Sentiment Signals for Market Investmentsby Arthur Knopf, Financial Economist and Contrarian: February 2023

Saturday, February 25, 2023

Off by a Day

Last week's call was a bust. I had been lookng for SPX 4000 by Fri, and when the SPX could not get below 4050 I gave up ST. Tue opened gap down, possibly due to a 0.5% rate increase by the New Zealand CB, and the strong services PMI data in the AM added to concern for those still looking for a Fed pivot. By noon the SPX reached 4000, but too late to do me any good. Continued weakness resulted in a Fri AM low just below 3950. There seemed to be a strong capitulation vibe during the week, but sentiment measures show only modest changes other than an uptick in hedging. BofA's M.Harnett came out for a call for the SPX to drop to 3800 by Mar 8, but I am more inclined to look for 3900 by mid-Mar then a rally back to ~4100 in Apr before a May/Jun trip to 3800 if Powell sticks to only rate hikes of 0.25%.

On a more positive note, I had been very disappointed with the newer releases of Windows 11 due to the changes in the File Explorer and after going thru 6 or 8 versions I found a version released in Japan in Nov 2021 which had the old File Explorer and a compressed WinSxS folder that reduced the install size to about 5gb or the same size as my x32 Win 10. So I am happy and will probably wait to next winter to install all of my custom software.

There are three more FOMC meetings thru June, Mar 21-22, May, 2-3 and Jun 13-14. I expect three more rates of 0.25% to the FF rate of 5.25-5.5% and TNX to 4.5-5%, then a pause of 6-9 mns.

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 declined slightly with strong BTFD in SPX calls while other components were marginally higher, indicating that the decline is not over.

Update Alt EMA. Very ST bearish sentiment bounced back from the extreme lows of last week.

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. Bearish sentiment remains near neutral with a strong bounce in UVXY vol, but no sign of NYSE capitulation volume.

Update EMA. Bearish sentiment bounced slightly.

Looking at the VIX Call + SPXADP Indicator for the very ST. A spike in bearish sentiment is likely to result in a counter trend bounce for a few days.

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. An increase in hedging has increased ST bearish sentiment back to the neutral level.

Bonds (TNX). Bearish sentiment in bonds reversed sharply early in the week as rates rose, reversing the positive catalyst for stocks and bonds that I expected last week, indicating that rates could continue to rise, possibly to the 4.5-5.0% level.

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. Much like bonds, the drop in gold miners caused a pickup in buying and a drop in bearish sentiment, indicating that lower prices are likely.

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. Bearish sentiment bounced of the extreme lows of last week which indicated a pullback was likely, but sentiment remains well below levels to support a sustained rally.

With the sister options Hedge Spread as a ST/INT indicator (outlook 1-3 mns), bearish sentiment has risen sharply ST that could cause a temporary low for a few days, but lower lows are needed before a Buy.

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, bullishness in SPX options and near neutral ETF sentiment remain worrisome.

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 for the NDX remains higher than for the SPX and should result in relative strength for NDX.

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 Mar 3. 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 3970, options OI for Mon is small with put support at 3950 and a slight positive bias toward call resistance at 4000. Likely positive but small gain by the close.

Tue EOM has large OI where SPX has strong put support at 3900 and 4000 and small call resistance at 4050. A move over 4000, possibly 4025 is likely.

Wed has small OI where SPX has some put suppoet around 4000 and call resistance at 4080. As a low confidence call, target 4025-50.

For Fri strong put support at 4000 and under should keep prices over 4000 where the target range is 4025-75.

IV. Technical / Other - N/A

Conclusions. There is not a lot in the sentiment outlook this week to be bullish about. The VIX call and SPXADP very ST indicator does show a weak Buy, however, at +1 SD, so there should be a bounce next week to the SPX 4025-50 level. The 2nd and 3rd weeks have the jobs data followed by CPI/PPI and will likely show strength resulting in a drop in the SPX to 3900. The following weeks FOMC could start a tradeable bounce, possibly to SPX 4100 if Powell sticks to his original plan of 0.25% hikes. One reason I think this is likely is that much of the recent strength in inflation comes from shelter (housing/rents) that are calced on a 12 mn rolling avg, and therefore show lagged data with recent data in a downtrend.

Weekly Trade Alert. This did not work very well last week, but I am again looking for a modest gain of SPX 50-75pts next week before lower lows mid-month. 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
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Long term forecasts

© 2023 SentimentSignals.blogspot.com

Saturday, February 18, 2023

AI Mania

Last weeks outlook was for a similar pattern to the previous week with early strength followed by a late week fade with potential for high volatility around the CPI release. The directions turned out to be correct, with the CPI somewhat higher than expected and both stocks and bonds gyrated throughout much of the day, ending with small gains. Stocks continued to hold up well into late Thur even though int rates moved higher with a sharp increase in PPI and the TNX retracing 50% of its gains since Oct the last two weeks, but the last hour started panic selling when Fed's Bullard came out with a hawkish position supporting more 0.5% rate increases. With the first hour of trading Fri, the SPX fell about 110 pts to 4050 from the Tue high, but remained well above the huge straddle at 4000. SPX options OI is showing another test of that target could be seen at the Feb 28 EOM.

