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

Saturday, January 7, 2023

All is Well, or Not

Last week was expected to be a struggle as the ST indicators were at a Sell level while Fri SPX options OI showed strong put support suggesting a move toward SPX 3900 by Fri close. A test of the recent lows was expected early in the week and Tue opened up following Europe then reversed sharply to just below 3800 by mid-day, then Wed saw a retest of the Tue open near 3870 then fell back toward 3800 before the Fri jobs report. Surprise, the unemployment rate (UR) actually fell from 3.7% to 3.5% which seemed to cause some early concern since the Fed wants higher UR, but a lower increase in wages and weaker ISM led to a sharp drop in int rates pulling stocks higher. The net result was a slow moving rallly fueled mostly by short-covering that managed a 100 SPX pt gain.

As mentioned previously, the tech layoffs that most were looking at as a harbinger of a recession are missing the case which is a return to normal from the work and school at home which was tech intensive. As a result jobs are moving from the high paying areas of tech and manufacturing to services such as retail sales and leisure. Likely many households that may have had a single wage earner of $100k that was laid off and could only find a new job for $65,000 have now become a two wage earner household with a net result of lower unemployment and lower wage growth.

Bearish sentiment has improved modestly overall. Tech/Other takes a look at gold compared to the TNX yield and China's SSEC index.

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 UVXY $ volume.

Update Alt. In this case the wts for the SPX 2X ETF ratio (SDS/SSO) and SPX puts & calls spread are adj to equal as in the DM/SM section for SPX ETFs. Bearish ETF sentiment is up while option sentiment is down, improving the INT outlook, but depressing the ST outlook.

Update Alt EMA. Sentiment reversed strongly from the ST Sell, but still remains negative

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. The ST indicator has also reversed from a Sell, but remains in negative territory.

Update EMA. For the very ST, sentiment has moved back to neutral

The VIX Call indicator and SPXADP EMA has dropped to 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. Here, we see a sharp drop in sentiment mostly from the Hedge Spread which was extremely high, but remains slightly positive.

CITI Surprise Inflation Index for Jan (expectations), I have been reporting this occasionally because it does not seem to fit the CPI, but I realized that it is forward looking while the CPI is for the previous month. In any case, the trend remains down, except for China.

Bonds (TNX). Bearish sentiment in bonds is mostly unchanged.

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. HUI appear to have a breakout over the 180-220 range, and sentiment is little changed.

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. A sharp move up in sentiment makes this indicator less unfavorable.

With the sister options Hedge Spread bearish sentiment as a ST/INT indicator (outlook 1-3 mns), here we see a sharp reduction in hedging, but overall well above the Buy level and may prevent the breakdown expected by Wall Street and the bears any time soon.

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) as bearish sentiment, higher ETF, but lower option sentiment offset.

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 very high for techs and should be supportive during the EPS season.

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 13. 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 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 3895, options OI for Mon is small with most of the puts below 3850 with 3825 the first support level, call resistance should push prices toward 3850.

Wed has somewhat larger OI where SPX has higher put support at 3850 that should keep prices between 3825 and 3875.

For Fri strong call resistance over SPX 3900 should keep prices between 3850 and 3900. Apparently, the bulls are expecting a large rally seen with Thur CPI report similar to the last 3 months, but we saw how the bearish consensus worked last week. This time likely a dud.

For optn exp Fri Jan 20 a huge straddle at SPX 4000 will likely act as a magnet with 3950-4000 likely.

IV. Technical / Other

This week I want to look at two factors besides the ETFs that seem to be important for the gold & gold stock outlook. The first is 1/TNX rate which showed a close correlation for 2016 thru 2020, but has since become less of a factor.

The second was the performance of the Chinas main stock market indicator, the SSEC. Here, the reason was that the China population is a large buyer of gold and the stock exchange may be an indicator of the buying power. It did not work as well as the TNX before 2019, but worked better after 2020. I had hoped to use both, but the big difference in holidays made it to difficult to match prices for the gold stock indicator.

Conclusions. Bearish has improved for the most part so any downside for the week should be limited to SPX 3825ish. However, EOW sentiment for Fri is almost a reverse of last week with most seemingly positioned in SPX options OI for a big up move with the Thur CPI release. Likely, there will be little reaction and SPX will remain in the 3850-3900 area

Weekly Trade Alert. Some weakness is possible early in the week to SPX 3825-50, while the best opportunity to test the 3900 area is Wed, prior to the CPI on Thur. . 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

© 2022 SentimentSignals.blogspot.com

Saturday, December 31, 2022

In with a Bang, Out with a Whimper

Last year at this time most were expecting a strong start and finish for 2022. while I was expecting the beginning of a multi-year bear market, but the outlook for 2023 is more murky. The 2022 ST outlook for the early Jan OI was a positive start over SPX 4800, but an EOW drop to 4700, exactly as happened. Next weeks outlook is for a weak start and a strong finish with strong bearish sentiment in OI positions. Further out the sentiment picture is made less clear with extreme positioning by both the bulls and bears, perhaps this just a reflection of the times as the far right and far left political agendas each seem to be gaining more power and the middle class is split between the super rich and the super poor with growing homelessness, looting and shoplifting.

