Bulls Stampede May Be Running on Fumes

Bulls continued to stampede prices higher last week running roughshod over SPX OI call resistance, but as as warned for the last few weeks, I am expecting disappointing EPS for the tech sector for the next two quarters and the mid-week TSLA and NFLX were a good example with Thur 10% and 9% drops, respectively.  Interestingly, the NDX ETF sentiment indicator reached a strong Sell Wed, while the SPX remains near the weak Sell.  There is good possibility that last July may be the beginning of a monthly cycle of early economic strength (jobs, ISMs) that cause int rates to rise and then fall back as inflation moderates or at least rises slowly.  Supporting this is the TNX sentiment (TBT/TLT) which moved back to a Sell.  A very good article by John Maudlin discusses the ins and outs of CPI calculation very clearly and shows why the CPI is likely to rise back to 4% YOY by Dec.

Next week is FOMC with the consensus (75%).expecting July and Sept rate hikes then done.  I am less sure (50%).  As has been discussed many times by Avi and shown by 2023.03.25 Tech/Other charts (see links below), the Fed tends to follow rates higher (esp 1990s and 2021), and I think they wait until the TNX gets to/over 4.5% before hiking.  Remember the Fed is expecting a Q4 recession and tough talk is cheap, so a continued hawkish pause is possible.  This weeks Tech/Other takes a detailed look at the 1966-1974 DJIA analog with potential targets around the 2024 election as the next major top.

A new addon to the History Lists for Tech/Other is for "other indicators" and so far includes two INT/LT indicators (5-6 yrs) the Rydex.Bear/Bull 3X ETF ratio and NYSE Adv/Dec volume where both show sentiment at the same point as late 2020 and implies 12-18 mns before a major top (aka Jan 2022), and two links to historical charts for DJIA and SPX with inflation adjustment.

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 spread 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 remains near the levels of mid 2021.

Update Alt EMA.  Bearish sentiment is also near the mid 2021 levels.

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 at the weak Sell level.

Update EMA. Bearish sentiment remains at the weak Sell level.

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. Bearish sentiment remains at the Sell level as very strong options FOMO (possibly 0TDE) skews sentiment.

Bonds (TNX).  Bearish sentiment VST moved back to the Sell level and a move back to 4%+ is possible with the Aug 4 jobs data.

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 jumped back to its recent high and may mean higher prices if the Fed remains on hold.

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 moved to the Sell level and remain there much like early 2021..

With the sister options Hedge Spread as a ST/INT indicator (outlook 1-3 mns), bearish sentiment continues to fall toward the Sell level, but may lead a major top by 12-18 mns.

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), LT bearish sentiment is near the levels of mid 2021.

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.

LT bearish sentiment has dropped to the Sell level second only to nov-Dec 2021 and likely means a 10%+ decline over the next several months.

For comparison, the SPX combining the hybrid ETF options (SPY) plus SPX 2X ETF without the int rate effectt,  (outlook 2 to 4 mns) bearish sentiment is at the weak Sell level seen in mid 2020 and early 2021.

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

With Fri close at SPX 4536, options OI for Mon is moderate with strong call resistance at 4550 and put support starting at 4500.  Expected range 4500-50.

Wed FOMC, options OI is small where consensus seems to be a hawkish rate hike with strong put Oi from SPX 4440-4475.  Contrarian expect range same 4500-50.

For Fri moderate OI with some negative bias, but probably not muck below SPX 4475.

For Mon EOM strong OI with many ITM calls that may pressure prices downward toward 4450, but EOM window dressing may offset this keeping prices between SPX 4500-4550..

IV. Technical / Other

This week I want to take a closer look at the late 1960s-mid 1970s DJIA analog. The first chart shows the current $ (no infl) performance from the Jan-66 top thru the 1970 low as an EW A/1 thru C/3 decline.

The second chart shows the performacne in constant 2023 $ (after infl), note the 1968 and 1972 highs remained 15 and 25% below the 1966 highs which is why I am looking at this as one 5 wave decline into the 1974 lows (last chart).  Note, the 9,000 price means $1 in 1966 equals $9 today, imagine a $5/hr job in 1966 equals $45/hr today or $90k/yr, a decent middle income salary.

The following table summarizes the DJIA performance from the Jan-66 top thru the Sept-74 lows and comparison the current performance of the DJIA, SPX and NDX.  The A/1 wave down was similar for the DJIA but larger for the SPX and much larger for the NDX and the recoveries so far have been proportionately larger.  From the A/1 low which was of similar duration, I am looking at the current rally as B/2 (a) which took 12 mns in 1966-67 but is currently is only 9 mns in 2022-2023 and appears to be an alternation, so I am assuming a 5-6 mn correction (b) followed by a 12 mn rally (c) to finish B/2.  The 2024 election looks like an important date.  Despite the current super bullishness today, I am expecting only minor new highs.  As shown in the lower B/2 table, a 9.3% correction followed by a 17% rally as in 1968 would put major indices at 1-2% above previous ATHs.  An interesting facet of this analog is the total duration from 1966-74 is 8 years, and 8 years from the 2022 top means a "big bear" in 2029-30 or 100 years after 1929-30 - happy anniversary.

