Blame It on Climate Change

The last few months, I indicated that stocks could continue tp rally with the TNX below 4% and would face headwinds if rates rose over 4%, but last week and a half the sustained breakout over 4% was more like a tornado.  Rates rose six days in a row thru Thur, reaching a new closing high of 4.3% compared to 4.25% Oct 2022 with the main culprit being Wed July's retail sales which caused some to estimate Q3 GDP at 5%+ and the FOMC notes which were hawkish.  The SPX swooned Wed thru Fri AM dropping from 4450 to a Fri open at 4335. 

The strength of the decline seemed to eliminate the traditional scenario outline last week, so I am going to concentrate this week on the two more bearish outcomes where much depends on the course of int rates (TNX).  I had been looking for a rounded bottom, or "cup and handle" for the TNX where the "cup" sides are complete, but the "handle" implies a retracement to about 3.8% before a breakout.  If the handle forms there could still be a retracement to the SPX 4550+ area in Sept which is also consistent with the Thur EW outlook by Dr. Schure (no J/S, reload).  So Scenario 1 (50%) assumes that rates retrace and the SPX gap fills at 4565.  From there, the c-wave sees a-down of 272 pts (4607-4335) x 1.62 extension to 4125 for a 10% decline (see scenario 2 for rate dependency).  This would likely be an expanding wedge in price and time to EOY.  Scenario 2 (50%) assumes that rates continue to rise where the lows will be about SPX 4125 if rates remain below 5%, but over 5% a 15% decline to about SPX 3920 is likely by EOY, this is also the 62% retrace of the entire rally from the Oct lows of 3490.

Sentiment is somewhat mixed with major distortion from new record volume in SPX puts and calls (see DM section).  The ST composite did reach a weak Buy while the VIX call indicator is near a strong Buy.  Other positive INT indicators are the Hedge Spread that reached a ST strong Buy and the NDX indicator that reached levels comparable to lows in 2020 and 2021.  Bond sentiment remains weak, but over the weak Sell.  SPX options OI last week showed a BE at/near 4300 which was surprisingly accurate and this week are a 4600 with large EOM OI showing a BE of 4550.  All together this seems to support a retracement of 50%+.

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 shows a large drop mainly due to SPX options.  The DM section shows a drilldown of SPX puts & calls and record volume (0DTE) is likely distorting sentiment.

Update Alt EMA.  Bearish sentiment fell sharply.

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 reached the weak Buy level and means a ST rally is likely soon.

Update EMA. Bearish sentiment is showing that ST EMAs are still similar to May, so a strong advance is unlikely.

Also, looking at the ST VIX Call & SPXADP indicator, bearish sentiment is near a strong Buy so lower VIX and higher SPX are likely for the next 2-4 weeks.

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 has turned positive but remains below a weak Buy, so a partial retrace for several weeks should start soon.

Bonds (TNX).  Bearish sentiment shows a moderate uptick, so a partial retrace is possible but not likely to last.

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 rose moderately.  As discussed above if int rates retrace, HUI may rally 10% back toward 235-40.

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 little changed.

With the sister options Hedge Spread as a ST/INT indicator (outlook 1-3 mns), bearish sentiment saw a sharp move back to the strong Buy level although LT EMAs are lagging.  A strong retracement over the next 4-6 weeks is possible, but new highs are unlikely.

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. Here, I am showing the raw SMA puts& calls with ratio. The extreme high volume (0DTE effect?) is usually bearish, while low P/C is bullish.  Large spikes in put buying is usually a ST bottom.

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 fell sharply mainly due to the extreme SPX optn volume.

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 rose sharply over neutral, pulled upward by ETF options and is at a level similar to Mar 2021 and could see a strong retrace of the current decline.

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

With Fri close at SPX 4370, options OI for Mon is moderate with strong put support at 4375.but a gap below until 4300.  Negative news could push lower, but above 4375, 4400 is likely.

Wed has moderate OI where SPX with large put OI at 4460 and 4475 similar to last week, but are now deep ITM.  Aug flash PMIs are out early, but likely to pull prices up over 4400 toward 4450.

For Fri stronger OI are likely to pull prices up toward the 4400-4450 level. .

For Thur EOM SPX has very large OI and a BE at 4550 and a move to 4450-4500 by EOM looks likely.

Using the GDX as a gold miner proxy closing at 27.5, prices should push higher toward 30-31.

Currently the TLT is 93.8 with the TNX at 4.25%, and should recover back toward the 100+ level.

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).  ES sentiment continues to fall, now at +.5 SD, YM (DJIA) is at neutral at 0 SD, Dow theory may keep DJIA up thru Sept-Oct, watch for Sell at -1 to -2 SD.

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
   Marketwatch Economic Release Calendar    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.   Last weeks economic news all but killed any hopes an econimic slowdown any time soon and lower rates from the Fed.  On the plus side stronger growth usuually means stronger earnings hence the ebb and flow pushing stocks lower as rates rise then higher when rates stabilize.  Hopefully, the lows will be seen in earnings in Oct-Nov as well as a good portion of the high rates surprise, setting the stock market up for a positive 2024.  As outlined above, the course of the stock market thru EOY will likely include a 10-15% decline depending on int rates (TNX).  Sentiment is not that favorable for bonds which increases uncertainty.  Aug 24-25 is Jackson Hole where global CB leaders discuss outlook.  Everyone has been expecting China to come out with a big stimulus package, but this would likely weaken the yuan.  China may be concerned that if they support a gold-backed currency, a weaker yuan means cheaper exchange prices for gold.  No stimulus from China may help lower int rates.

Weekly Trade Alert.  A modest turnaround is expected next week for the SPX to 4400-50 and possibly 4450-500 thru EOM.  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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