Bad Cop, Good Cop

Last week was one of my better weeks in a while as the overall outlook was a weak start (Mon SPX low -70), a strong Wed (SPX +100), and a weak Fri (SPX -50 at open), but the expected range was too conservative at SPX 3950-4050 (act 3937-4100).  Next week looks to be less exciting with some downward pressure toward SPX 3975-4000 (options OI) before a more important top optn exp week (Fri 16th).  Many traders were caught off balance by Powell's semi-dovish comments Wed, expecting a larger decline toward SPX 3800-900, and the result was a huge short-covering rally.  A look at the Dec 30 shows huge bullish OI positions down to SPX 3835 (JPM hedged equity fund), so the expected decline may occur later in the month, possibly supported by tax loss selling in the techs, still down 20%+ despite the huge rally in the DJIA.

Equities were also supported during the week by continued strength in bonds (lower rates) and so far the TNX has found support at 3.5%, but may be tested next week with continued economic weakness with ISM and confidence data.  I was surprised at how easily the strong jobs data and wage gains were shrugged off by bonds, as this is more supportive of stagflation with slower growth plus wage/price inflation pressure.

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 continued to push lower, especially in options, now approaching the levels of the Jan SPX top.

Update Alt EMA.  The more gradual decline in sentiment has prevented the EMAs from reaching the extremes of the Jan top.

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.  NYSE volume data remains near neutral and is likely to fall before a significant SPX decline.

Update EMA.  The last strong sentiment signal was a Buy, and although below neutral, sentiment has not shown a Sell yet, so the Buy is still in effect.

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.  Again, sentiment is below neutral, but not enough to end an upward trend.

Bonds (TNX).  Bearish sentiment in bonds is mostly unchanged as rates remain in the lower end of 3.5%-3.7% range.

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.  Bearish sentiment fell sharply last week as a weak USD pushed up gold prices.

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.  New lows in bearish sentiment were seen last week.

With the sister options Hedge Spread bearish sentiment as a ST/INT indicator (outlook 1-3 mns), hedging remains high and is beginning to look like a mirror image to 2020-21.

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 has reached new lows, mainly due to extremely bullish options positioning.

For the NDX combining the hybrid 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.

Bearish sentiment is in the area of previous ST tops in 2022.

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 9 + EOQ. 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 4072, options OI for Mon is small, where call resistance at and above SPX 4050 could push prices lower toward 4000-4025.

Wed has small OI where SPX has weak call resistance at/over 4025 that could push prices lower.

For Fri stronger OI with ;arge straddles at SPX 4000 and 4050 may keep prices in that range.

For Fri Dec 30 EOQ, strong OI dominated by SPX calls indicate that a pullback to 3800-3900 is likely.  The 42k call contracts at 3835 are worth about $24k a piece (likely JHEQX) and represent about 1/3 of the $2.8B dealer call exposure.

Conclusions.  Some economic weakness was expected to show up in last weeks data, but so far the effect on stock prices has been minimal with most of the effect seen in a lower dollar and int rates and higher commodity prices (inflationary).  The Fed heads seem to be playing "good cop, bad cop" and as a result creating more uncertainty with Bullard (bad cop) on Mon pressing for a more rules based policy (Taylor rule, meaning higher rates), while Powell (good cop, inflation is transitory) indicating more of a wait and see approach.  The strong jobs report is a leading indicator of corp profits, else why hire more workers if business is slowing down.  There does, however, seem to be a shift in hiring from high paying factory and tech to lower paying services sector.  This makes me less pessimistic about 2023 Q1, but leaning more toward stagflation.

Weekly Trade Alert.  A modest 1-2% pullback is expected next week to SPX +/-4000 with a test/best of 4100 the following week with CPI Tue 13th and FOMC 13-14th. 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