correlation with TNX int rates may not be so simple.  Also, sentiment analysis for TLT below also shows that a sharp drop in bearishness is warning of problems ahead.

A couple of weeks ago, I showed a chart of TNX back to 1962 where a 60 year cycle brought rates back to the same level of 4%.  This week I want to look at TNX rates (red) relative to inflation (blu) over the same period.  For some reason the inflation data was missing for 2022, so I penciled in the approx inflation.  What is interesting is that in both 1974 and 1980 when inflation exceeded int rates by several percent as happened in 2022, int rates initially fell right after the peak in inflation, but then continued higher for a considerable amount of time (> 1 yr).  Essentially, this means that even if inflation declines, int rates may continue higher for some time.  The most likely scenario is that inflation eventually stabilizes around 3% similar to 2004-08 and int rates remain in the 4-5% area.

INT/LT sentiment indicators are at or near Sells indicating that a sharp downturn (10%+) in the next 1-4 mns is likely.  ST indicators show that SPX 4000 may provide support thru mid-Dec or later.  If the analog to late 2015 serves as a guideline with a retest of the June-Sept (SPX 3500-600) lows, this may presage a sharp rally to 4300-500 by the late Spring encouraged by a Fed pause or truce in Ukraine.  Tech/Other shows an update of the VIX call/SPXADP indicator and an expansion of the VIX term structure & SKEW indicator using ETF options.

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.  An official Sell has been reached, but may become stronger before a strong decline begins.

Update Alt EMA.  Longer EMAs may need more time for strong Sell.

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.  Indicator has turned down but only at weak Sell (-1 SD).

Update EMA.  Same as above.

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 hold up this indicator.

Bonds (TNX).  Bearish sentiment in bonds has fallen sharply as the recent 0.5% drop produced the same sentiment change as the Aug-Jul 1.0 drop, supporting 3.5% as strong support.

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.  ETF sentiment remains high supporting prices as long as int rates moderate.

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.  BTFD continues to push this indicator to an extreme Sell.

With the sister options Hedge Spread as a ST/INT indicator (outlook 1-3 mns),  bearish sentiment remains moderately strong and may support higher prices or a "controlled" decline.

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 sharp drop in both ETF and options sentiment has pushed this indicator to a strong Sell.

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.  Sentiment has dropped to its lowest level since the Mar high/

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 Dec 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.

With Fri close at SPX 4026, options OI for Mon is very small and call resistance from 4000+ may push prices toward 4000 or lower.

Wed has somewhat larger OI where SPX has somewhat stronger put support at 4000 and call resistance at 4025 & 4050.  A range of 4000-50 is likely.

For Fri stronger call resistance at SPX 4000 is likely to push prices to or below that level.

For optn exp Fri Dec 16 AM, strong OI$ bullish bias of $10B is likely to pressure prices below SPX 4000, but huge straddle at 4000 may limit losses.

IV. Technical / Other

This week I wanted to take a brief look at the VIX call indicator plus SPXADP that may be setting up a double bottom similar to the SPX July top.

Combining the ETF calls and puts with the VIX/VXV & SKEW shows some interesting similarities between the periods of Aug 2018-Dec 2018 and July 2021 to Nov 2022.  First both periods started out with very low VIX/VXV & SKEW and high ETF calls and puts for a couple of months, then when the SPX declined in Oct 2018, the VIX/VXV & SKEW rose to +1.5 SD and the ETF calls and puts dropped sharply.  This time it took the same indicators almost a year to reverse as sharply from lower levels and now the highs in the VIX/VXV & SKEW are similar to Nov 2018, while the ETF calls and puts are making a double bottom, also similar to Nov 2018.  If the analogy continues, a sharp drop in SPX, possibly starting by late Dec, could push the VIX/VXV & SKEW to a Buy, setting the stage for a strong rally into the Spring.

Conclusions.  Most INT/LT indicators are warning the a significant decline of 10%+ is near with the exception of the Hedge Spread which may take several weeks of SPX 4000+ to turn around. The ST indicator is moving downward, but also needs more work to generate a Sell.  The way the bond sentiment is dropping, we may even see a Sell in bonds by the EOY.

Weekly Trade Alert.  SPX still likely to be range bound (3950-4050) unless int rates drop dramatically.  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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Lots of Action, but Little Progress

A brief SPX rally early in the week pushed as high as 4029 with the Tue PPI release that fell to only 0.2% for Oct and bonds rallied as well with the TNX briefly falling to 3.7%.  However, strong SPX call OI resistance at 4000 and signs of weakening retail sales from Target sent the SPX back to the 100D SMA support at 3910.  As seen in the SPX options section, last weeks price action has neutralized (straddled) most of the call resistance between 3925 and 4000 for Nov 30 EOM, and a few more days of similar price action may create enough support to create a rally to SPX 4050-4110 late Nov-early Dec with jobs data Dec 2nd, PPI  9th and CPI 13th.  FOMC is also Dec 13-14.

