Sentiment Signals for Market Investmentsby Arthur Knopf, Financial Economist and Contrarian

Saturday, January 22, 2022

If It Looks Like a Bear and Growls Like a Bear

Last weeks outlook was pretty much a bust as a corrective rally was expected before any further decline. The immediate cause of the Mon selloff was a sharp rise in rates (TNX) with the decline in the SPX matching the rise in TNX, -93 pts vs +.93%. I have been warning of the risk of higher rates for months and noted last week that the low capitulation (ST Composite) would make the SPX prone to sharp and sudden selloffs. In any case, once the selloff started, it began to snowball and ended with the SPX down 9% (below 200 day SMA) abd NDX down 14%. The DJIA, however, made a higher low than Sept & Dec, but also below 200 day SMA.

INT, I had been looking for a 15-18% decline in SPX in Q1 2022 and it looks like we have a good start. For all intent and purposes. I believe the ED scenario for a new ATH is dead and the most bullish option is for a double top in SPX near 4800 in Feb-Mar. ST/INT sentiment indicates that more weakness next week is likely (SPX 4350-4450) before a sustained rally. A potential cause may be a decline in the Omicron spread or some inflation relief.

I. Sentiment Indicators

The INT/LT Composite indicator (outlook 3 to 6+ months) has three separate components. 1st is the SPX and ETF put-call indicators (30%), 2nd the SPX 2X ETF INT ratio (40%), and 3rd a volatility indicator (30%) which combines the options volatility ratio of the ST SPX (VIX) to the ST VIX (VVIX) with the VXX $ volume.

Update. From recent low extremes, ST sentiment has moved back to neutral, but still much lower than after similar declines in Feb, Oct and Dec of 2018.

[ The ST Composite as a ST (1-4 week) indicator includes the NYSE volume ratio indicator (NYDNV/NYUPV & NYDNV/NYDEC) and the VXX $ Vol/SPX Trend. Weights are 80%/20%.

Update. VXX $ Vol has moved to the highs of the last two years, but the NYDNV still lags and will likely move higher before a turn.

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. This composite is nearing the Buy level for a multi-week rally.

Update ema. ST EMAs (grn) are at a strong Buy level and indicates a low in price is near, but LT (blue) lags so a ST range bound market is likely.

Bonds (TNX). (TNX Close is back) ST/INT bearish sentiment in bonds shows that since mid-2020 shows three of four Buys occurred at peaks in rates, while Feb 2021 preceded top by about a month.

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. Sentiment remains little changed as a brief move over 260 resistance was reversed.

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. Similar to the LT Composite, neutral was reached, but well below declines of similar size in 2018.

And the sister options Hedge Spread bearish sentiment as a ST/INT indicator (outlook 1-3 mns) shows hedging at the highest level since mid-2020 and is likely to limit further downside.

Taking a look at the ETF ratio of the INT term SPX INT (2X) ETFs (outlook 2 to 4 mns) as bearish sentiment, a sharp rise has now taken sentiment to neutral that may support a counter-trend rally.

The INT term NDX ST 3x ETFs (outlook 2 to 4 mns) bearish sentiment is still some what weaker than for the SPX, but may support a counter-trend rally.

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'm only going to look at the larger Fri and EOM Jan 31 for SPX as well as the GDX for Feb exp and TLT for Mar exp.

With Fri close at SPX 4398, options OI for Fri is moderate with a large P/C. Put support extends up to 4600, but is unlikely to matter. A sharp break below 4350 could reach 4300 but 4400+ is more likely.

Mon Jan 31 EOM larger OI where SPX has strong put support at 4300 and 4350. At 4400, 6k calls and 9k puts may cause wild swings around 4400.

Using the GDX as a gold miner proxy closing at 31.6, the large call OI at 32 may keep a lid on any rally attempts, while moderate put support at 30 may support a trading rance.

Currently the TLT is 143.6 with the TNX at 1.75%. With the TLT at 144 when TNX was 1.7% on Jan 14 and 140 when the TNX reached 1.87% on Tue, this appears to be the trading range thru Mar by OI support/resistance zones.

IV. Technical / Other

Conclusions. In a way, last weeks selloff was a lot like the "flash crash" of Aug 2015 which also occurred during an optn exp week. For months I have been referring to the rounded top of 2015 as a strong candidate for a 2021-22 top and similarities suggest a test of the highs is possible before a larger top. A recent example is seen in the German DAX that had a 9% drop in Dec then rallied to a double-top in Jan, and an important consideration is the so-called death cross of the 50 and 200 day SMAs which occurred in the 1929, 1938, 1974 and 2008 bear markets.