Last weeks outlook was a draw with some initial weakness followed by late week strength was expected, and early weakness did appear, but there was little follow thru to the upside with the close for the weeks SPX -5 pts following the previous weeks decline of -7 pts. I had warned of an expected trading range until the mid-Jan earnings season and inflation news and the SPX seems to be forming a triangle. To me the most likely outcome INT is an extended trading range with a weak upward bias to frustrate both bulls and bears. The biggest concern remains interest rates as governments embrace the "give away" fiscal policy which only increases borrowing and offsets the CB's rate hikes.

Update Alt. In this case the wts for the SPX 2X ETF ratio (SDS/SSO) and SPX puts & calls spread are adj to equal as in the DM/SM section for SPX ETFs.

A mixed bag as higher volatility and SPX ETF sentiment offset lower options sentiment.

Update Alt EMA. A move lower in sentiment may indicate some initial weakness.

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. Very little improvement here with a weak Sell.

Update EMA. Very ST, weakness or volatility is expected.

Update EMA. The ST/INT sentiment is becoming more positive due to the Hedge Spread and a ST breakdown is possible before a strong reversal.

Bonds (TNX). Bearish sentiment in bonds remains little changed as the last two weeks bearish outlook for bonds proved prescient with a two week reversal of a little more than 50% of the two month decline from the Sept highs.

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. Prices remain in a range as is sentiment. Two factors I had previously discussed for gold & gold stocks are China's SSEC and 1/TNX and recently the SSEC has been a positive factor (hopefully I will show in next weeks Tech/Other).

Update. Another indicator that may mean ST weakness.

With the sister options Hedge Spread bearish sentiment as a ST/INT indicator (outlook 1-3 mns), bearish sentiment is literally off the charts, so INT strength is expected.

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) as bearish sentiment, again with the offsetting ETF and options sentiment.

The NDX bearish sentiment is the highest of the last 5 years as prices test the Sept lows (a possible double bottom?), with a strong increase in ETF options sentiment and ETF sentiment the same as at the Sept NDX lows.

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 6. 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 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 3840, options OI for Tue is small with call resistance at 3875 and little support until 3800 or lower as 3800 and 3850 are straddled so a close near the mid-point is likely.

Wed also has small OI where SPX has support starting at 3800 but may be influenced by Friday's larger OI.

For Fri strong put support at SPX 3800 and below with straddled positions up to 4000 indicate a close between 3850-900 is likely.

IV. Technical / Other - NA

Conclusions. A somewhat weaker than expected outlook to the week, but withhin reason. The Wall Streets siren song to "Buy bonds and Sell stocks" lost some of its luster last week as bonds joined stocks with at 50%+ retrace from the Sept lows, but the questions remains as to how the second recommendation will fare. Last weeks options OI for TLT showed what appeared to be smart money puts at 95 for Mar exp, but the 5 pt drop to 100- for the week was a surprise and the sharp rise in rates put pressure on stocks, but is likely to stabilize ST and may allow stocks to rally.

Weekly Trade Alert. Some weakness is expected early with a possible retest of recent lows, but a strong finish to the week toward 3900 is expected by Fri close. 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

© 2022 SentimentSignals.blogspot.com

Saturday, December 24, 2022

BRRRRRRRRRRRR!

Last weeks outlook was that the SPX was likely to waffle around current levels (3854) with headwinds provided by the large SPX call OI at 3835 and possible gap fill from the Nov CPI ramp at 3750, while options OI for Wed and Fri showed the potential for a move to .SPX 3900. As it turns out the first move was down to a SPX low of 3800 Tue then a ramp Wed to 3980, followed by lower lows Thur to a near gap fill at 3760 on news of stronger GDP and BOJ giving up on ZIRP, and then moved back to unchanged Fri (3846). Bonds took a hit, however, as the TNX rose from a low of 3.5% to 3.75% even as PCE showed more cooling of inflation. The result of last weeks volatility, however, was to increase put support around current levels and next weeks moves may be mild with an upward bias toward SPX 3900+. Sentiment also improved, especially the NDX composite and hedging, improving the INT outlook for 2023 Q1.

It's interesting to sometimes see follow up articles on topics I discuss on the WE and on Mon MW Prem had an artricle how Wall Street had their worse year-end forecast since 2008 with average YE 2022 forecast SPX at 5200+, the same as Avi. (Here is the hack version. Scroll top panel or scroll and copy/paste to see full page with Google text, data:text/html, <html contenteditable>).