A lot of interesting news came out last week.  In a discussion of inflation most of the improvement was seen in lower goods prices, while services/wages, which are more sticky, was up.  Then Bullard's comments on Thur rattled the markets somewhat when he stated that using the Taylor rule implied a fed funds rate of 5-7%, and may have ended the bond rally.  On Friday ZH published an article showing possible repercussions of financial sanctions as foreign CBs were large sellers of T-bonds, especially China and Japan - who have been buying oil from Russia.  Finally, a letter from ExecSpec which aligns closely to my outlook for more upside into early Dec before a tough Q1 in 2023.

Tech/Other looks at several volatility measures including the VIX term structure, SKEW, and VIX call indicator and SPXADP for clues on market 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 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.

Increased bullishness in options plus lower bearishness in SPX ETF combined to produce a sharp drop in bearish sentiment.  A sizable decline (10%+) is likely only weeks away.

Update Alt EMA.  Closing in on a Sell, but LT (blu) needs to be lower.

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.  The extreme low UVXY $ Vol contributed to last weeks 100 pt SPX drop, but NY vol still positive leading to neutral sentiment similar to Aug 2022.

Update EMA.  EMAs bouncing around just below neutral

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 a closeup shows similarities to Jul-Aug before sentiment produced a moderate Sell.

Bonds (TNX).  Bearish sentiment in bonds dropped sharply last week and are nearing the levels seen at the Aug low in rates.  Excessive bullishness is confirmed by TLT options OI below.   An article by M.Hulbert on Fri contradicts the bullish bond recommendations recently by GS and B of A's M.Harnett looking at data back to 1871.  (Note. In my version of Chrome, the article is split into 3 panels.  To view on a single page copy/paste&go this into a new tabs url - "data:text/html, <html contenteditable>", then copy article text to new tabs text area.)

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.  Prices rose somewhat over the early 2018 range on USD weakness and may move sideways until sentiment falls.

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 continues to fall as the prospect of a "Fed pivot" becomes more deeply ingrained with better inflation news, but BTFDers fail to realize pivots only happen after something really bad happens.

With the sister options Hedge Spread bearish sentiment as a ST/INT indicator (outlook 1-3 mns), sentment is bouncing aroud and a move toward neutral is likely before a significant decline occurs..

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 continues to decline while bullish options sentiment remains extreme.

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.  NDX ETF and ETF options sentiment are about at the same level as Aug 2020 which was followed by a 10% decline in Sept.

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 Nov 25. A text overlay is used for extreme OI to improve readability, P/C is not changed. Also, this week includes a look at TLT & GDX for Dec exp.   A new addition is added for OI $ amounts with breakeven pts (BE) where call & put $ amounts cross and $ volume.

Markets are closed Thur for Turkey Day and early Fri. With Fri close at SPX 3965, options OI for Mon is moderate with put support a 3900 and call reesistance at 4000.  OI & Vol $ indicate traders may be too bullish, so may trade around 3950.

Wed has smaller OI where SPX has opposing OI P/C and $ P/C that may increase volatility, but pre-holiday volume will likely be light.

For Fri stronger OI. but again mixed with scattered calls at lower ranges possibly giving a negative bias.  Weekly range of SPX 3900-4000 possible

For Wed Nov 30 EOM strong OI where last weeks early decline added put support from SPX 3900-4000 and continued similar price action may add enough support for a pop to the 4050 major resistance level.

Using the GDX as a gold miner proxy closing at 27.4 is now at major call resistance level and a drop down to 26 by mid-Dec is likely..

Currently the TLT is 99.6 with the TNX at 3.8%, and strong call resistance at 100 is likely to put a floor on rates near current levels.

IV. Technical / Other

This week I want to look at a couple of volatility indicators which remain the most bullish INT/LT indicators.  First the VIX term structure (1 mn VIX/ 3Mn VXV).  Typically INT bottoms occur when the VIX/VXV is 1.0 or higher and LT bottoms may reach 1.25.  Tops INT/LT occur around 0.75-0.8.   Currently the VIX TS is in the middle of the range with ST fear high relative to LT fear so a top is unlikely.

Combining the VIX TS with the SKEW gives a more representative picture of the sentiment strength as a high SKEW and low VIX TS gives a Sell, while as now when SKEW is low and VIX TS is high gives a Buy.  Combined sentiment today is similar to the choppy periods of early 2018 and mid-late 2019.

Looking at the composite of the VIX call indicator (grn) and SPXADP (red) show the VIX call at the Sell level,,but is not confirmed by the SPXADP.  This is similar to July where choppy behavior preceded a more significant top.

Looking at a closeup of the above shows a similar ST sideways sentiment pattern before a final move higher in SPX.

