Is It Time for a Change in Seasonal Patterns?

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
   10.21 A comparison of 5 year periods (1960s, 90s & today) for inflation and int rates (Fed funds & TNX)    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.  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.

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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