What a week! Sat no one was talking about DeepSeeks R1 AI software, so
I was expecting more of a delayed reaction by WS. However, by Mon that was
all anyone was talking about and the mega cap AI stocks led a sharp opening gap
from SPX 6101 beyond my downside targets near 6000 to open at 5970 with NVDA
down 18%. Earnings for last quarter were favorable for some of the non-AI
large cap stocks, esp IBM which was up 18%, and the BTFD crowd pushed the SPX
back up thru Fri AM to fill the Mon gap before news of Trump tariffs send stocks
skidding from SPX 6120 to 6030 in a couple of hrs before a close at 6041.
So the weakness call was right but the timing was off. Trader Joe's latest
ES chart shows about what I am looking for, but
timing-wise I am hoping for a low mid-Mar to fill the gap near SPX 5850 after EPS season, and a high June-July
after tariffs begin to slow the economy. Factors supporting this are the
latest NAAIM report showing a sharp drop in % of bullish active managers to 68%
from 86% a couple of weeks ago and the continued outperformance of Germanys
DAX
supported only by a dovish ECB.
ST sentiment has improved slightly with last weeks pullback as the VIX call &
SPXADP moved toward neutral, but the ST composite remains near neutral.
The options FOMO indicator also moved from a strong Sell to above a weak Sell,
but the hedge spread indicator remains near a strong Sell. Nothing to
support a rally, but a consolidation between SPX 6025-75 is possible thru
mid-week. SPX options OI suggests weakness EOW into jobs report Fri.
Discuss.
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, INT view. Bearish sentiment remains between a weak and strong
Sell.
Update Alt EMA. Bearish sentiment improved to 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, SMA only]. Weights
are 80%/20%.
Update. Bearish sentiment remains near neutral.
Update EMA. Bearish sentiment improved slightly but remains near neutral.
The ST VIX calls and SPXADP indicator bearish sentiment improved from near a
strong Sell to above 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 improved from a strong Sell to in between a
weak and strong Sell.
Update options FOMO. Bearish sentiment also reversed sharply from near a
strong Sell to in between neutral and a weak Sell.
Bonds (TNX). Bearish sentiment remains at low extremes as rates
tested 4.5% early Fri before reversing upward.
For the INT outlook, 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 continues to rise as gold made an ATH and the HUI
rallied sharply. Gold appears to be the preferred "safe haven".
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 low but moved above the weak Sell level.
With the sister options Hedge Spread as a ST/INT indicator
(outlook 1-3 mns), bearish sentiment continues to hover near a strong Sell.
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 improved due to
bearish positioning in SPX options.
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 remains near a strong Sell.
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 continued to fall to a strong Sell as 2x ETF
sentiment fell sharply with weak relative buying in SDS.
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 7. 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. Note multiply OI$ by 100 for shares/contract.
With Fri close at SPX 6041, options OI for Mon is moderate with put support
starting at 6050. Likely range SPX 6025-75.
Wed has small SPX OI with small put support at 6025 and larger put support at
6000. Call resistance starts at 6090. Could see continued weakness
near 6025.
For Fri SPX has moderate OI with balanced P/C, but ITM calls should give
negative bias toward 6025 or lower. Put support is at 6000
For Fri Feb 21 PM still has fairly small OI, but as Fri 7th, ITM calls are
likely to give a negative bias toward 6000.
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 remains
at neutral 0.0 SD, NQ (NDX) bearish sentiment is back to a strong Sell at -2.0 SD, YM (DJIA)
remains below neutral at -0.5 SD.
Click dropdown list to select from the following options:
Tech / Other History
2025
2024
2023
2022
Other Indicators
Conclusions. Last week David (China entrepreneurs, DeepSeeks R1)
struck a solid blow to Goliath (US deeppockets, NVDA). The question
remains as to whether this will be a serious setback for the US AI tech giants
and stocks in general and if so how soon. The availability of cheaper
access to more advanced technology by users is likely to benefit a wider range
of the S&P 500 and possibly broaden the rally at some point, but the "shock and
awe" effect is not likely over. Most seem to be looking for a more
immediate downturn, aka Trader Joe, while I still think that "back-looking" EPS
reports will support stocks for a while.
Weekly Trade Alert. Possibly some range trading between SPX 6025-75
thru mid-week, but 6000-6025 by Fri. Updates @mrktsignals.
