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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