Will the Stock Markets Cool Off in August?

Last week I mentioned that we may start seeing monthy cyclicality with economic strength (jobs & ISMs) that would likely push int rates (TNX) higher and stocks lower followed by moderating inflation that would push rates lower and stocks higher.  Thur and Fri were perfect examples, when Thur Q2 GPD release showed surprising strength with GDP at 2.4% vs the expt 1.6% (although 40-50% may be petro products, food and munitions being sent to Europe).  Fri was the release of the PCE inflation data which was somewhat lower than expt falling from 4.6 to 4.1% (as the Feds favored inflation gauge,this is still well above the 2% target).  The result Thur was a 2% or 80 pt drop from the SPX high of 4607, while the TNX rose from 3.85 to slightly over 4%, a Fri SPX recouped about 2/3 of its losses while the TNX only regained 1/3 of losses

Aug, however, may be more complicated that thought with Thur after close release of AAPL EPS that should at least cause a retest of recent highs O/N, and the past weeks strength in GOOG and METAs online ads point to continued strength in consumer spending and a likely strong Fri AM jobs report.  So Fri may see some opening strength then a fade into the close.  The last two weeks also discussed potential dollar weakness and/or strength in oil and gold due to the refilling of the SPR and the BRICS gold-backed currency with oil already reaching $80 up 20% the last three weeks.  This week the GDX ETF sentiment reached the Buy level, so a rally may not be far behind.

SPX sentiment showed a slight improvement for the week with ST sentiment turning positive after the recent 2% decline and small improvement in INT/LT sentiment.  A couple of weeks ago when looking at the Barcharts COT ES charts, I noticed a potential IHS with a top in Mar 2022 at 4632 and Thur topped at 4634 then dropped sharply.  This does not square with SPX due to diff in premiums, but it may be the bears last hope given the strength in ES bearish sentiment recently.  This does correspond with the recent EW outlook of  Dr A.Schure (no J/S) as a W-3 top.

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 improved slightly but remains in weak Sell territory similar to July 2021.

Update Alt EMA.  Bearish sentiment bounced off the Sell 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%.

Update. Bearish sentiment moved back toward the neutral level.

Update EMA. Bearish sentiment VST moved into the positive area and may support a ST 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 continues to be dominated by extreme options FOMO sentiment that may be due to the growth in 0DTE option trading.

Bonds (TNX).  Bearish sentiment continued to decline even with rates back to the near 4% 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. Bearish sentiment in the ETFs increased sharply, supporting the view that a bottom similar to late 2022 is forming.

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 fell sharply and remains in a position similar to early 2021 which saw retrace/consolidation.

With the sister options Hedge Spread as a ST/INT indicator (outlook 1-3 mns), bearish sentiment remains higher than most other INT indicators.

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 near 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 off the Sell level as the NDX may be in a ST topping pattern.

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 Aug 4. A text overlay is used for extreme OI to improve readability, P/C is not changed. Also, this week includes a look at TLT & GDX for Sept exp.   A new addition is added for OI $ amounts with breakeven pts (BE) where call & put $ amounts cross.

With Fri close at SPX 4582, options OI for EOM Mon is strong with strong put support at 4500 and call resistance weak down to 4550 and strong at 4600.  Some weakness is possible toward 4550

Wed has very small OI where SPX has less call resistance and more put support in the mid 4500s, so that any early week weakness is likely to be reversed.

For Fri SPX options OI is moderate showing a likely trading range of 4450-600 with strong support/resistance at 4500 & 4600.

Using the GDX as a gold miner proxy closing at 30.7 with strong put support at 30 and a move toward call support near 35 is possible.

Currently the TLT is 99.8 with the TNX at 3.97%, and having broken below the 100 support level, a move to 95 the Oct 2022 low is possible.

IV. Technical / Other

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 is slightly more bullish with an increase in bearish sentiment.

Click dropdown list to select from the following options:

Tech / Other History
2023
   07.22 A closer look at the 1966-74 markets indicate marginal new ATHs likely around 2024 Pres election    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.  While much of the political news has been focused on numerous accounts of Trumps wrong doings following the 2020 election insurgency, the Bidens legacy of family backroom dealings may be becoming equally important with news that the Hunter plea deal fell apart.  Congress investigations are likely to be delayed until after the Summer recess and begin in Sept.  This could turn into a late Fall political drama and may coincide with the expected SPX 8-10% market correction.

Weekly Trade Alert.  The Thur PM AAPL earning report and Fri AM jobs report are likely going to be the biggest market movers for the week. If the recent highs at SPX 4607 and ES 4634 hold, there is a good chance it will be a ST/INT top.  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

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