Time for a Time Out

Another successful week, but still full of surprises.  The Sun update indicated that the UBS CSuisse buyout would create a more bullish start to the week, and the SPX climbed steadily thru Thur to reach the EOW target of 4000.  Wed was expected to be down as the Fed held steady in the inflation fight and raised rates 25BP, even though many including Musk were calling for a "pivot".  However, the SPX held steady over 4000 after the rate hike, but after a brief spike to 4040 fell hard the last 90 min to close below 3940.  The choppy action between 3900 and 4000 continued thru Fri which rallied steadily from an opening low at 3910 to close at 3970, missing the 4000 target.

Next weeks outlook is for more of the choppy trading, but likely in a tighter range.  If June -July 2022 patterns continues we may remain in a range from SPX 3900-4000 until mid-late Apr, while a Fed pause at the May 2-3 FOMC may provide fuel for a move to SPX 4200 or higher thru June.  What happens to int rates (TNX) after the Fed pause is likely to be important.  If rates continue to rise with the TNX moving to 4%+ then SPX 4200 is a likely maximum.  If rates stay near 3.5% then 4300 is likely.  A move to 4.5% by Fall due to continued inflation and strong growth probably means a retest of SPX 3800.

The Tech/Other section takes a "big picture" look at int rates (fed funds, TNX) and the PCE inflation gauge for two possible LT scenarios..

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 (40%), 2nd the SPX 2X ETF INT ratio (30%), 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.  This week breaks SPX options into volume adj (1/B-A) and traditional spread (A-B).

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 climb, especially in options, with continued fears of a banking crisis, aka 2008-09, and now resides at neutral.

4Update Alt EMA.  The brief spike to neutral has pulled back 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.   ST volume sentiment continued to rise sharply, now producing a strong Buy similar to the levels of the June and Sept SPX lows.  I still expect continued chopy behavior similar to June-July which saw a range of 3800-900 for a month before a breakout rally.

Update EMA.  Here, we also see a strong Buy just below the June levels.

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 similar but somewhat weaker bearish sentiment than at the June and Sept lows.

Bonds (TNX).  Bearish sentiment in bonds remains below neutral and will probably remain in the same trading 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.  ETF bearish sentiment fell sharply and may mean limited upside.

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).  This week a "fix" is included for the SPX low options P/C discussed in the SPX ETF section.

Update.  After the "fix", bearish sentiment now appears similar to the Aug 2019 period, where a choppy advance ended in the Jan 2020 meltup.

With the sister options Hedge Spread as a ST/INT indicator (outlook 1-3 mns), bearish sentiment continued to fall to the weak Buy level following the June 2022 pattern.

A new composite SPX options indicator uses both the volume adj (1/B-A) and P/C equivalent spread (A-B) to compensate for the discrepancy between the two.  This replaces the old SPX options indicator for the SPX ETFs + options below and the INT/LT composite.

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 rose above neutral with a sharp rise in options sentiment.

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.

The 10% rise in the NDX the last two weeks from the 11,800 level resulted in a sharp drop in sentiment and will probably result in more normal market performance.

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 31. 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 & TLT for Apr exp.   A new addition is added for OI $ amounts with breakeven pts (BE) where call & put $ amounts cross.

With Fri close at SPX 3971, options OI for Mon is moderate with strong put support at 3950 and call resistance at 4000, so a tight range 3950-4000 is likely with a close near 3970 .

Wed has very small options O, where SPX has put support a 3900 and call resistance at 4025 and 4065. 

For Fri EOM strong OI with outside support/resistance at SPX 3900 and 4025 and mostly straddles in between.   Likely range 3950-4000 with small downward bias toward 3950-70.

Using the GDX as a gold miner proxy closing at 31.5 made it over strong resistance at 31, but OI and OI$ indicate a drop to 30 is likely.

Currently the TLT is 106.8 with the TNX at 3.38%, similar to GDX the move over call resistance at 105 is likely to reverse pushing TNX back to 3.5%.

IV. Technical / Other

This week I want to look at the Fed's inflation target using the PCE with the TNX and fed funds rates.  The last time the PCE was over 4% was 1990 at the beginning of a recession due to an oil shock from the Iraq invasion of Kuwait. As you can see, until 2015 there was a positive spread between the TNX and PCE which is called the real interest rate.  The spread is based on expected inflation and is usually based on what happened the last few years.  In the 1990s, people expected a return to high inflation of the 1980s and now we see the opposite where people expect the low inflation of the 2010s.  The result was that rates were too high in the 1990s, but are probably too low today which is why I expect higher rates.  Note the chart does not include last weeks rate hike.

