A Tale of Two Inflations

Last weeks title "No Pullbacks Allowed" said it all.  I had been expecting a small pullback to about SPX 4000, but the only ST bearish indicators were the VIX Call indicator which is right about 75% of the time and the large OI straddle at SPX 4000 that becomes less effective as it becomes farther OTM.  Short-covering rallies can be more tricky and many who took longer dated shorts expecting the crash to SPX 3000 by EOM June  (top, hack) are likely becoming nervous and use every dip to cover.   One perma bear who claimed to have taken 40-50 short positions Apr 11-12 ar SPX 4120-30 and announced a buy and forget mode made me particularly skeptical about a near term pullback.  It looks more like the SPX will maintain the 4110-70 level thru May 3 FOMC with a possible pullback to 4000 mid-late May with seasonal selling and likely uptick in inflation following the bounce in oil prices and last weeks surprise strength in PMIs.

Exec Spec had a particularly good article this week regarding the disconnect in inflation expectations as many investors seem to believe that the Fed has done too much with a ST return to lower inflation and lower rates while a more objective view shows that inflation remains a LT problem.  I still think that the Fed is likely to pause after one more hike in May, but more hikes are likely in early 2024 as inflation remains "sticky".  Wider acceptance of the SVB crisis being solved similar to the 1998 LTCM crisis with a following liquidity blowoff makes it more likely that a retest of the SPX 3700-800 in the Fall is necessary to setup a 2024 election rally.

Discuss.

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 indicates a ST pullback is due, but as seen in mid-2018, 2019 and 2021 the topping process can take several months allowing for a continued advance.

Update Alt EMA.  Bearish sentiment continues to favor a ST pullback that may be part of a LT topping process.

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 bearish sentiment improved somewhat last week and may favor a bounce.

Update EMA.  Very ST bearish sentiment spiked higher and may lead to a retest of recent highs.

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 pushed sentiment back toward neutral.

Bonds (TNX).  Bearish sentiment in bonds remains near the Sell level.  INT sentiment may be forming a "cup and handle" with a rounded bottom for the cup pointing to a 4%+ rate by Fall that may coincide with a correction in SPX.

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 continued to find strong resistance at $2000 as stronger PMIs indicated "higher for longer" Fed policy.  The Aug Buy for the ETF sentiment resulted in a 50%+ rally, but overall sentiment is near levels of several INT tops.

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 has reached the level of the Mar top.

With the sister options Hedge Spread as a ST/INT indicator (outlook 1-3 mns), bearish sentiment rose above neutral.

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. No chart.

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 above the levels of recent ST tops.

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 NDX seems to be losing support as the hedging favorite with sentiment falling back to 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 Apr 28. 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 May and TLT for June exp.   A new addition is added for OI $ amounts with breakeven pts (BE) where call & put $ amounts cross.

With Fri close at SPX 4134, options OI for Mon is small indicating put support/call resistance at 4100/4150.

Wed has somewhat smaller OI where SPX shows wider support/resistance at 4050 and 4170.

For Fri EOM, strong OI shows stronger call resistance over SPX 4100 and another straddle at 4100 that may act as a target.

Wed May 3 FOMC has very small OI so far, but shows SPX call resistance over 4125, so its possible that overly optimistic "pivot" investors are disappointed and start the long awaited pullback to 4070 or possibly 4100 by the end of May.

Using the GDX as a gold miner proxy closing at 33.6 shows strong call resistance at 35.5 and minor put support until 29.  Prices may fall further.

Currently the TLT is 104.4 with the TNX at 3.57%, Avi's recent calls for lower rates and TLT targeting 120 looks like a consensus with strong call resistance over 110 and no put suooprt until 102.  Possible range seems to be 100-110.

IV. Technical / Other - N/A


Conclusions.  Last weeks action was lackluster, but lacked the typical distribution volume seen for a significant top.  We may see a seasonal pattern of weakness starting early May, but a higher high, possibly SPX 4250+ seems likely into the mid-late June on higher volume for an INT top.  To me the SPX 3800-4200, or extended, range remains likely thru the EOY.  Fall SPX weakness may result from a combination of slower growth and higher inflation, ie stagflation, while a recession is unlikely if unemployment remains below 4%.

Weekly Trade Alert.  ST sentiment is showing a bounce is possible to start the week, possibly to test the recent highs at 4160-70, but a pullback toward 4100 is likely by the EOW.  Next weeks FOMC coul be critical for a larger break below 4100.  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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