There has been a lot of talk recently about AI with MS Windows release of Bing's AI ChatGPT. Several articles have shown some pretty quirky behavior. An excellent article at Phil's Stockworld discusses some of the positive and negative results from interactions with one of the personas "Sydney", while a second discusses a hidden persona "DAN" (do anything now) and its predictions for the next stock market crash. Finally, an example of the more traditional use of AI for algorithmic trading in the stock market at Neptune.AI.

Overall bearish sentiment has shown little change with the mild pullback in the SPX the last two weeks which paints a doubtful picture for those hoping for a move to 4300.

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 decline led by volatility measures and SPX ETF and options sentiment, indicating that more downside is likely over the ST/INT.

Update Alt EMA. ST/INT EMAs are testing the lows of the last few weeks and indicates that the SPX 4300+ target that some are looking for is unlikely ST.

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 slight positive uptick in sentiment may make keep stocks up for a few days similar to last week.

Update EMA. The very ST sentiment spike remains within a longer negative bias.

Update EMA. Very little change in sentiment indicates more downside is likely INT.

Bonds (TNX). Bearish sentiment in bonds saw a fairly strong rebound and may keep rates ST in a trading range around current levels.

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. A strong rebound in bearish sentiment seems to be positive, but EOQ options OI are very bullish (likely dumb money), and the trend is likely sideways to down thru Mar exp. Contrast this with Avi's recent prediction (no J/S) of an imminent breakout in gold to $2,100 ST then $2,400.

Update. Sentiment testing recent lows means more downside is likely.

With the sister options Hedge Spread as a ST/INT indicator (outlook 1-3 mns), bearish sentiment continues to consolidate around neutral, so there is little fuel for a short-covering rally.

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, ETFs are little changed while options speculation is increasingly bullish meaning more downside likely for the INT.

NDX sentiment has improved slightly and the NDX may outperform the SPX ST.

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 July 16. 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 4079, options OI for Tue is small with moderate put support at 4075 and little net call resistance until 4150, so some upside is likely.

Wed has very small OI where SPX has overlapping support/resistance from 4050 to 4150, so not much directionality.

For Fri strong put support up to SPX 4100 and some deep ITM calls that may offer resistance indicates 4100-4150 is likely.

For Tue Feb 28, EOM strong put support at SPX 4000 and call resistance at 4200 with straddled positions in between leaves no clear call, but the BE indicates a move below 4050 is possible.

Using the GDX as a gold miner proxy closing at 28.4, strong call resistance at 30 and over and little downside put support means limited upside and larger downside risk.

Currently the TLT is 102.4 with the TNX at 3.83%, very little net support/resistance between 95 and 107 means no directional bias.

IV. Technical / Other - N/A

Conclusions. The last two weeks have been fun, but the next two may be somewhat boring with the Feb jobs data Mar 10 and CPI/PPI Mar 14/15. Last week I mentioned 2015 as a potential analog for 2023 and a closer look shows a rounded top that lasted for several months, so any decline may drag on for a while.

Weekly Trade Alert. A consolidation week is likely with SPX 4075-4125. 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

Saturday, February 11, 2023

All Your Heart Could Desire

Last week went as well as could be expected as weakness was expected by mid-week with a possible low target for the SPX at 4050, and the week started with an early Tue rally to 4180 after many of the bears on Wall St and elsewhere who had been looking for a drop to the low 3000s early in 2023 switched to ST bullish targeting 4300-400. But the rally began to fizzle late Tue and dropped to a low Fri AM to SPX 4060 before a closing rally to 4090. The main reason for the decline was a turnaround in techs as int rates rose strongly during the week with the TNX rising to 3.75%, retracing over 1/3 of the decline since the Oct high at 4.35%. I have been warning of higher rates for the last two weeks.

Next week is optn exp week with CPi and PPI on Tue/Thur. Most seem to be expecting the SPX to go higher, while options OI for SX indicates a more likely drop with a very large straddle at 4000 the likely target.

Discuss.

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. Overall bearish sentiment remains in a sideways trend with ETF and volatility declining while options sentiment is rising.

Update Alt EMA. The sideways trend continues.

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. Last weeks selloff has moved sentiment to slight positive, but is likely to move higher before a turnaround,

Update EMA. Very ST a bounce is likely Mon/Tue before a resumption of the downturn.

Another ST indicator with VIX calls and SPXADP shows similar sentiment.

Update EMA. ST/INT sentiment shows very little change in sentiment, indicating that lower prices are likely over the INT term.

Bonds (TNX). Bearish sentiment in bonds remains largely unchanged, indicating that a continued rise in rates is likely.

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. A sharp decline of over 10% the past 10 days saw a sharp rise in ETF sentiment, but headwinds are still likely if rates continue to rise.

Update. Sentiment seems to be forming a long basing period as in 2021.