Looking at 1990, it took 4 years for the PCE to drop to the Feds target rate of 2% even with a recession.  Today with continued signs of a stronger economy, it could take much longer.  So I want to take a look at what I see as two of the most likely outcomes and what it means for interest rates.  The first (prob 40%) is the 2006-07 prelude to the 2008-09 financial crisis where fed funds rate rise over 5% and stays there for two years while TNX rises staying between 4.5-5% until a full-blown financial crisis occurs.  The second is 1998-99 (prob 60%) where the Fed lowered rates (today replaced with QE & other bailouts), but persistent inflation and strong growth with tech boom leads to higher TNX and Fed had to raise rates 9 mns later, eventually up to 6.5%.  This led to tech crash and an even bigger recession.

Conclusions.  Its probably time for a time out.  The last two weeks have been fairly wild but if options OI is any indication, next week will be calmer with most of the time spent in the SPX 3925-4000 area. 

Weekly Trade Alert.  Mon could see a small pullback but SPX OI support is strong at 3950.  Fri EOM shows a potential range of 3900-4025, but neutral bias centers around 3950-75.  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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Sentiment Indicating a Positive Spring

For the most part since Dec, I have been sticking to the big picture with the outlook of a beginning of a multi-year bear market (after inflation), trying to avoid the whipsaws seen by many of the bears who switch from calls for a drop to SPX 3000 or lower on every decline and a high of 4300 or higher on every rally.  Last week ended up on being one of my best calls of the year even though prices were relatively calm.  The outlook was for a move to SPX 3925-75 by EOW with a warning of a probable new low first, and Mon began weak with a drop to 3808 before rallying to 3930 with news of the Fed backing SVB depositors.  With Wed options OI showing weak support down to 3825, the SPX then dropped to 3840 with a move up into Thur to meet the 3950+ target for Fri AM exp and a possible drop to 3900 for PM exp. 

Many are now looking at the SVB, Silvergate, and Credit Suisse problems as the beginning of a 2008-09 financial crisis, but from my perspective this is more like the LTCM crisis of 1998, where a highly leveraged hedge fund had to be bailed out by the Fed.  Later this was looked at as giving the green light to more speculation (BTC up 30% Tue) and a primary driver of the dot-com bubble and bust (will we see bubble#2).

The SPX options component for the INT/LT Composite and SPX ETF+options (DM/SM) is adjusted this weeki for the difference between the sentiment shown by high volume and low P/C ratio discussed last week.  Also Tech/Other shows a SPX volume chart reflecting the high volume seen last week as an INT bullish 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 (40%), 2nd the SPX 2X ETF INT ratio (30%), 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.  This week breaks SPX options into volume adj (1/B-A) and traditional spread (A-B).

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.  Last week saw an uptick in bearish sentiment roughly equal to the Dec lows at SPX 3800 before a 400 pt rally.

Update Alt EMA.  ST EMAs (grn) are near the Level of the Dec price lows, but LT (blu) indicate that more backing and filling may be necessary before a sustainable rally.

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 has now reached the strong Buy level.

Update EMA.   ST remains weaker than Dec lows, while LT remains weak, indicating backing and filling is probable before a large move up.

The VST VIX Call and SPX indicator shows strong SPXADP, but weak VIX call support likely result is choppy advance.

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.  Weak Buy level reached.  Bottom is near, but advance likely to be labored.

Bonds (TNX).  Bearish sentiment in bonds remains slightly negative.  Higher rates likely, but it could take a while.

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.  Sentiment is near neutral overall, but positive support from ETFS.

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 surprisingly strong increase in bearish sentiment ST may indicate an INT strong rally (10%+) if LT sentiment continues to improve.

With the sister options Hedge Spread as a ST/INT indicator (outlook 1-3 mns), bearish sentiment reached the Buy level at last weeks lows, but the quick reversal Thur-Fri may mean a choppy advance.

A new composite SPX options indicator uses both the volume adj (1/B-A) and P/C equivalent spread (A-B) to compensate for the discrepancy between the two.  This replaces the old SPX options indicator for the SPX + options below and the INT/LT composite.

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 remains weak and may need a few weeks of choppy behavior, similar to Sept 2022, before a sustained advance.

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.

Update.  Last weeks best call was for out-performance by techs with the NDX up 6% vs SPX 1.5% aided by lower rates.  With continued strength in sentiment, relative strength should continue.

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 24. 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 and $ volume.

With Fri close at SPX 3917, options OI for Mon is small with BE only slightly above current levels.  A successful deal for Credit-Suisse could push prices over 3950, otherwise a close between 3925-50 is likely.

Wed has somewhat smaller OI with stronger SPX call resistance at 3950, but BE suggests a  range of 3925-75.

For Fri strong put support up to SPX 3950 may lend a positive bias for the week.  With a BE of 4015, a test of 4000 is likely.

For Fri EOM strong put support does not start until SPX 3900, so lower lows can be seen thru the last week of Mar.  There is also very strong call resistance at 4065, likely from the JPM hedge fund.  The BE at 4000 indicates prices likely to close between 3975-4000.

