Last weeks outlook mentioned a top near SPX 5025-50 forecast by a top EW analyst with warnings of "sticky" inflation that would likely result in a 2% pullback to about 4950. As it turned out Mon was stronger than expected and pushed up to SPX 5048 and NDX 18040 before a fade into the close back to 5030. Tue CPI ended up being more than just "sticky" as a monthly increase of .3% was reported with even stronger "core inflation". My biggest grip is that a single digit (0.x) can be misleading since the Oct-Jan inflation numbers of .1%,.2%,.2%,.3% could actually be .14%,.19%,.24%,.26% before rounding and if so then Jan was a good number (up less). The Tue AM decline left a large gap at SPX 5030 and a late turnaround from 4920 brought the SPX back above 4950 and the race to the gap was on and was filled Thur AM. Surprisingly, the SPX OI Fri resistance levels at 5000 held with opening and closing levels near 5000.
Sentiment has turned moderately negative with a decline down to the SPX 4850 level expected by mid-Mar. I noticed a price pattern from late 2006-07 which is somewhat similar to what I am expecting for 2024 and have outlined it in the Tech/Other section.
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 fell slightly but remains near a weak Sell.
Update Alt EMA. Bearish sentiment fell slightly but remains near a weak Sell.
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 to below neutral.
Update EMA. Bearish sentiment fell sharply with the very ST (grn) EMA at a strong Sell, otherwise reaching a weak Sell.
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 fall, now fully at a weak Sell.
Bonds (TNX). Bearish sentiment remains at low extremes. The TNX continues to bounce between MAs at 4.15 and 4.35%, and a breakout could target the large gap from early Nov at 4.8%.
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 increased slightly via ETFs as prices bounced off the 200 level indicated as a potential breakdown 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 at the weak Sell level.
With the sister options Hedge Spread as a ST/INT indicator
(outlook 1-3 mns), bearish sentiment continues to hover just below neutral and is likely to limit any decline at this time.
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 dropped sharply to the weak Sell level.
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 rose but remains at the weak Sell 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 rose to well above the weak Sell level.
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 Feb 23. 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 Mar exp.
A new addition is added for OI $ amounts with breakeven pts (BE) where
call & put $ amounts cross.
Mon closed. With Fri close at SPX 5006, options OI for Tue is moderate with weak put support up to 5000, so a close over 5000 is likely, possibly back to 5030.
Wed has somewhat smaller OI where SPX has more call resistance at 5000 where a straddle may keep prices near.
For Fri moderate SPX OI has strong put support at 4060, but straddles at 4950 and 5000 are likely to contain prices, but over 5000 next call resistance is 5050.
For EOM/Thur strong call resistance down to SPX 4950 could lead to a move down to 4900.
Using the GDX as a gold miner proxy closing at 26.9, strong put support at 25.5 should limit losses with little call resistance for a move higher.
Currently the TLT is 92.6 with the TNX at 4.3%, similar to the TBT/TLT ETF sentiment, there is almost no bearish sentiment (puts) and call resistance at 92 should keep prices down and rates up.
IV. Technical / Other
This week I will take a brief look at a possible analog for 2024 compared to late 2006 thru 2007. This fits the timeline that I have previously outlined with a top late 2024 (possibly near the election) and also the outlook for Fed rate cuts. Note the long, virtually uninterrupted, rally late 2006 that carried into mid-Feb 2007 and then the mild, but somewhat violent, decline into mid-Mar. This could correspond with a sizable pullback in NDX starting with the NVDA EPS Wed after the close. One example may be SMCI, a small AI related stock that has tripled the last month from 300+ to 1075 Fri AM, then crashed back down to 800. I don't expect NVDA to crash, but the whole sector is due for a pullback. A likely target for SPX is 4850.
What followed then was a rally into May-June that could correspond to expectations of Fed rate cuts either in May or July, and then a larger correction if the economy and inflation outlook continue to be strong. A larger correction could target SPX 4650 or the 200 SMA. Finally, a pre-election rally in anticipation of a Trump victory with more tax cuts. I am unsure of either rally top, but don't expect a lot over SPX 5000. Trumps MAGA program, designed to increase jobs for Americans, is unlikely to be bond friendly and with a tight jobs market is likely to be inflationary. A 60% tariff on goods from China could see a similar retaliation in rare earth exports needed for critical tech and could be disastrous for NDX as China refines 90% of global supply.
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 increased slightly at
a weak Buy to + 1.25 SD, NQ (NDX) remains a strong Sell at -2.0 SD, YM (DJIA) is a weak
Sell at -1.5 SD, Dow theory no longer supports DJIA.
Click dropdown list to select from the following options:
Tech / Other History
2024
2023
2022
Other Indicators
Conclusions. Although sentiment ST is moderately bearish, INT/LT still shows significant caution (hedge spread) and no major trend changes are expected. What may happen later in the year as the election approaches, is that no one wants to be short a Trump victory, therefore setting up a buy the rumor, sell the event response.
Weekly Trade Alert. Some volatility may occur around the Wed NVDA EPS after the close, but just as likely to see new highs as not. Downside is expected by EOM SPX 4900-50, however. Updates @mrktsignals.
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