Who Will Win, Goldilocks or the Three Bears?

One of the main benefits of using a stastical approach to measuring sentiment is that it relieves most of the effects of cognitive bias which is the biggest reason most think that if markets are going down they will keep going down and the opposite if going up.  Just as many at the end of 2022 were calling for the SPX to continue lower in 2023 below the 3000 level, many are now calling for SPX 5000 or higher in 2024.  Perhaps higher prices are possible ST into early 2024, particularly if int rates continue to fall, but the logic behind the current bond rally seems flawed.  One thing that most ignored in the last CPI report was that wages increased 0.4% MOM or 5% annualized.  I have predicted that the next round of inflation would be from higher wages (from strikes, continued demand) and will represent the early stages of a wage-price spiral.  As businesses have to pay more for labor, they then have to raise product prices to keep the same margin and a circular process begins.  All of the int rate cuts expected by the Fed are based on previous rate hiking cycles that ended in recessions, and cutting rates if the economy remains strong just increases inflation.

Bearish sentiment dropped sharply last week after the "Fed pivot" speech by Powell which caused the TNX to drop from 4.3% to 3.9% and TLT jumped 5%  with a 2.5% increase in SPX.  Although my range target was SPX 4250-4650 thru mid-2024, my caveat was that if rates continued to fall SPX would continue to rally.  I still think the bond market is wrong, but that is my bias.

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 saw a sharp drop from - .5 SD to -1.0 SD, a weak Sell level.

Update Alt EMA. Bearish sentiment VST (grn) sentiment dropped very sharply last week but several more weeks may be needed to reach the July levels for the LT sentiment for an INT top.

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 remains modestly negative.

Update EMA. Bearish sentiment remains just above the weak Sell level.

The ST VIX calls and SPXADP indicator bearish sentiment remains between the weak and strong Sell levels.

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 continued to decline as hedging continues to fall.

Bonds (TNX).  Bearish sentiment has dropped below the strong Sell level with the TLT completing a 23% retracement from the 160+ level to 82 with a move to 100.

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 rremains below neutral with a sharp rise in bearish ETF sentiment.

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 near the weak Sell level and well above the level seen before the July top.

With the sister options Hedge Spread as a ST/INT indicator (outlook 1-3 mns), bearish sentiment has reached the weak Sell level but several more weeks may be needed to reach the levels at the July top.

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 remains about the same.

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 saw a very sharp drop with ETF options sentiment crashing from the extreme highs seen early Oct.  Sentiment has now reached the lowest levels of the last three years.

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 has joined the NDX with sentiment now approaching the levels of the July price highs.

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 Dec 22. 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 Jan exp.   A new addition is added for OI $ amounts with breakeven pts (BE) where call & put $ amounts cross.

With Fri close at SPX 4719, options OI for Mon is moderate with call resistance from 4700-800 with put support from 4600-25.  A small pullback to 4700 or lower is expected.

Wed has somewhat smaller OI where SPX has put support at 4675.

For Fri SPX OI shows strong call resistance from 4650 to 4700, but little resistance above 4700.  Delta hedging may push prices higher if over 4700, else 4600-50 is possible.

For Fri EOM strong SPX OI indicates the potential for a drop to 4600 or lower, but as last week support from lower int rates will likely offset sentiment.

Using the GDX as a gold miner proxy closing at 30.5 is at call resistance and could go either way.

Currently the TLT is 99.2 with the TNX at 3.9%, here, prices have out run resistance and a 99-102 range is likely ST.

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 negative at -.5 SD, YM (DJIA) is neutral at .0 SD, Dow theory may support DJIA thru EOY.

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Tech / Other History
2023
   12.08 A look at the Feds recession indicator based on the unemployment rate using the Sahm Rule    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.  Some of the INT sentiment indicators are at or below the Levels of the July price highs (esp NDX), while the ST indicators (ex VIX Calls) still indicate that a few weeks may be necessary before a substantial decline begins, likely by mid-Jan.  One of the things I like to see is a high volume climax in buying/selling at the quarterly opt exp for an INT turn, and previous occurrences were June 2022 and Mar 2023 lows.  Last weeks Thur/Fri volume was twice the average.  Again int rates will likely determine the direction of stock prices, but I expect a consolidation of about SPX 4650-4750 thru mid-Jan.

Weekly Trade Alert.  An increase in volatility is likely with weakness early in the week.  the SPX 4700 level is the important pivot for EOW prices with downward pressure below and the reverse above.  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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