With the sister options Hedge Spread as a ST/INT indicator (outlook 1-3 mns), bearish sentiment remains near 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) as bearish sentiment, options and ETFs continue to converge from the unusual pattern with extreme options bullishness and high ETF bearishness. This is one of the main reasons while I doubted a continuation of the bear trend over the ST.

Bearish sentiment continued to fall last week and is now slightly below neutral.

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 July 16. 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. I just noticed that I forgot to use 2023 in titles.

With Fri close at SPX 4090, options OI for Mon is moderate with put support up to 4100+ and call resistance at 4125. An early week move over 4100 is likely.

Wed has smaller OI where SPX put support moves down to 4050 but call resistance is also higher at 4150, so an increase in volatility is expected with the CPI/PPI data.

For Fri AM strong $OI is likely to push the SPX toward the the large straddle at 4000.

For Fri PM moderate OI shows a bounce back to SPX 4050 is likely.

IV. Technical / Other - NA

Conclusions. My INT out is pretty much unchanged as the decline is likely to continue into May/June with a potential counter trend rally from Mar thru mid-Apr. Reflecting on the longer term trend, it was only 8 years ago in 2015 when the SPX traded in a 10-15% range for most of the year before a breakout rally into the 2016 election. I doubt if Trump2 is possible, but given Biden's low rating, a DeSantis+TX senator has a very good chance to win and the markets might rejoice in 2024.

Weekly Trade Alert. A possible repeat of last week with early strength to SPX 4100+ and a late week swoon to SPX 4000 or lower before a last minute rebound. 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

Saturday, February 4, 2023

No Recession in Sight

My outlook from two weeks ago was for the SPX to remain in a trading range for 2023 between 3800-4200, but admittedly I was expecting a pullback into mid-Mar to the lower portion of the range before 4200. Last week with the Fed raising rates only .25% and a dovish interpretation, short covering exploded, especially in techs, as the TNX fell below 3.4% and the SPX spiked up to 4194. My macro outlook has been doing much better as Fri jobs numbers surprised many. As MW stated "The unemployment rate (UR), meanwhile, slid to a 54-year low of 3.4% from 3.5%, the government said Friday. That’s the lowest level since 1969. Hourly pay rose a modest 0.3% for the second month in a row, reflecting the smallest back-to-back gains in almost two years." My analog to the late 1960's is starting to look more and more likely.

The low UR means the Fed has more business to do as one of the biggest drivers of 1960s & 70s inflation was wage inflation driving a wage price spiral, so they may continue .25% hikes into May/June. If so the expected correction may stretch into that time frame and could reach the bottom of the range at 3800 before a summer rally as the Fed finally pauses.

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 decline for SPX ETFs and volatility, while options rose slightly. The result was modestly lower sentiment.

Update Alt EMA. This remains in a sideways pattern.

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 Bearish sentiment fell and remains in a negtative position.

Update EMA. Bearish sentiment rose slightly.

Update EMA. Hedging continued to fall sharply pulling the ST/INT indicator to the levels which ended the bear market rallies since last Jan.

Bonds (TNX). Bearish sentiment in bonds continues to hover at low levels as the struggle at the 3.5% support level continues.

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 remains above the levels expected for a major downtrend, but the strength in jobs Fri helped the dollar and sent gold tumbling.

Update. The late pullback caused a small spike in sentiment, but it remains at very low levels.

With the sister options Hedge Spread as a ST/INT indicator (outlook 1-3 mns), bearish sentiment was off the charts during Jan as the consensus was for an imminent recession and SPX drop to the low 3000s, but weakness so far has remained mostly in techs. As a result of continued strength in the broader market hedging has now fallen to levels comparable to other bear market rallies during 2022.

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 sentiment was down while options was up with the result of little change.

Much of Jan hedging appeared to be in techs and as the double bottom held around 11,000, techs rallied almost 15% over the past month and sentiment fell sharply nearing the levels of ST tops during 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 Jan 10. 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 & TNX for Mar exp. A new addition is added for OI $ amounts with breakeven pts (BE) where call & put $ amounts cross.

With Fri close at SPX 4136, options OI for Mon is small with little put support until 4000 and call resistance at 4150. A drop by the close to 4100 looks likely but 4110-25 puts may provide some support.

Wed has somewhat smaller OI where SPX shows similar support resistance levels with a slightly more negative bias.

For Fri stronger call resistance from SPX 4100-50 and below could push prices toward 4050.

For op exp Fri AM $OI shows a strong negative bias with a very large straddle at SPX 4000 that may act as a magnet.

IV. Technical / Other - N/A

Conclusions. Surprising strength (short-covering) pushed the SPX to the top of the expected trading range of 3800-4200 quicker than expected, but this likely means a more drawn-out correction, possibly to May/June as the Fed continues to hike Fed funds rates to the 5-5.5% range in .25% increments. A pause is then likely with a summer rally back to the top of the range.

Weekly Trade Alert. Some weakness is expected by mid-week with SPX 4050 likely by EOW. 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