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