IV. Technical / Other

Last week saw very strong volume in SPX, just below the 2 SD Buy level and the highest since June of 2020 so a strong rally of 10%+ may be near.  Most of the week was about 50% above ST avg of 2.4B shares while Fri was 5.4B.

Conclusions.  Next week is FOMC Tue-Wed and the price behavior Fri seemed to reflect more hope of a "pivot", but I am going to stick with 2-3 more 25PB hikes based on the strong inflation numbers and the EU 50BP hike.  The markets may be temporarily dissappointed, but options OI indicates a small range of SPX 3925-75 and Fri suggests a move up to the 4000 level from any pullback.   Many of the sentiment indicators are now indicating that there is support building for a strong rally of 10%+ from the SPX 3808 lows or about 4200, but that some bottoming (3900-4000) may be required before more progress.

Weekly Trade Alert.  Not much indication of volatility this week, but a pullback on FOMC Wed toward 3925 may target SPX 4000 Fri.  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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Are Stocks Destined for Lower for Longer?

The SPX seemed to be following the prescribed path with weakness thru mid-week to 4000 or lower (3970) before a bounce back to 4025 or higher (Thur AM 4018) before news of a liquidity crisis at Silicon Valley Bank (venture capital) hit the news.  As a bank run and fear of contagion spread, the stock market dropped hard into late Fri, hitting a low at SPX 3848.  Bank stocks as a whole (BKX) were down over 10% for the week  with the collapse of SVB on Fri.  I admit knowledge of the banking sector is a weakness of mine, but I doubt this a sign of widespread contagion similar to the securitized mortgage crisis of 2008-09.  However, Avi has been warning of potential bank liquidity problems for several months, although this may also be enough to cause the Fed to be more cautious with rate hikes.

Several of the longer term indicators, including the INT/LT Composite, Dumb/Smart Money and SPX ETFs and options, remain near recent lows in bearish sentiment so several more weeks of bottoming in the SPX 3750-3850 area are possible before a sustained rally.

Tech/Other takes a closer look at the SPX options put-call spread components that are included in the INT/LT composite, DM/SM indicator and SPX ETF/options indicator, and why it may not be as bearish as it seems.

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.  The swiftness of the Thur-Fri decline may not have been long enough to reflect changes in sentiment, but low levels of bearishness are still a cause for concern.

Update Alt EMA.  Bearish sentiment continues to decline, but may need a sharp decline (blowoff) before a final 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.  Bearish sentiment rose on top of a strong surge in UVXY $ Vol, but is likely to move higher before a sustainable low in SPX.

Update EMA.  Very ST there could be a bounce for a few days (op exp wk), but is not likely sustainable.

VIX calls & SPXADP.  Sentiment is neutral after a brief surge Thur.

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 spike in hedging on Fri may lead to a ST reversal, but sentiment should be higher for a sustainable low.

Bonds (TNX).  Bearish sentiment in bonds remains near the weak Sell level and rates are likely to continue higher when the current crisis passes.

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.  Gold stocks remain in a tight range with a small increase in bearish sentiment.

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 remains at the Sell level.

With the sister options Hedge Spread as a ST/INT indicator (outlook 1-3 mns), bearish sentiment spiked very ST (grn) to the Buy level but likelky needs for INT sentiment to catch up before a sustainable bottom for SPX.

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 sentiment continues to continue to keep this indicator at the Sell level (see Tec/Other for discussion), while ETF sentiment remains neutral.

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.

The majority of the hedging remains to be seen in techs and are therefore expected to outperform 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 Mar 17. 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 3862, options OI for Mon is moderate where delta hedging may offset put support.  Expect range 3850-3900.

Wed has smaller OI where SPX has only modest put support over 3825 with a wide possible range.

For Fri AM strong OI $ in puts is likely to push prices to SPX 3950+.

For Fri PM strong put support extends up to SPX 3900 with a likely range of 3900-4000.

For Fri EOM strong call resistance in the SPX 4025-75 area is likely to limit any upside, and 3950-4000 seems likely.

IV. Technical / Other

This week I wanted to take a closer look at the SPX options.  In late 2019 and 2020 we saw a spike in volume of SPX options before the market top and we are seeing an even larger one in 2023 as reflected in the SPX options spread.  One thing that is different is the P/C ratio.  The 2020 and 2022 tops saw the P/C ratio rise to 1.75+ before a top and todays ratio of 1.25 is more indicative of the early stages of a rally as in the second half of 2020, hence the preference for a trading range with a blowoff top before a large decline (20%+).

Conclusions.   The SVB collapse was unexpected and may have accelerated the decline to SPX 3800 expected by May/June.  The potential change in sentiment is not likely reflected in sentiment measures due to the rapidity of the decline, but my overall outlook for a trading range INT remains unchanged,

Weekly Trade Alert.  There is likely to be a bounce to SPX 3925-75 for opt exp week, but it could be volatile with lower lows first.  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

© 2023 SentimentSignals.blogspot.com