Weekly Trade Alert. Sentiment indicators are showing that ST/INT bottom is near, while LT (ETFs) show that much lower levels are likely before a bottom. Next week may be range bound (SPX 4350-4450) before a multi-week rally begins. Updates @mrktsignals.

Investment Diary, Indicator Primer,
update 2021.07.xx Data Mining Indicators - Update, Summer 2021 (in progress),
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

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© 2022 SentimentSignals.blogspot.com

Saturday, January 15, 2022

Eye of the Hurricane

Last week started out like gangbusters as the washout warned about in Mon options OI sent prices down to the SPX 4582 before a sharp reversal begain reaching the upside target of 4725-50 (act 4749) on Wed. Mon large put position at SPX 4615 seemed like a possible target for algos as that would force negative delta hedging pushing prices down further before a reversal. A Sun/Mon article by Avi G. before the open did not help as he setup support at SPX 4630 for a continuation rally, while below made 4400 probable.

This weeks sentiment outlook shows considerable improvement, but not enough to support a sustainable rally just yet. The ST Composite remains a problem and indicates that more sudden selloffs are likely. Overall, next week is likely to see a rise back to the SPX 4700-50 area, but a move back down to 4650 or lower is likely before EOM to setup a sustainable rally. Possibly a down Jan makes everyone turn bearish before a final rally into late Feb-early Mar.

The markets seem to be in a rotational correction between tech/cyclicals. In Nov 2021, the DJIA fell about 9%, but strength in the NDX resulted in only a 3.5% correction in the SPX. This week seems to have completed a 9% correction in the NDX, while the SPX only fell 4.5%. Those looking for a larger drop in SPX may be disappointed due to rotational strength.

Update. The INT/LT Composite saw a strong bounce in ST sentiment (EMA), but a sustainable rally is unlikely until INT sentiment reaches -.5 to -1.

The ST Composite as a ST (1-4 week) indicator includes the NYSE volume ratio indicator (NYDNV/NYUPV & NYDNV/NYDEC) and the VXX $ Vol/SPX Trend. Weights are 80%/20%.

Update. The ST Composite remains stuck at low levels at there has been little down volume (capitulation) and may be the source of the recent sudden selloffs. Expect more choppiness.

Update. The ST/INT Composite sentiment has finally risen over neutral, but compared to the Sept lows more work to the downside is likely.

Update. The ST/INT Composite EMAs show that for the very ST sentiment is similar to the Sept lows, so higher prices may be seen next week into optn exp before further retests of the lows.

Bonds (TNX). Bearish sentiment in bonds remains unchanged, Still working on TNX Close.

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 continues to drop as the HUI 240-60 range continues to hold.

Update. Options bearish levels have increased considerably over the last week with sentiment at/above the levels of the Sept price lows and may indicate that last Mon washout may be the lows for the Jan pullback (4582).

And the sister options Hedge Spread bearish sentiment as a ST/INT indicator (outlook 1-3 mns) also rose considerably nearing the Sept levels, indicating that bottom may be close.

Taking a look at the ETF ratio of the INT term SPX INT (2X) ETFs (outlook 2 to 4 mns) as bearish sentiment, we see that SPX ETF sentiment rose sharply last week, but may need further to go (blue EMA) before a sustained rally.

The INT term NDX ST 3x ETFs (outlook 2 to 4 mns) bearish sentiment has finally started to rise with a sharp jump last week although LT EMAs show more work is needed to sustain a rally

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 Jan 21 plus EOM.

With Fri close at SPX 4663, options OI for Tue is small with a probable trading range of 4650 to 4685 and a likely close 4675+..

Wed also has small OI where SPX has strong put support at 4650 and little call resistance until 4750 with a move over 4700 and 4725 likely.

For Fri strong call resistance at 4725 and above will likely push prices back toward 4700 or lower.

For EOM strong call resistance at 4725 & above should limit gains and likely pressure prices toward 4650-75. Strong put support falls to 4600.

IV. Technical / Other - N/A

Conclusions. INT bearish sentiment is now rising, particularly in options and ETFs, which seems to support the ED scenario for a top in the next couple of months. SPX options OI for next week (Tue-Fri) optn exp seems to support another move over 4700, possibly to the 4750 area. The ST Composite, however, shows little signs of capitulation, so sudden selloffs as we saw on Thur may be the norm for a couple of more weeks and may indicate another test of the Jan lows, possibly around the next FOMC Jan 25-26.

Weekly Trade Alert. Next week may see the eye of the hurricane that has been Jan 2022. Increasing bearish sentiment is expected to push the SPX higher and may test last Wed high around 4750, but more downside is expected post exp. Updates @mrktsignals.

