My primary outlook for 2023 Q4 has been for weakness into the EOY rather than
the popular EW outlook for a correction to SPX 4250ish for Sept-Oct followed by
a strong rally toward 4800 by EOY. The reasons for expected weakness were
higher int rates (TNX) due to sentiment and some weakness in tech sector EPS as
the 2023 H1 boost in EPS was largely due to a one time effect of layoffs.
In addition, the 10-15% total decline from the SPX 4600 area was expected to be
related to the level of TNX as under/over the 5% level. The 5% level was
hit on Oct 20th and has since hovered between 4.85-4.95% with the biggest
decline Mon on the news of Ackman covering his TLT shorts. The biggest
problem I see for bonds is the baby boomers (born 1946-64) who control about 50%
of the wealth (RE, stocks & bonds). They have been told to use bonds as a
safety cushion and a mass exodus could be disastrous. Bond sentiment
(TBT/TLT) remains near the strong Sell, indicating about a 75% probability of
5%+ TNX rates by EOY. Anticipation of higher rates combined with
lackluster bearish sentiment, but relatively high levels of hedging may be the
reason the the stock market selloff continues unabated at only a moderate pace.
Last weeks expected bounce lasted only for a day as stocks followed bonds.
Next week is FOMC week with the Fed widely expected to continue its pause, but
remain data dependent. I think the best thing for the bond market would be
for Powell to go full Paul Volker and raise rates 0.5% for Nov and Dec with a
"do whatever it takes" stand to squash inflation, but thats about as likely as
Russia surrendering in Ukraine.
Bearish sentiment remains muted for the INT/LT althought the ST composite did
reach the weak Buy level, that is not likely enough to cause an INT bottom.
A bounce is possible toward SPX 4200 due to strong put OI support for SPX, but
lower lows are still likely.
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 continues to remain just above neutral.
Update Alt EMA. Bearish sentiment dropped early in the week but bounced to
above neutral by EOW.
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 up from neutral last week to the weak Buy
level, but still not at levels to indicate major support.
Update EMA. Bearish sentiment last weeks bounce did not last long and by Tue
was back to a week Sell before a small bounce EOW.
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 not recovered from a strong Sell mid-July,
possibly due to expectations of strong seasonal uptrends.
Bonds (TNX). Bearish sentiment remains at the strong Sell level
and with rates hanging around the 4.8-4.9% level, a break over 5% could happen
any day.
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 remains near neutral as a weak Sell from int rates
offsets a weak Buy from the ETFs. Weakness in China and US
stocks may be offsetting strength in gold.
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 continues to slowly improve.
With the sister options Hedge Spread as a ST/INT indicator
(outlook 1-3 mns), bearish sentiment a very sharp drop in hedging was seen
early in the week down to neutral before the late decline moved sentiment back
above the weak Buy 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 was largely
unchanged.
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 fell sharply early in the week with the decline in ETF
option 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.
Bearish sentiment for SPX is more bullish than for NDX.
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 Nov 3. 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 4117, options OI for Mon is moderate and very skewed to
the put side with strong support around 4000 and resistance at 4200.
Tue EOM has much larger OI where SPX sentiment is also heavily skewed to the
put side, but delta hedging may offset and likely range is 4100-4200.
Wed (FOMC day) has small OI where SPX has strong put support at 4100-4110 with
little call resistance in sight.
For Fri stronger OI shows put support at SPX 4150 that should indicate a
positive finish for the week.
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 (SPX) sentiment is neutral at
+ 0 SD, NQ (NDX) is Neuttral at + 0 SD, YM (DJIA) is a strong Buy at + 2.5 SD, Dow theory
may support DJIA thru EOY.
Click dropdown list to select from the following options:
Tech / Other History
2023
2022
Other Indicators
Conclusions. Lower prices are still expected as long as pressure on
int rates (TNX) persist. At the current level of 4.8-4.9% we only one day
away from a move over 5%. Expectations of seasonal strength seem to be
keeping bearish sentiment from rising to.levels that would support a meaningfull
rally. A dovish interpretaion of FOMC outcome could result in a counter
trend bounce for a week or two.
Weekly Trade Alert. Options OI have not proven very effective
lately, but a positive FOMC outcome could result in a move toward SPX 4200. Updates @mrktsignals.
The last couple of weeks have been hard as far as calling the
market, but I have tried to emphasize that stock prices would be dependent on
int rates (TNX) and oil prices. As a result the rally toward SPX 4400 was
compressed into Mon/Tue when rates stabilized and oil prices fell several
dollars, but when oil reversed Wed so did rates and the SPX followed bonds
lower. The high for the TNX Fri was 4.99% a fraction below the 5% level.
