Score One for the ST Indicators

Surprisingly, the Fed did exactly as expected (by me) with a 0.75% hike and lower future hikes at 0.5%, but apparently it was a big disappointment to the "Fed pivot" bulls.  The result was a 5% drop in two days matching the 5% drop in two weeks in the 2015 analog (chart in Tech/Other) mentioned in the Wed update, but I was caught offguard, expecting more consolidation into next week.  Options OI and ST sentiment indicate that next week is likely to consolidate at lower levels (SPX 3700-800), while optn exp OI for Nov 18 show the possibility for the common exp week rally back to SPX 3850-900.

Following up on the discussion last week about the possibility of a weak dollar policy after the 2024 election (HUI), I decided to look at the LT trend int TNX int rates from the St. Louis Fed DB.  The chart below shows TNX rate from 1962-2022 and surprisingly rates today are identical to Jan 1962 at 4.1% - a complete round trip in 60 years.  Many economist consider a regression to the mean (5.9%) to be likely with overthrows common - this means 6.0% or more is possible over the next few years.  Speaking of a weak dollar, Fri 2% USD drop saw a $50 surge in gold and a 5% jump in oil prices - that probably did not make Powell very happy.  Causes may have been more rumors of China relaxing lockdowns or a news release of Trump formally announcing his candidacy for the 2024 elections next week.

The Sell the previous week in both the VIX call indicator and the ST Composite proved timely, but my interpretation was not.  Tech/Other section shows a ST indicator using the SPXADP + VIV call indicator and a chart for for Oct 2015-Jan 2016 which seemed to have the same sentiment as today where an EW 4th wave was expected with a 5th wave to follow upward (today to SPX 4150).

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.   A small decline in overall bearish sentiment resulted from a moderate decrease in ETF and volatility offset by an increase in options sentiment.

Update Alt EMA.  Sentiment declined only slightly.

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.  A sharp increase in bearish sentiment pushed the indicator back to neutral but several more days of increases are likely to support a rally.

Update EMA.   Very ST (grn) is positive, but LT (blu) likely to reach neutral before a rally.

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 push this indicator into positive territory, but likey needs to push higher to support a rally.

Bonds (TNX).  Bearish sentiment in bonds continues to consolidate just below a Buy as rates bounce around 4%.

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 continue to consolidate as ETF sentiment starts to fall, still following the early 2018 period.

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.  A small uptick in bearish sentiment followed last weeks pullback.

With the sister options Hedge Spread as a ST/INT indicator (outlook 1-3 mns), bearish sentiment rose sharply somewhat similar to the May period when sentiment rose as prices rallied erratically before the June plunge.

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 bearishness and options bullishness continued toward neutral.  Most INT declines occurred with options bearishness higher than ETF levels.  The large divergence between options and ETF seemed to form a collar where high ETF bearish levels put a floor on prices while high options bullish levels provided a ceiling.  A move toward the middle increases the chances of a large move in either direction.

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.  The difference between options and ETF sentiment is declining more slowly than for SPX.

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 11 and Nov 18. 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 3771, options OI for Mon is small with a slight upside bias (BE) where a move to 3800 looks possible, but put support is low at 3700 so early weakness is possible.

Wed has similar OI where SPX has stronger put support at 3750, but call resistance from 3800-25 could limit upside.

For Fri strong put support at SPX 3700 and call resistance at 3800 with BE at current level indicates little change for the week is likely.

For Fri Nov 18 AM strong put support extends up to SPX 3850 with $2.2B net dealer put exposure indicates a rally to 3850-900 is likely optn exp week.

For Fri Nov 18 PM stronger call resistance above SPX 3800 indicates that a move back toward 3800 is likely by EOD.

IV. Technical / Other

This week I want to show a ST usage of the SPXADP (adv/dec percent) combined with the VIX call indicator as a tool used for updates.  Below the chart is the correlation table where ST periods (1-4) weeks shows modest improvement over the VIX call indicator alone.

This is a historical analog from 2015 showing the performance of the SPX after a 10%+ rally in Oct.  I was expecting more of a consolidation before a drop, but the 5% drop last week matched the 5% drop the 1st two weeks of Nov 2015.  I remembered this period as one where most EWers posting at T.Caldaro's were considering Nov-Dec as a 4th wave expecting SPX 2400 in Q1 2016, while I warned that sentiment was predicting otherwise.  Jan 2016 turned out to be a bear trap as the decline switched everyone to bearish mode just before a rally into the election.  What surprises are in store this time?

Conclusions.  The INT outlook was for a SPX trading range between 3850-900 to the upside and 3600-50 to the downside and so far the SPX traded between 3912 to 3698.  The 2015 analog provides some interesting possibilities as many, including BofA's M.Harnett, are insisting on the traditional 4th wave and 5th wave rally based on a Fed retrenchment, while the surprise may be a late 2022-early 2023 swoon to the lower portion of the range before a sustainable rally.

Weekly Trade Alert.  ST sentiment and options OI indicate that next week may be a consolidation at lower levels SPX 3700-800 before a rally attempt to test recent highs at 3900 during optn exp week.  CPI Thur could be volatile.  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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