Saturday, January 7, 2023

All is Well, or Not

Last week was expected to be a struggle as the ST indicators were at a Sell level while Fri SPX options OI showed strong put support suggesting a move toward SPX 3900 by Fri close.  A test of the recent lows was expected early in the week and Tue opened up following Europe then reversed sharply to just below 3800 by mid-day, then Wed saw a retest of the Tue open near 3870 then fell back toward 3800 before the Fri jobs report.  Surprise, the unemployment rate (UR) actually fell from 3.7% to 3.5% which seemed to cause some early concern since the Fed wants higher UR, but a lower increase in wages and weaker ISM led to a sharp drop in int rates pulling stocks higher.  The net result was a slow moving rallly fueled mostly by short-covering that managed a 100 SPX pt gain.

As mentioned previously, the tech layoffs that most were looking at as a harbinger of a recession are missing the case which is a return to normal from the work and school at home which was tech intensive.  As a result jobs are moving from the high paying areas of tech and manufacturing to services such as retail sales and leisure.  Likely many households that may have had a single wage earner of $100k that was laid off and could only find a new job for $65,000 have now become a two wage earner household with a net result of lower unemployment and lower wage growth.

Bearish sentiment has improved modestly overall. Tech/Other takes a look at gold compared to the TNX yield and China's SSEC index.


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 ETF sentiment is up while option sentiment is down, improving the INT outlook, but depressing the ST outlook.

Update Alt EMA.  Sentiment reversed strongly from the ST Sell, but still remains negative
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 ST indicator has also reversed from a Sell, but remains in negative territory.


Update EMA.  For the very ST, sentiment has moved back to neutral

The VIX Call indicator and SPXADP EMA has dropped to a weak Sell..

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, we see a sharp drop in sentiment mostly from the Hedge Spread which was extremely high, but remains slightly positive.

CITI Surprise Inflation Index for Jan (expectations), I have been reporting this occasionally because it does not seem to fit the CPI, but I realized that it is forward looking while the CPI is for the previous month.  In any case, the trend remains down, except for China.
Bonds (TNX).  Bearish sentiment in bonds is mostly unchanged.
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.  HUI appear to have a breakout over the 180-220 range, and sentiment is little changed.



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 sharp move up in sentiment makes this indicator less unfavorable.

With the sister options Hedge Spread bearish sentiment as a ST/INT indicator (outlook 1-3 mns), here we see a sharp reduction in hedging, but overall well above the Buy level and may prevent the breakdown expected by Wall Street and the bears any time soon.
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, higher ETF, but lower option sentiment offset.
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 remains very high for techs and should be supportive during the EPS season.



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 Jan 13. 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 3895, options OI for Mon is small with most of the puts below 3850 with 3825 the first support level, call resistance should push prices toward 3850.
Wed has somewhat larger OI where SPX has higher put support at 3850 that should keep prices between 3825 and 3875.
For Fri strong call resistance over SPX 3900 should keep prices between 3850 and 3900.  Apparently, the bulls are expecting a large rally seen with Thur CPI report similar to the last 3 months, but we saw how the bearish consensus worked last week.  This time likely a dud.

For optn exp Fri Jan 20 a huge straddle at SPX 4000 will likely act as a magnet with 3950-4000 likely.


IV. Technical / Other

This week I want to look at two factors besides the ETFs that seem to be important for the gold & gold stock outlook.  The first is 1/TNX rate which showed a close correlation for 2016 thru 2020, but has since become less of a factor.

The second was the performance of the Chinas main stock market indicator, the SSEC.  Here, the reason was that the China population is a large buyer of gold and the stock exchange may be an indicator of the buying power.  It did not work as well as the TNX before 2019, but worked better after 2020.  I had hoped to use both, but the big difference in holidays made it to difficult to match prices for the gold stock indicator.

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