Have Stocks Become the Last Game in Town?

Last weeks outlook was highly dependent on int rates and the price of oil.  As it turned out TNX broke above the ST TL outlined in the Tech/Other section and before Tue opened I warned (update) that this would probably mean lower SPX prices.  BY the EOW oil prices did retreat to below $85, but TNX rates remained above the TL (>4.7%).  Fri strong jobs data pushed the SPX down to the 200 SMA, but when it held,  a strong short covering rally followed.  The DJIA futures sentiment (COT) jumped to a strong Buy level of +2 SD equal to the June 2022 and Mar 2023 levels.  This seems to indicate some strength thru the EOY, but if TNX rates remain above 4.5%, SPX prices may be limited to the low 4400s.

Next week we have the PPI and CPI Wed/Thur that are likely to show the effects of higher oil prices and not be particularly market friendly.  SPX options Oi indicates that modest range of about 4275-4350 is likely, while Fri option exp week shows the potential for a move toward SPX 4400.   One possible reason for continued upward in int rates is the retirement community, which have been told for much of the last two decades to use bonds as a security blanket  as a hedge for stock volatility, but the last two years have seen bonds more volatile than stocks with the 30 yr T-bond down over 50% and the 10 yr down 35%.  Most were told to use age related indexing with a 65 yr old 65% in bonds, at 75 use 75%. etc.  If rates continue to rise into the EOM, the Fed is likely to raise ST rates and cause a relapse in stocks.

Bearish sentiment is not particularly strong for SPX, except the hedge spread and looking back to the peak in Mar before a rally from 3800 to 4600 it may need to go much higher to support an equivalent rally to 4700- 800.  Bond sentiment (TBT/TLT) is notable in the it has fallen back to the weak Sell level even with the breakout in rates last week.

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 increased slightly last week but remains below the weak Buy level.

Update Alt EMA. Bearish sentiment increased last week but remains below 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 retreated to below the weak Buy level with a sharp move down Thur/Fri.

Update EMA. Bearish sentiment remains near the neutral level.

The ST VIX calls and SPXADP indicator bearish sentiment reached the strong Buy level early in the week with strong VIX call buying, but retreated EOW to a weak Buy.

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 spiked with a sharp increase in the Hedge Spread before closing below a weak Buy.

CITI Surprise Inflation Index for Oct shows an upward trend in inflation, strongest for CA and weakest for EU with a turnaround from deflation for China.

Bonds (TNX).  Bearish sentiment for bonds continues to puzzle as buying continues to increase as rates rise.  I checked iShares website and they indicate 67% ownership of TLT is institutions, likely the asset mngrs and hedge funds buying TN futures shown last week, so I need to stop referring to this as retail sentiment.  The result is that sentiment is back to a weak Sell at the 4.8% 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 rose above neutral as prices fell to 200 with strong selling in the +ETF.

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 rise from the strong Sell level, now just below neutral.

With the sister options Hedge Spread as a ST/INT indicator (outlook 1-3 mns), bearish sentiment spiked well above the strong Buy level.  I changed the scale to showhow extreme hedging became in Mar with the retest of the SPX 3800 area before a 800 pt rally.  We may need to see something similar to the SPX 3900-4000 level before a rally to 4700-800.

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 continued to fall, pushed lower by high SPX options 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 increased to a weak Buy on the basis of a large 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.

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 13. 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 4309, options OI for Mon is small where a large straddle at 4300 may keep prices between 4300-25 although the high BE indicates a move toward 4350 is possible.

Wed has very small OI where SPX shows less upside potential with call resistance at 4325.

For Fri strong OI for SPX indicates a potential range from the put support level at 4275-4300 to call resistance at 4350.

For optn exp Fri strong OI shows put support extending up to SPX 4350 with call resistance at 4375.  The straddle at 4000 may push prices to 4375 or higher.

IV. Technical / Other - N/A


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 +0 SD, YM (DJIA) is a strong Buy at +2 SD, Dow theory may support DJIA thru EOY.

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Tech / Other History
2023
   09.29 A ST trend for TNX, INT/LT COT bearish for bond futures (TN), LT 20/30 yld curve    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.  Last week was weaker than expected as interest rates continued to rise, possibly as a fallout of the dismissal of McCarthy as speaker of the House (what, that never happened before, another first) and the outlook for more fiscal problems.  Bonds continue to worry as bearish sentiment remains extremely low and I expect that retirees who have been told to use bonds as a safety net are freaking out even as hedge funds and asset mngrs scoop bonds up as fast as possible.  We may continue to see limited strength into early Nov similar to the 2015 analog, but gains may be limited to the low SPX 4400s if TNX remains over 4.5%.

Weekly Trade Alert.   Expecting a range of SPX 4275-4350 next week with highs Fri and 4400 possible optn exp week.  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

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