Bond sentiment (below) is at the strong Sell level, and with bonds as oversold
as they are we could see a crash, or more likely another consolidation for
several months and then another sharp move upward. In this weeks
Tech/Other section, I look at the comparison between inflation, the TNX rate and
the Fed funds rate for 1966-71, 1997-2001, and 2018 to today. Both
historical periods showed showed a Fed pause of several months before the second
bout of inflation which sent rates much higher.
ST sentiment reached a Sell mid-week, but I have been busy trying to finalize
the software setup/upgades for Win 11 this month and was not able to post.
ST sentiment is back to neutral/VST positive and INT sentiment has not changed
much, although a significant drop in hedging occurred. Lower prices still
seem likely with a SPX target of 4150 by EOY if TNX stabilizes between 4.5-5%
and lower if rates rise further.
Has anybody besides me been wondering what happened to the gold-backed
currency by China and Russia announced back in Aug? It's possible that
with the recent turmoil in the bond markets, the biggest CB holders of gold (US,
China, Russia) may consider selling gold rather than selling more bonds.
The generational gold low in the late 1990s occurred with heavy CB selling.
Could it happen again?.
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 is just on the positive side of neutral.
Update Alt EMA. Bearish sentiment is just on the negative side of neutral.
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 dropped to a weak Sell+ mid-week, but closed at
neutral.
Update EMA. Bearish sentiment very ST dropped close to a strong Sell
mid-week, but closed at a weak Buy. A ST bounce is possible but lower
prices are likely until LT sentiment improves.
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 closed slightly lower for the week.
Bonds (TNX). Bearish sentiment continues to confound as rates
rose to just below 5% at 4.99%, sentiment moved closer to a strong Sell.
Given the oversold condition two possibilities are a crash or INT consolidation
between 4.5 to 5% then another strong move up in 2024.
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 the HUI rallied over 10% with the ME conflict and
strong gold, pushing sentiment back to neutral.
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 continues to rally slowly and may be repeating
2021 where a move to neutral at 0 SD is necessary before a sustained rally.
With the sister options Hedge Spread as a ST/INT indicator
(outlook 1-3 mns), bearish sentiment fell back to the weak Buy area.
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 in a
narrow range around 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 has now fallen below neutral.
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.
Bearish sentiment for SPX is more bullish than for NDX.
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 27. 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 & TLT 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 4224, options OI for Mon has strong put support and is
likely pull prices up to the 4275 level.
Wed has somewhat smaller OI where SPX has strong put support at 4260 with a
weak bias toward 4300 and no real call resistance until 4350.
For Fri strong SPX OI extends up to 4300 with some call resistance at 4350, so
4300-50 is possible.
For EOM strong SPX OI shows a continuation of the weekly outlook with put
support at 4300 and call resistance at 4350.
Using the GDX as a gold miner proxy closing at 29.5, there is strong put support
at 29, so there should be a positive bias.
Currently the TLT is 83.2 with the TNX at 4.92%, The TLT is well below put
support and some snapback is likely, but geopolitical influence may be more
important..
IV. Technical / Other
This week I want to look at two previous periods of rising inflation and int
rates (10 yr bond, TNX), and the Fed funds (FF) rate. My primary analog
to today is the late 1960s where the Vietnam war from 1965-75 and middle east
problems lead to an inflation spiral. As of two weeks ago we now have both
problems with Ukraine/Russia and Israel/Hamas.
The stock market topped in Jan
1966 and declined into Oct and then rallied into Nov 1968 with a sharp
correction late 1967 (see 2022.12.24 T/O link). As you can see the initial
bout of inflation doubled from 2 to 4% causing the Fed to raise rates from 4.5
to 5.75 % as stocks fell. As inflation fell, the Fed cut rates, but the
correction in TNX was minor compared to the drop in inflation. The lower
bond rates did not last long and began rising as inflation stabilized and
similar to today, by late 1967 the TNX was higher than at the inflation peak as
the bond vigilantes correctly anticipated a further uptick in inflation.
The implication is that by late 2024, inflation could become a major problem
again leading to another Fed tightening cycle, leading to a declining stock
market and recession by late 2025.
The second comparison was to the late 1990s where the LTCM crisis was compared
to SVB today and was followed by a tech melt-up and a sharp uptick in inflation
and bond yields. Obviously, the Fed has become more innovative today
compared to the 1960s and 1990s as the response to SVB was to provide more
liquidity directly to the banking system, but the result is mostly the same as
cutting rates.