Investment Diary, Indicator Primer,
update 2021.07.xx Data Mining Indicators - Update, Summer 2021 (in progress),
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

© 2022 SentimentSignals.blogspot.com

Saturday, January 8, 2022

The Season of the Witch

So far the "January indicator" is not looking favorable for the stock market. Last weeks outlook was looking for a pullback in the SPX from a possible high of 4820-30 (act 4819) to the 50 SMA area 4650-700 (act 4662), although I did not expect the rapidity of the decline. In last weeks conclusions, I noted that the biggest surprise for 2021 was the bond markets indifference to the rise in inflation, but last week seemed to break the spell with rates (TNX) rising from 1.5% to 1.8% with one of the sharpest rises in several years. All may not be lost since I have noted in the past that asset allocation from bonds to stocks is typically seen at the last stage of a bull market. One comparison is 1999, where stocks fell when rates rose sharply, then rallied as rates consolidated/retraced. One factor that seemed to change was the outlook for the Fed to move up timing for increases in the Fed funds rate.

There were many divergences in the markets last week with the brunt of the decline suffered by the NDX (down 7%), while the SPX fell 3.5% and the DJIA only fell 2% (bolstered by the banks and oil stocks, up 10%).

Overall, ST/INT sentiment seems to indicate a corrective bounce ahead somewhat similar to the 38% retracement from the first leg down in Sept, while INT/LT sentiment (esp ETFs) continues to indicate bear market possibilities. Sentiment so far does seem to favor the SPX ending diagonal outlined last week.

Due to high volatility this week shows EMA sentiment. There was an extreme low seen in bearish sentiment in the INT/LT Composite indicator early in the week, this may be similar to that seen in Sept 2018 and Dec 2020 which preceeded INT tops by 1-3 months.

The ST Composite as a ST (1-4 week) indicator includes the NYSE volume ratio indicator (NYDNV/NYUPV & NYDNV/NYDEC) and the VXX $ Vol/SPX Trend. Weights are 80%/20%.

An extreme low in the ST Composite was also seen and compared to the last occurrence at this level in Oct 2020, this may not be extremely bearish for the ST.

The ST/INT Composite saw a strong bounce in sentiment, see EMA for more.

The faster EMAs show that a near term bounce is likely and appears very similar to the first leg down of the Sept pullback which saw about a 38% retracement before the final leg down.

The CITI Inflation Surprise Index for Jan shows huge jump for the EU, while the US and CA show flat to down inflatio surprises. It's possible that next weeks CPI/PPI (Wed/Thur) show some inflation relief that that temporarily halts the current rise in int rates.

Bonds (TNX). Bearish sentiment in bonds saw a retreat last week as the bond bears got it right, loading up on shorts before the latest int rate rise. I just noticed that the TNX Rate in title & chart refers to the 10 day SMA, not the close and will try to fix over the next couple of weeks.

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.

Bearish sentiment declined as the HUI fell to the 240 support level, and remember that with LT sentiment still negative, I do expect a breakdown sooner or later.

Similar to other INT indicators above the recent extreme spike low may be a warning of an INT top over the next 1-3 months.

And the sister options Hedge Spread bearish sentiment as a ST/INT indicator (outlook 1-3 mns) bottomed out in the same area as the first down leg in Sept and now supports a corrective bounce.

Taking a look at the ETF ratio of the INT term SPX INT (2X) ETFs (outlook 2 to 4 mns) as bearish sentiment, SPX ETF sentiment is rapidly approaching the indifference seen in the NDX ETFs over the last two months and last week showed the result of that. One explanation is the asset allocation from bonds to stocks, but is likely to end badly.

The INT term NDX ST 3x ETFs (outlook 2 to 4 mns) bearish sentiment remains little changed which makes you wonder if a 7% decline in a week does not effect sentiment, what will it take to reach the next Buy signal.

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 Jan 14. After Jan exp, I expect to resume OI coverage for TLT and GDX.

With Fri close at SPX 4677, options OI for Mon is moderate with clear put support up to 4700 and the first level of call resistance at 4735. Strong put support at 4615 does not rule out a washout before a reversal.

Wed has somewhat weaker OI where SPX shows strong put support at 4560 and strong call resistance at 4800. Moderate put support could push prices up to the 4725-50 area.

For Fri strong put support is mainly between 4450-4525 which inflates the overall P/C, but weak support over 4700 may lead to weakness back to 4700 if there is an early week rally.

IV. Technical / Other - N/A

Conclusions. I usually get a couple of questions every year about my long-term outlook, but I stopped that several years ago because I found it counter productive (source of bias). However, you can see below I was expecting the DJIA to top in the 36-38k area, this year I noticed that Trader Joe published a year-end review where he was looking for a Super Cycle III top which is about what I am expecting with a SC IV being a flat somewhat like the 1970's, then finally a crack-up boom (inflationary cycle) for SC V when gold will shine.

