Bond Trifecta Sinks Stocks

The last few weeks and months saw a relentless stock market rally in the face of consistent calls for an economic downturn and recession, starting with the tech meltup fueled by AI mania, then expectations of a broadening of the rally with the Dow theory buy signal triggered late July.  However, sentiment indicators began warning of trouble ahead, first with a Sell signal in bonds in June and more recently a Sell on the NDX mid-July.  At the same time many of the LT bears who had been looking for SPX 3000 in Q$ 2023 began looking for a continued move up to 4800.  However, warnings of potential trouble in bondland surfaced the previous Friday when the BOJ announced a "tweak" to its yield curve control policy threatening the Yen carry trade and causing a spike in rates.  Last weeks TLT options OI noted that a move below the 100 support level (Fri 99.8) left the next support level as 95.  Then Tue announcement of the US Treasury borrowing of almost $1T each for Q3 and Q4 and finally Fitch's Wed downgrade of US debt to AA+ from AAA sent rates higher and bonds lower with the TLT below 95 (-5%) before a rebound Fri.

Stocks followed bonds lower.  Although I didn't see the sudden collapse in bonds or the drop in the SPX to 4500 coming, we did see the expected early rally Fri and late collapse of almost 60 pts by the close, in spite of unexpected weakness in AAPL.  The potential for extended stock weakness thru Q4 due to pressure on bonds lines up perfectly with the 07.22 1966-74 analog (Tech/Other history).  I had been wondering about the DJIA/SPX/NDX tradeoffs, but last weeks decline (-1.5%+,-2.5%+,-4.0%+) lines up almost perfectly with the 2022 declines, and projects about DJIA 32.5K, SPX 4100, and NDX 14k (down 9%, 10-11%, 12-15%).  The Barcharts ES IHS top at 4632-34 (Mar 2022) does look important and also targets a low of about ES 4100.

Sentiment indicators for the stock market improved modestly, but only enough to support a consolidation (SPX 4450-4550).  Bond sentiment, however, has become scary as last weeks 5% decline in the TLT actually resulted in less bearish sentiment as moderate economic weakness continues to prevail.  The outlook for inflation remains mixed as ST weakness may lead to price moderation, but higher oil prices, cutbacks in Ukraine/Russia wheat supplies and US drought leading to higher food prices as well as continued strikes make the INT/LT inflation outlook less favorable.  Note CPI/PPI this week Thur/Fri.

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 rose modestly led by SPX ETFs, hedge spread and volatility measures.

Update Alt EMA.  Bearish sentiment remains below the weak Sell and can be a multi-month topping pattern.

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 to a modest positive, but at a consolidation rather thab rally level.

Update EMA. Bearish sentiment moved to a positive 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 rallied sharply back to the weak sell level led by options FOMO indicators.

Bonds (TNX).  Bearish sentiment surprisingly fell, especially since the TLT fell almost twice as much as the last decline with the June jobs data (Jul 7).  From a contrarian perspective, this means rates have to rise much farther to reach a sustainable bottom.

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 saw a sharp spike upward, which traditionally would be bullish, but given the outlook for rates (higher) and alternation, comparison to the mid-2018 consolidation (bearish) may be preferred to late 2022 (bullish). This could result from a gradual increase in inflation and more Fed rate hikes.

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 bounced off a Sell similar to early 2021.

With the sister options Hedge Spread as a ST/INT indicator (outlook 1-3 mns), bearish sentiment reversed above a weak Sell and likely means a more tedious decline (slow).

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 rose modestly as ETF sentiment rose and options fell.

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 with a sharp rise in ETF option (ST) sentiment while SQQQ/TQQQ (INT) was mostly unchanged.

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 11 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 4478, options OI for Mon is small where strong put support at 4450 and 4500 are likely to limit movement a positive bias is expected, but negative delta hedging may keep prices below 4500.

Wed has small OI where SPX has much stronger put support at 4475 and 4490.  A positive CPI report is likely to push prices back to 4500-20..

For Fri moderate OI has major support/resistance at SPX 4400/4600 with a positive bias to 4500+.  The deep ITM 4275-80 calls skew BE, but are not likely to have much effect.

For optn exp Fri PM moderate SPX OI indicates a likely closing range of 4500-25 and extended range of 4450-4550.  The deep ITM 4275-80 calls distort $OI.

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 back to neutral.

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.  The call for a potential INT top around the ES4632-34 appears valid, but the reason was a pesky, unpredictable "gray swan", although Biden's spending habits as Pres resemble that of his son while on cocaine and someting had to give.  Unlimited support of Ukraine, student loan forgiveness, greening of America are only a few, but wait, now the Treasury says that $Ts needs to be borrowed to pay off the debt now that income from selling SPR assets are not available.  I think the "bond vigilantes" may be waking up.

Weekly Trade Alert.  Early weakness is possible but Mon may close positive.  Wed is most likely to rally with strong SPX put support into CPI Thur AM, perhaps to 4520-40, but Fri is less certain.  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
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