The final chart shows the DJIA from 1966-80 in current $, where the price low was made in 1974, although a sharp pickup in inflation produced lower constant $ lows later.

The following uses barcharts.com as a source and discusses S&P futures (ES) as a third venue of stock sentiment in addition to options and ETFs.  The non-commercial/commercial spread represents a LT bearish sentiment .(dumb money/smart money) indicator. As explained in investopedia, commercial investors (red) are institutions and are smart money, while non-commercials (green) are speculators such as hedge funds and are dumb money. Here is the current  barchart graph for the S&P 500 (top) and trader positions (1st bot) with positives as net longs and negatives as net shorts.  Bearish sentiment is represented by the spread and is positive if red > green (Buy) and negative if green > red (Sell).  Sentiment remains neutral.

Click dropdown list to select from the following options:

Tech / Other History
2023
   07.08 TNX since 2020 shows bounce likely temp w/ more back&fill before rounded bottom completes    07.01 Sentiment for BKX is at warning levels, Barcharts ES sentiment is now neutral.    06.24 Another update to VIX call indicator using VIX P/C; how volatility (VIX) effects options pricing    06.17 OTDE Volume & Put/Call Ratio Drilldown - low volatility (VIX) ahead    06.10 Volatility indicators warning of a nearing top    05.20 A review of indicators that performed well in 2015s rounded top    05.13 Comparing the VIX term structure (VIX/VXV) and volatility ratio (VIX/VVIX)    05.06 A review of the current int rates (TNX), unemployment and CPI compared to the 1960s    04.29 Addressing the negative M2 growth misconception, adding Barcharts ES outlook    04.15 Several LT/INT indicators show INT gains likely (SKEW&VIX/VXV,VIX/VVIX,BPSPX&SPXADP)    03.25 Comparison of PCE inflation and TNX rates to late 1990s indicates possible tech meltup    03.18 Strong SPX volume at Mar optn exp supports Spring rally of 10%+    03.11 Low SPX P/C ratio indicates likely trading range    03.04 LT T-bonds (10/20yr) => more Fed tightening, LT NYSE Adv/Dec volume => possible ATH retest    01.28 SPX correlation w/liquidity, Fed bal sheet - Treasury Gen Acct - O/N reverse repo    01.14 Volatility indicators, ST VIX calls indicate pullback SPX 200 pts, INT/LT SKEW & VIX/VXV still bullish    01.07 Gold performance relative to int rates (TNX), and China stock market (SSEC)
2022
   12.24 Late 1960s analog, TNX,Unempl & CPI => Recession 2024-25, DJIA top Feb'66 retest late '69    12.17 A contrarian view to the consensus 2022H2 recession & bear narket low of SPX 3000    12.10 Yield curve inversion (since 1980) not perfect recess indicator compared to inflationary 1960-80    11.26 Sentiment indicators showing a sharp drop late Dec as a setup for a strong Spring rally    11.19 Sentiment indicators showing choppy move higher likely before pullback    11.05 Using the SPXADP with the VIX call only indicator improves effectiveness

Other Indicators
   INT/LT Rydex 3x Bear/Bull Fund Ratio    INT/LT NYSE Up/Down Volume 100 & 200 DMAs    S&P 500 Historical Charts with Inflation Adjustment    DJIA 100 Year Historical Charts with Inflation Adjustment

Conclusions.  The last two weeks remind me of late 1999 when it was almost impossible not to be bullish, but you knew it was a trap.  Many are still expecting a near term recession with some even insisting that a recession has already begun using alternative measures to GDP, like GDI, but as I have been saying since Dec 2022, unemployment is the best ST indicator of a recession and until we start seeing 4%+ unemployment there will be no recession.  Last weeks oil outlook proved timely and I am expecting $80-85/bbl by EOY.  Early to mid Aug may be similar to July where a strong jobs number pushed TNX rates to 4.1% and the SPX fell 75 pts, then "good" inflation pushed rates back down and SPX higher.  As discussed in last weeks comments higher rates can be an ebb and flow as seen in 1999 with lower stocks when rates rise, then stocks recover as rates fall.

Weekly Trade Alert.  A modest pullback is likely with possible EOM strength.  Better opportunies are likely early to mid Aug.  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
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