Conclusions.  More upside for the SPX still appears likely before a larger correction.  The increase in put support with last weeks volatility indicates that continued trading between SPX 3900-4000 next week may provide enough bearish sentiment for a push upwards into early-mid Dec.  With jobs data Dec 2nd, PPI the 9th, CPI the 3th, and  FOMC Dec 13-14, plenty of data-driven market movement is possible.  The SPX 200D SMA is now 4067 and likely 4050 by EOM, is it a coincidence that major call resistance lies there?

Weekly Trade Alert.  More range bound trading SPX 3900-4000+ is expected.  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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More CPI Party Likely, but Hangover Threatens

Two weeks ago I was expecting a consolidation around the SPX 3800-900 before a pop&drop to SPX 3950ish with the CPI report, but the extreme volatility around the FOMC and mid-term elections plus the change from DST really threw me for a loop.  The actual outcome was two pop&drops for both FOMC and elections then a huge pop for the CPI (act 3958 and Fri 4001), but remember the CPI was for Oct when oil was $80/bbl and the USD was well over 110.  Fri UMich consumer expectations showed higher inflation expectations for Nov, so lower prices may be short-lived, also this does not bode well for Black Fri sales as consumers retrench and that may lead to a late month SPX pullback.

The election outcome was a surprise to many, including myself, as a red GOP tidal wave was expected to wash away the Dems.much like the recent hurricane did to homes on the FL shoreline.  Final results are still unclear, but the House appears have gone to the GOP, while the Senate appears to be leaning toward the Dems.  A surprise result could cause ST volatility next week.

ST sentiment indicates that a pullback of 100-200 SPX pts is likely over the next 2-4 weeks, but optn exp week could push prices higher to test the 200D SMA at 4080.  If so, a pullback into the EOM is likely to 3850-900 due to disappointing BF sales.  I am expecting some economic weakness in Q4 to feed into Jan earnings period for a larger pullback.  Tech/Other looks at an update for the ST VIX call & SPXADP indicator.

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.  Bearish sentiment retreated moderately mostly in volatility measures and ETF options.

Update Alt EMA.  The very ST (grn) showed an extreme drop similar to the Aug top, but a declining pattern as in late 2021 could mean a week or more before a downturn.

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.  Sentiment is slightly below neutral with an extreme low for UVXY $ vol (33% avg), previous lows were seen on Oct 31 and Nov 7 with resulting SPX drops of 100 and 200 pts within a week.

Update EMA.  Very ST (grn) is just short of a Sell at -1.8SD.  Depth of SPX pullback is likely to be proportional to decline next week.

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.  The very ST mild Buy (+1SD) has reversed to a mild Sell.

Bonds (TNX).  Bearish sentiment in bonds fell sharply with last weeks rate pullback.  A 1% pullback simlar to post-June could mean 3.25%, but the lower bound should be the real rate (GDP growth at 1%+) plus infl expt and 3.5% seems optimistic unless there is a reccession.

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 sharp drop in the dollar continued to support gold and PM stocks combined with positive sentiment from ETFs and int rates.  As ETF sentiment remans high, prices may continue higher.

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 remains near a Sell, but could have a long lead tme as 2nd half 2021.

With the sister options Hedge Spread bearish sentiment as a ST/INT indicator (outlook 1-3 mns), sentiment rose to moderate Buy in the middle of last week and remains 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), bearish sentiment continued sideways as options rose and ETF fell.

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.  Here ETF sentiment rose and options fell with combined remaining mildly 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 Nov 18.  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 3993, options OI for Mon is small and well into call resistance which is strongest at 4110.  A move over 4010 could push higher w/delta hedging, but a move lower toward 3960 seems more likely.

Wed has very small OI where SPX could move toward the 3900 calls, but lower resistance at 4000 means a move higher is possible..

For Fri AM strong resistance at SPX 4100 will likely stop any rally while the large straddle at 4000 makes it an attractive point for "max pain".

For Fri PM strong call resistance above SPX 3900 indicates that a move to that level or lower is posible if weakness appears during the week.

For Nov 30 EOM/Wed looks much like Fri where put support appears between SPX 3800-50 and call resistance above 3900 indicates a pullback is likely before the EOM.

IV. Technical / Other

A look at the ST VIX calls and SPXADP shows sentiment fell sharply Thur and Fri, indicating that a temporary reversal is near.  (Grn EMA is below -2SD)

Conclusions.  The volatility of the past two weeks still has my head spinning, but at least I have had a positive bias since the early Oct CPI report.  The election results and Russian pullout may cause me to change my LT view, but peace in Ukraine by the Spring now looks even more likely.  Pullback now or later seems to be the question for SPX.  I am leaning toward a test of the 200D SMA at 4080 (possibly 4110 for C=A) similar to the Aug high at 4325, but it likely depends of what happens to the USD and int rates, if lower then stocks higher.

Weekly Trade Alert.  SPX options shows strong resistance over 4000, so it's difficult to make a strong argument for a continued rally, but a move over 4000 could accelerate due to call delta hedging.  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