Is a Bond Market Crash Possible?

SPX options OI and slightly positive sentiment were of little help last week as oil prices continued to soar hitting a high of $95/bbl before reversing sharply Thur.  The bond vigilantes were in full force as well as TNX rates spiked to 4.6% driving the SPX down to a spike low at 4238 Wed.  Most probably don't know much about the 1970's "bond vigilantes", but this was a name given to the institutional bond investors who sold large holdings of bonds when oil prices rose sharply due to higher inflation expectations.  The result was that they forced the Fed to raise ST int rates to reduce demand and lower oil prices and we may be in the early stages of something similar.

Sept goes to the EW analysts who were looking for a drop to SPX 4250-70, but the outlook for the rest of the year (SPX 4700-800) will be highly dependent on int rates, which are not looking favorable.  On the one hand by several measures bonds are as oversold as they were in 1969, while there is an anomaly of extreme buying by both hedge funds and asset managers (ZH Prem).  We also have an unusual comment by Jamie Dimon last week that he doesn't think the markets are prepared for 7% int rates.  Does he know something we don't?  As a result, I have prepared a special Tech/Other section looking at several bond sentiment indicators, including a ST trend analysis since May that indicates the potential for a drop to 4.25% and a look at the COT data discussed in the ZH Prem article.  I should also point out that MW Prem is no longer available thru Brave browser, but is in Tor (default settings).  Parts of ZH Prem are accessible using ancient tech, circa 2000, that doesn't render the overlay, but I am afraid to say more since it may result in a MW Prem repeat.

Sentiment remains a mixed bag with the ST composite near neutral, but the VIX call & SPXADP just below a strong Buy.  Other INT indicators are largely unchanged, but the Hedge Spread continues to show hedging at the strong Buy level.

I. Sentiment Indicators

The INT/LT Composite indicator (outlook 3 to 6+ months) has three separate components. Starting Aug 26, 2023 SPX options are removed due to extreme 0DTE volume distortions. New weights are ETF put-call indicator (30%), SPX 2X ETF INT ratio (40%), 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.

Update Alt. Bearish sentiment rose early in the week, but the fell to neutral by EOW.

Update Alt EMA. Bearish sentiment declined below the neutral 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 rose above the weak Buy then retreated by EOW.

Update EMA. Bearish sentiment EMAs are lagging somewhat, possibly due to the orderly decline.  Something similar happened Apr-May 2021, so outcome is uncertain.

The ST VIX calls and SPXADP indicator bearish sentiment moved above a weak Buy, similar to the Aug lows.  A bounce is possible to about SPX 4400.

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 reteated back toward neutral.

Bonds (TNX).  Bearish sentiment retreated sharply to near the weak Sell, in spite of the breakout over 4.5%.  Strong complacency is not normally a good sign

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 continues to drop, even with the decline in PMs, much like bonds.

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 rose slightly.

With the sister options Hedge Spread as a ST/INT indicator (outlook 1-3 mns), bearish sentiment spiked to a new high, but we may be looking for a repeat of the Dec 2022 setup is there is to be a rally to ATHs.

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 fell sharply back to the weak Sell.

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 above neutral with a spike in ETF options sentiment.

For the SPX combining the hybrid ETF options plus SPX 2X ETF (outlook 2 to 4 mns) produces an indicator where, in this case, ETF options are a proxy for the SPY options.

47Bearish sentiment for SPX is more bullish than for NDX at a weak Buy, but SPX ETF sentiment fell.

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 Oct 6. 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 crossa.

With Fri close at SPX 4288, options OI for Mon is small with put support up to 4300, but may run into resistance around 4325.

Wed has very small SPX OI where 4300-4340 is neutral and prices may rise higher.

For Fri moderate SPX OI and strong put support up to 4300 should keep prices higher with only minor call resistance until 4400.

For Fri PM monthly opt exp strong put support at SPX 4300 and 4315 should keep prices elevated.  With no call resistance until 4400, a supportive jobs report could help prices rally toward 4400.

IV. Technical / Other

Last week I mentioned that I had only an INT/LT bond sentiment indicator, so this week I want to look at the daily TNX price trend as a possible ST indicator.  Since May, the TNX has been following predictable path with 4-6 week rallies of around .5% followed by about a 1/3 retrace over 2-3 weeks.  If the pattern continues, rates could drop to the TL around 4.25% by mid-late Oct.  This could support a rally to SPX 4500+, but is likely dependent on oil prices.  Very ST 4.5% appears a support and must be broken first.

However, another INT/LT indicator using 10 year US bond futures (TN), shows extreme buying by both hedge funds (red,top) and asset mngrs (grn, bot).  The ZH article uses the inverted asset mngrs, but since the large specs (grn,top) is similar, I am going to use that for the asset mngrs.  As you can see the last time there was a large spread (red - grn) was 2020 Q1, the exact top for bonds, and the spread now is twice as large.  The time before that was an INT low early 2019, so not perfect but still ominous. Using the TBT/TLT indicator it showed Sells for 2020 Q1 and today, while neutral early 2019.  So todays Sell is confirmed.  My outlook depends on oil.

Also, this week I wanted to look at the yield curve for 20yr/30yr bonds.  Since 1990, the Fed's int rate cycles were not completed until the long end of the yield curve showed flat (98.5%)  20yr/30yr bond yields which means LT inflation is under control.  We still don't have that, so higher rates are likely.

Finally an update for the NYSE INT/LT volume indicator, a quick look shows that a lot of damage was done in the recent decline with the indicators now at the level of Apr 2021, 9 mns before the 2022 top.  This could mean a major top in mid-2024.

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 is neutral at +.5 SD, YM (DJIA) is a slightly stronger +1 SD, Dow theory may keep DJIA up thru Sept-Oct.

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Tech / Other History
2023
   09.22 A look at Dow Theory and a DJIA diagonal and possible similarities to late 2015    09.15 Use of Brave browser Shield for enhanced internet access to some sites    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
   U.S. 10 Year Treasury Note (TNX Rate), Futures, Extended Hours    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.  The sentiment picture remains mixed and I continue to believe that the main driver of stocks for the INT term will be int rates, and the main driver of int rates for the INT term is oil.  Using TNX for int rates, a drop to 4.25% would probably support a rally to SPX 4500+, but for that to happen oil will probably need to fall to $85/bbl.  The TNX TL in T/O shows that as a possibility.  I don't think there will be bond market crash, but a continued rise in oil to $100+ by EOY is likely to push the TNX to 5-5.5% and likely drive the SPX below 4000.  A rise in oil to $120 in 2024 will probably result in rates of 6-6.5%.

Weekly Trade Alert.  Assuming oil stays $90 or lower and TNX rates drop below 4.5%, SPX could rally toward 4400 by EOW.  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
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