This weeks Tech/Other tries to tie together some economic indicators I have been looking at with the outlook for stocks using historical stock data from Macrotrends.net. Using the DJIA, the market topped on Feb, 1966 after inflation nearly tripled following the beginning of the Vietnam war in 1965. Much of the data today looks similar and the outlook may surprise you.

Update Alt. In this case the wts for the SPX 2X ETF ratio (SDS/SSO) and SPX puts & calls spread are adj to equal as in the DM/SM section for SPX ETFs. Somewhat less bearish as options indicators became less bullish.

Update Alt EMA. Little overall change.

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. Here we saw a sharp drop in bearish sentiment, mainly from NY down volume, may be holiday related.

Update EMA. A very sharp reversal to Sell may mean some early week weakness.

Vix Calls & SPXADP ST EMA. Some contrast here as ST sentiment only dropped to neutral.

Update EMA. Hedging is even more huge. Combined with OI put support EOY and 2023 Q1 should be positive.

Bonds (TNX). Bearish sentiment in bonds surprisingly fell even as rates rose. Is this more of Wall Streets "Buy bonds, sell stocks"? This looks ominous for bonds. Options Oi indicates 4.0-4.25% is possible in 2023 Q1.

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. Little change in sentiment or outlook.

Update. Some improvement, but ominous LT.

With the sister options Hedge Spread bearish sentiment as a ST/INT indicator (outlook 1-3 mns), whoa, did someone drop a nuke? Too much hedging for a strong decline.

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) as bearish sentiment, options optimism is starting to wane.

Update. A big increase in options and ETF sentiment could leead to a significant bounce for NDX starting by EOY or early 2023 Q1.

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 July 16. A text overlay is used for extreme OI to improve readability, P/C is not changed. Also, this week includes a look at the TLT for Mar 2023 and GDX 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 3845, options OI for Mon is mainly bearish, increasing the potential for another push toward 3900.

Wed has small OI where SPX 3850-3900+ is likely.

For Fri EOQ strong increase in put support has pushed BE well over SPX 3935 and a move to 3900-25 is likely.

Currently the TLT is 102.2 with the TNX at 3.75%, the larger call OI and $OI combined with the ETF low bearish sentiment tells me that retail (dumb money) is bullish, meaning large put position at 95 is smart money (contrarian). Normally, I would say 98 (TNX 4%) is the target, but if 95 puts are SM, then 95 or better is likely (4.25%). I setup a bond calculator in GoogleDocs to compare changes in rates to TLT prices. For me it loads directly into Chrome and inputs are on line 2, Coupon is a plug (3.9), bonds is maturity (20), and rate is current TNX (.0375). TLT price is in last col. Current TLT is 102, change rate to .04 and TLT is 98.

Using the GDX as a gold miner proxy closing at 28.9, some pullback is likely with support at 27.

IV. Technical / Other

This week I want to summarize the major economic factors discussed the last two weeks in one chart showing the 10 year int rate (blu), unempl rate (grn) and CPI (red). As I have discussed the armageddon that most seem to expect for 2023H1 (strong recession) is unlikely until unemployment reverses sharply. Compared to the 1960s, we seem to be at 1967 where the first ramp in inflation and int rates concluded. Over the following year infl retraced about 38% which at todays peak of 8% is about 5%. Note, however, that int rates had only a very short correction and began to rise again even as infl continued to fall. If the comparison holds and unempl remains low, a recession may not happen until the 2024 election or after.

I was finally able to find a source of historical stock price data at Macrotrends.net. In this case, I decided to use the DJIA rather than SPX due to major changes in SPX. In late 1960s and 1970s, the most heavy weighting in the SPX was oil stocks which were positively correlated with infl, while today it is tech stocks that are negatively correlated. The following is in constant dollars (infl adj), and the secular bear market lasted 14 years with a total decline of about 75%. I expect something similar this time.

This is the current dollar (nominal) chart which is much less dramatic since half of the 75% loss above was due to infl. The lowest nominal price was in 1974 with a 50% loss. The biggest reason for the seemingly mild effect on prices is that when firms can pass on inflation with higher prices this increases the growth rate in EPS making stocks more attractive. Note that after the first bear "wave" prices double topped before the 1969-70 decline and we may see something similar for the DJIA this time, but not likely for the SPX due underperformance of techs.

Conclusions. Running out of time. Next year should be interesting. I haven't felt this alone as an analyst since last year when everyone else was bullish and I was bearish. I can't really say that I am bullish, but more bullish than bearish. The Tech/Other scenario or some variation seems the most likely to me. With the recent talks of more stimulus, ie, Congress $1.7T and 14+ states sending out inflation relief checks, it seems like this madness is likely to continue for a while until everyone gets strangled by higher int rates. As Jamie Dimon (JPM CEO) said before the 2008 banking crisis "as long as the music is playing, you have to keep dancing".

Weekly Trade Alert. Next week should have a positive bias with SPX 3900+ possible. 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

© 2022 SentimentSignals.blogspot.com