Fall (Season) is Only a Month Away

Pricewise, last week's outlook was almost perfect as an early week pullback was expected that could reach the 4425 level (act 4437) before a rebound to new ATHs at 4475-85 (act 4480) and the begin a pullback to test the early month lows around 4370 (act 4368), and then rebound.  As has happened before, the algos seemed to drive the markets at hyperspeed, compressing a two week outlook into several days.

INT/LT indicators such as the Composite indicator, DM/SM indicator and SPX 2X ETFs are near levels seen at the Feb 2020 top, warning that a major pullback is near.  However, the VUX Buy&Sell components SKEW & VXV/VIX remain some distance from a Sell level, and ST/INT indicators remain moderately positive.  In conclusion, only a weak rally is expected, possibly to SPX 4550-600 or even a rounded top over the next few months.  It's very possible that weaker inflation may provide further impetus for more gains, but when the cause is recognized as an economic slow down or recession in 2022. a bear market will start.

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.

The Composite bearish sentiment continued to fall last week, largely due to the SPX ETFs, and is now approaching the levels seen at the Feb 2020 top - an INT/LT top is nearing.

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%.

The ST composite has now turned up, now matching levels seen at the May 2021 lows.

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.

This indicator remains moderately positive at levels seen after other ST pullbacks over the last year.

The EMAs remain little changed.

Bonds (TNX).  Bearish sentiment in bonds remains at low levels.

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.

Prices continued to fall last week reaching the lower range of the 240 to 260 support level.  As shown in the options OI update a 10% rally is possible ST, but LT I still think 140 or lower will be seen before a major bottom over the next two years.

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).

Like the INT/LT Composite the DM/SM indicator is following a very similar pattern to the Jan-Feb 2020 top.

And the sister options Hedge Spread bearish sentiment as a ST/INT indicator (outlook 1-3 mns) remains in a positive mode as hedging remains strong and likely contributed to the whipsaw behavior of last weeks pullback.

Taking a look at the ETF ratio of the INT term SPX INT (2X) ETFs (outlook 2 to 4 mns) as bearish sentiment, bearish sentiment hit a three year low in the prior week and likely contributed to the early week pullback.  Bearish levels remain at extremely low levels.

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 Aug 23. Also, this week includes a look at the GDX & TLT for Sept 17 exp.

With Fri close at SPX 4442, options OI for Mon is moderate with an overall high P/C.  Put support and call resistance are likely to keep prices between 4420 and 4460 with a positive bias.

Wed has somewhat smaller OI where SPX could make it to the 4475 level on a move over 4450, otherwise a range between 4425 to 4450 is expected.

For Fri strong call resistance at 4450 and over and low P/C will likely push SPX prices down to 4425 or lower.

For EOM very low current P/C and straddled puts and calls at SPX 4375 and 4400 and strong vall resistance around the 4450 level shows the potential of a retest of the recent lows, possibly to the 4350s.

Using the GDX as a gold miner proxy closing at 30.8, prices have pushed well into put support at 32 and 33 tat could mean a 10% rally is possible, but the extremely low overall P/C is very worrisome for the LT.

Currently the TLT is 150.5 with the TNX at 1.26%, but with call resistance near the current levels at 150 and moderate put support beginning just below current prices at 148 there is little indication of a sharp rise in rates or falling prices.

IV. Technical / Other

NA


Conclusions.  As mentioned last week the bears relying on "seasonality" to usher in a multi-month decline into Oct were likely to be disappointed as their views simply bolstered hedging activity, forcing a short-covering rally when the markets reached a ST bottom.  Sentiment is now showing ST/INT support for continued higher prices, while INT/LT indicators are showing that an important INT top is approaching, very possibly when the "seasonality" trade turns positive in Oct.

Weekly Trade Alert.  Next weeks outlook is uncertain with a probable range of SPX 4425-75 with a positive bias, athough Fri & EOM OI are currently showing excess bullishness that could result in a pullback to 4400 or lower.  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

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