Record Heat Scorches Bonds, Stocks Wither

Last weeks fireworks started early in the week in the bond market as the expected breakout ended up being to the upside similar to late 2020  I was surprised to rates to continue to rise on Mon and after the early close did some reading of reports from balanced fund managers (60% equity/40% bonds).  Apparently many went into June over-weight bonds due to the "perfect recession indicator", the 3mn/10 yr Treasury yield curve from 1980, which predicted a recession by June.  As June came to a close, rather than the "rebalancing" or selling stocks and buying bonds, they were forced to sell bonds, which turned into a frenzy with Thur "fake" ADP jobs report showing double the expected new jobs.  Fri was not much better, and even though jobs reported were 20% lower than expected, the drop in unempl rate to 3.6% and a jump in wages from .3 to .4% as warned last week was enough to sink an attempted rally to SPX 4440 back to the 4400 target indicated by SPX options OI.

Little change in most of the sentiment indicators points to a continuation of the current trend, which is down, for the INT term.  The ST indicator does support a VST bounce of 1-2 days, but SPX options indicates a return to SPX 4400 or lower by Wed and Fri.  A look at Fri June 21st indicates a possible drop to about SPX 4325.

Tech/Other takes a look at the TNX rate history since the 2020 low and the conclusion is that an immediate break higher is unlikely.  CPI and PPI next week look like there will be little change based on options positioning and the Citi Inflation Surprise 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 (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 dropping slowly now near the mid-2021 level.

Update Alt EMA.  Bearish sentiment dropping slowly now near the mid-2021 level.

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%.  UVXY had a reverse 10 to 1 split June 23 and adjustments were made for weak volume preceding split.

Update. Bearish sentiment dropped sharply Mon on light volume but ended neutral by EOW.

Update EMA. Bearish sentiment VST (grn) reversed sharply and SPX may see 1-2 day bounce.

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 dropped to the Sell level early in the week, but bounced back to the weak Sell by EOW.

CITI Surprise Inflation Index for July shows a flattening and may indicate little change for next weeks CPI & PPI.

Bonds (TNX).  Bearish sentiment saw a sharp jump with the sharp rate rise to 4.09%, filling the 3.9-4.0% gap and completing a possible H of an IHS pattern.  Sentiment almost reached the neutral level of Feb 2021 and may mean a retrace of several months similar to early 2021.  (More in Tech/Other)

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 stalled out before reaching a Buy.

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 similar to last week near the Sell level.

With the sister options Hedge Spread as a ST/INT indicator (outlook 1-3 mns), bearish sentiment remains just above the weak Sell level.

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 continues to fall sharply, reaching the weak Sell level.

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 bounced slightly at the -1.5 SD level with ETF put buying..

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 14. 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 4399, options OI for Mon is small with strong put support at 4345 and 4360, weak support over 4400 and call resistance at 4450.  Most seem to expect more weakness, but likely positive close about BE at 4410.

Wed has very small OI where SPX call resistance extends down to 4400 with weak put support from 4350-75.  CPI will probably disappoint with weakness from 4375-4400.

For Fri stronger OI with many ITM calls scattered from SPX 4100.  Probable range 4375-4400.

For Fri PM opt exp week stronger call resistance could send prices to SPX 4325-50 .

IV. Technical / Other

This week I want to look at TNX int rate from 2020.  From an EW perspective, this appears to be an impulse (5 wave) move with W1 and W3 starting from a convergence of MAs.  The current W4 looks like a rounded bottom in the form of a IH&S where the recent move to 4.09% was the completion of the R side of the H.  With the duration of W2 about 12 mns, the RS could extend into the Fall and comparison to W2 indicates support at the MAs or about the recent breakout area of 3.7-3.8%.  W5 is expected to reach 5-5.5% probably late 2024 or early 2025.

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).  This weeks bearish sentiment declined slightly and remains neutral.

Tech / Other History

Click dropdown list to select from the following options:
2023
   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 2015    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 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

Conclusions.  It's interesting that with the SPX options indicating a possible SPX drop to the low-mid 4300s by opt exp week June 21, the following week is the next FOMC June 25-26.  Currently the consensus is that there is a 75% prob of a 25BP hike.  However, a recent Fed research report on Financial Conditions since 1990 shows the tightest financial conditions currently, second only to 2008-09.  This report could be used as an excuse to delay hikes for several months and could spur an SPX 2-3% short covering rally.

Weekly Trade Alert.  Next week may start with an SPX bounce, particularly Mon (close ~4410), while Wed/Fri should drift down to 4375-4400.  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