Weekly Trade Alert. A retracement from the lows is likely to start next week that could reach the SPX 4725-50 level, but a retest of the lows is likely by late Jan. CPI.PPI could show some relief, helping both bonds and stocks. Updates @mrktsignals.

Saturday, January 1, 2022

Welcoming the New Year Edition

In last weeks conclusions, the outlook was for some consolidation before a move higher to SPX 4750+ in Jan unless an ED was playing out (see Tech/Other). Mon's romp to 4800+ quickly resolved that option, and stocks moved sideways, then lower to close the week. Weakness may spill over into Mon but could move back to ATHs to complete w-c of 5 of the ED by mid-week (options OI).

If the ED continues to be followed, Jan may see strength to start and end, but could see lows in the SPX 4650-4700 mid-late month before a turn around. Tech/Other section also looks at an update of the Composite Put-Call Revised spread, now at new lows.

The INT/LT Composite bearish sentiment reached new lows last week. It's possible to see lower levels since Dec 2018 SPX lows were +2 SD and Dec 2019 reached -2 SD since Mar 2020 reached +4 SD.

The ST Composite as a ST (1-4 week) indicator includes the NYSE volume ratio indicator (NYDNV/NYUPV & NYDNV/NYDEC) and the VXX $ Vol/SPX Trend. Weights are 80%/20%.

ST Composite sentiment dropped sharply, but may fall to the Sell level before a top.

ST/INT Composite sentiment is somewhat more bearish due to the FOMO component (below) and is nearing the levels seen before the Sept pullback.

Options FOMO sentiment has reached a new extreme and should be considered a strong warning of a pullback nearing.

EMAs have declined sharply and resemble the periods before the Sept and late Nov pullbacks.

Bonds (TNX). Bearish sentiment in bonds saw a sharp jump last week. This pattern has been seen several times at the EOM recently (possibly following poor auctions) and has typically been followed by lower rates.

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.

Lower rates (TNX) could improve the ST outlook which remains mostly sideways.

Similar to the Jan 2020 decline in SPX, this indicator has been ST positive but has now declined back to the level of the Mar 2020 top.

And the sister options Hedge Spread bearish sentiment as a ST/INT indicator (outlook 1-3 mns) saw a sharp drop early in the week with a move to new highs, but the late week weakness has moved back above neutral and is likely to limit losses ST.

Taking a look at the ETF ratio of the INT term SPX INT (2X) ETFs (outlook 2 to 4 mns) as bearish sentiment, it is moving back toward recent lows.

The INT term NDX ST 3x ETFs (outlook 2 to 4 mns) bearish sentiment continues to inch its way lower even though the NDX failed to make ATHs last week.

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 Jan 7.

With Fri close at SPX 4766, options OI for Mon is small and the P/C is neutral. SPX may decline to 4750 but is likely to rebound to 4775 by the close. SPX 4700, 4725 and 4775 are fully hedged and are unlikely to affect prices.

Wed has larger OI and much larger P/C where SPX has moderate put support at 4750 and strong call resistance at 4775, but a push over that level could move up to the 4830+ level..

For Fri, SPX strong put support drops to 4700 with strong call resistance at 4850. There is call resistance and little net put support down to 4700, so a reversal lower is likely.

IV. Technical / Other

This week I wanted to take a brief look at the Combined Put-Call Revised spread indicator (Equity + ETF + SPX), recently a sharp decrease in ETF bearish FOMO sentiment has pushed this indicator (red) to new lows, a strong ST/INT warning.

The SPX potential ED from what some are calling a wave 4 correction in Oct, the next high should be c of 5 topping near 4820-30, possibly early next week.

Conclusions. Best wishes for the New Year. The surprise so far in 2021 for me has been the tranquility in the bond market in the face of soaring inflation. Expectations seem to lag as they did in the 1980s when inflation fell, and an aging population switching to safer assets may be the reason. As I have mentioned several times, as long as the DJIA div yield (1.58%) remains above the TNX rate (1.51%). this should be supportive of stocks or at least limit the downside.

Weekly Trade Alert. A move in the SPX to the upper bound of the ED (4820-30, 4850 max) should provide an opportunity for a 2-3 week pullback of 3-4% by EOM (4650-700). Updates @mrktsignals.

Investment Diary, Indicator Primer,
update 2021.07.xx Data Mining Indicators - Update, Summer 2021 (in progress),
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

© 2021 SentimentSignals.blogspot.com