The final chart is for 2018 to today. One thing that is notable compared
to the two previous periods is that the real rate (bonds, blue less inflation,
red) was 1-2.5% in the late 1960s, and 3-5% in the late 1990s, while since 2018
much of the period had negative real rates. This is the main reason why
rates should be higher today. Compared to the historical average since the 1960s
of 2%, at todays inflation rate of 4%, the TNX should be close to 6%..
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 (SPX) sentiment is neutral at
+ .5 SD, NQ (NDX) is Neuttral at -.5 SD, YM (DJIA) is a strong Buy at +2.5 SD, Dow theory
may support DJIA thru EOY.
Click dropdown list to select from the following options:
Tech / Other History
2023
2022
Other Indicators
Conclusions. Interest rates and oil prices are likely to continue
to be important as there is no major change in sentiment. SPX options OI
does indicate that a snapback rally to 4300 or higher is likely if rates
stabilize between TNX 4.5-5% and oil between 85-90/bbl.
Weekly Trade Alert. A move to SPX 4300+ by EOW/EOM looks likely if
rates and oil stabilize. Updates @mrktsignals.
Last weeks outlook was for a modest rally with a trading range of about SPX
4275 to 4350, and Mon started weak to SPX 4285 with news of the Gaza conflict.
However, little reaction in the oil market and flat int rates (TNX) resulted in
a sharp short covering rally that continued when rates and oil both fell
sharply Tue/Wed to SPX 4385. (Biden probably drained the SPR ST.) Int rates started rising
late Wed/Thur with poor results of Treasury bond sales and stopped the stock rally.
Fri selloff seemed to be recognition of the LT implications of Israel's war
with a 5% spike in oil while int rates may have caught a flight to safety bid.
The TNX fell to a low of 4.53% with Thur AM CPI before rebounding and the 4.5%
support level seems to be holding.
Sentiment indicators showed a large drop in bearish sentiment with Wed
results toward a weak Sell, but rebounded to above neutral by Fri close. One thing I noticed this week is that if you have/create a Google Blogger acct, you can view the lead-in portion of the ZH Prem articles by copying the source code into the html section of a new draft and press preview. The article starts about halfway down the page.
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 slightly to the weak Buy level.
Update Alt EMA. Bearish sentiment rose slightly to the weak Buy 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 fell sharply last week from the weak Buy level to
below neutral before closing just above neutral.
Update EMA. Bearish sentiment fell sharply last week from above neutral to a
weak Sell before closing just above neutral.
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 also saw a wide swing for the week to well
below neutral before a late bounce back.
Bonds (TNX). Bearish sentiment continued to fall below the weak
Sell 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 fell slightly at just below the weak Buy level.
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 just below neutral.
With the sister options Hedge Spread as a ST/INT indicator
(outlook 1-3 mns), bearish sentiment remains near a strong Buy with a sharp
drop mid-week and late recovery..
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 slightly.
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 fell mid-week then bounced back to the weak Buy level.
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.
Bearish sentiment for SPX is more bullish than for NDX.
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 JOct 20. 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 4328, options OI for Mon is moderate with put support at
4300 then 4280 with little call resistance until 4400 Could be a weak
start to/below 4300 and sharp reversal later.
Wed has smaller OI where SPX has call resistance at 4350 and little put support
until 4300 that should define the trading range.
For Fri AM strong OI where the large call position (straddle) is probably to far
OTM to effect prices and 4350+ looks likely.
For Fri PM strong SPX OI show put support up to 4350 and call resistance at
4375, but the straddle at 4400 may pull prices to the 4375-4400 area.
For EOM strong PX OI shows strong put support up to 4340 and call resistance at
4400 and may lock prices in the 4350-4400 area.
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 (SPX) sentiment is neutral at
+ .25 SD, NQ (NDX) is Neuttral at +.25 SD, YM (DJIA) is a strong Buy at +2.5 SD, Dow theory
may support DJIA thru EOY.
Click dropdown list to select from the following options:
Tech / Other History
2023
2022
Other Indicators
Conclusions. Oil prices and int rates are likely to remain key
drivers of stock prices, but next week earnings season gets into full gear and
there will likely be more volatility in individual stocks. The outlook is
for another mildly positive week with a possible weak start to/below SPX 4300
with a late close around 4375. Oct 20 is the last day of blackout for
stock buybacks that may keep stocks up thru EOM, but there won't be much of the
debt fueled buybacks seen over the last several years due to high int rates.
Weekly Trade Alert. A weak start is possible down to/below SPX 4300
but the week should finish near 4400. Updates @mrktsignals.
