Panic in Bond Land

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
   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.  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.

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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