Next Week's CPI Could be a Doozy!

Last week's outlook for the SPX was spot on as an early week rally to about 4225 was expected to fail, falling back towards 4150.  After Tue opening to 4234 was immediately sold, the Wed update indicated OI put support was raised to 4175 and the Thur low of 4168 then quickly rallied back to 4200.  Fr bond rally after a weaker than expected jobs outlook and factory orders sparked a tech rally and raised the SPX back to 4330.

So far June is starting much like May where an early decline to the mid-4100s was followed by a sharp rally to the mid-4200s in the first week.  The second week of May, however, saw an inflation scare with a three day decline of 4% into the CPI release that came out as 0.4%.  As shown below, the CITI inflation surprise index indicates this months CPI release could be much worse, but with the FOMC the following week expected to support "inflation is transitory", any losses are also expected to be transitory.

In this weeks Tech/Other, there is a revisit to the Combined Put-Call Indicator using the std var approach.

I. Sentiment Indicators

The overall Indicator Scoreboard (INT term, outlook two to four months) bearish sentiment saw a sharp downturn last week as the SPX moved back towards its ATH.

The ST Composite is a ST (1-4 week) indicator and includes the NYSE volume ratio indicator (NYDNV/NYUPV & NYDNV/NYDEC) and the VXX $ Vol/SPX Trend. Weights are 80%/20%. This indicator is back near its recent lows and may be suggesting a near term test of the recent lows near SPX 4150 next week.

The CITI Surprise Inflation Index for May saw a huge move upwards.  One of the reasons I started following this series several months ago was that it is released the first week of the month, a week ahead of the CPI and two weeks before the PPI.  Inflation has been relatively tame since 2017, but this year the CITI index has correctly indicated an upward trend and if the proportions are correct could be predicting a CPI of 1.0% or higher (compared to 0.4% for Apr).

Bonds (TNX).  Bearish sentiment in bonds fell slightly as a combination of weaker than expected nonfarm payrolls and factory orders reduced fears of a strong economy.

For the INT outlook with LT still negative, the gold miners (HUI) bearish sentiment with the inverse TNX rate and the 3x ETF ratio continues to decline.

II. Dumb Money/Smart Money Indicators

The option-based Dumb Money/Smart Money Indicator as ST/INT term (outlook 1 to 3 mns) bearish sentiment rose slightly.

And the sister options Hedge Spread bearish sentiment as a ST/INT indicator (1-3 mns) after warning of a ST pullback last week (5 Day EMA), remains near neutral.

Taking a look at the ETF ratio of the INT term SPX INT (2X) ETFs (outlook two to four mns) as bearish sentiment, sentiment rose for the week, indicating that the rally is not likely over.

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 Jun 11. Also, this week includes a look at the GDX and TLT for Jun exp. 

With Fri close at SPX 4230, options OI for Mon show moderate call resistance from 4225-35 and strong resistance at 4250 and little put support until 4150.  May see downward pressure late in day.

Wed has somewhat larger OI where SPX  has strong put support at 4200 and little call resistance up to 4260.  Could see an ATH retest.

For Fri, low overall P/C and moderate to strong call resistance over SPX 4200 indicate a decline to the 4150-4200 area is likely with a probable close over 4175.

Using the GDX as a gold miner proxy closing at 38.7, there is little change from two weeks ago where strong resistance at 40.5 has held and there is weak pressure into the 35.5 to 37.5 area.

Currently the TLT is 139.9 with the TNX at 1.56%, outlook is little changed where there is strong put support at 135 and little call resistance to higher prices.

IV. Technical / Other

This week I wanted to take a brief look at the Combined Put-Call Revised indicator (Equity + ETF + SPX).where we saw extreme low sentiment in Q1 and for several months have been coiling in an area below neutral similar to the last half of 2019.  A move down to test the earlier lows may be necessary before a top.

Conclusions.   Overall sentiment remains mixed as the CPC Revised shows bearish sentiment is not supporting a strong advance, but is not currently supporting a strong decline.  There may be a temporary inflation scare with the Thur CPI release as shown by the CITI index, but the expected number is 0.9% and anything less than 1.2% may only produce another drop into the SPX 4150 area.  The Hedge Spread has improved, while the ST COMP (NYDNVl) is weaker, and the SPX 2X ETFs are supportive for the INT, so more range trading is likely.

Weekly Trade Alert.   Mon-Wed may see an ATH retest with 4250 possible, while Thur-Fri may see a retest of the 4150-75 area.  Updates @mrktsignals.

Investment Diary,  Indicator Primer,
 update 2020.02.07 Data Mining Indicators,
 update 2019.04.27 Stock Buybacks,
 update 2018.03.28 Dumb Money/Smart Money Indicators

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