The Omega Market

The week started much as expected with some initial upside followed by a pullback to SPX 4375 before a move up to retest the ATHs at 4430-40 although the latter followed a more complex path than expected. With the SPX 4440 seen as a potential top by many EW analysts a pickup in put buying and hedging has increased support and reduced the risk of a sharp immediate selloff.

Many of the ST/INT sentiment indicators remain near neutral while the INT/LT indicators are showing resemblance to both the periods preceding the Sept-Oct 2018 and Feb 2020 tops. Wouldn't it be interesting if Sept-Oct 2021 was an INT top similar to 2018?

Spending way too much time with home buying, selling!

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.

Bearish sentiment continued to climb for the week even as the SPX made new ATHs, now reaching the levels seen before the final rally to an INT high Feb 2020.

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%.

Sentiment fell to just below neutral at the end of week after a sharp decline at the start of the week which reversed as the SPX fell to 4375 Wed AM and bounced strongly.

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.

Bearish sentiment was weak to start the week but rebounded to end above neutral

Sentiment is "nesting" near neutral resembling that seen in Mar 2021 which was followed by a six week rally.

CITI Surprise Inflation Index for July continued to show a sharp uptick and a strong CPI could put upward pressure on int rates.  Last week saw a double bottom in TNX at 1.13% and a close near 1.3%.

Bonds (TNX).  Bearish sentiment in bonds has declined close to the Sell level with the TNX chart now appearing as a slanted IHS with a two year projection of about 2.5%.

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.

The surprisingly strong jobs report lead to a rally in the US$ and a 2% pullback in gold with the PM stocks also correcting back to the top of the HUI 240-60 INT support zone.

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).

DM/SM indicator could follow the path of Sept-Oct 2018 and consolidate for a few weeks or see a retest of the sentiment lows with a blow off rally similar to Feb 2020.

And the sister options Hedge Spread bearish sentiment as a ST/INT indicator (outlook 1-3 mns) continues to be mildly supportive of higher prices with an uptick in hedging. 

Taking a look at the ETF ratio of the INT term SPX INT (2X) ETFs (outlook 2 to 4 mns) as bearish sentiment, the extended period of extreme lows is showing a combined event risk of a Mar 2020 selloff with greater longevity than the Oct-Dec 2018 selloff.

The INT term NDX ST 3x ETFs (outlook 2 to 4 mns) bearish sentiment is now at its lowest extreme since the near 100% vertical climb the first 6 mns of the covid crisis.  As seen on Fri selloff with ATHs in other markets and the interest rate sensitivity discussed last week, the NDX may be facing trouble if int rates begin a longer term climb.

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 13.

With Fri close at SPX 4437, options OI for Mon is very small and could be some delta hedging support at 4425 with only small upside call resistance.

Wed has similar OI where SPX has clearer call resistance at 4450+ and downside is unclear.

For Fri larger OI shows strong call resistance at 4425 and 4450 and put support at 4400 and 4375.  With CPI out on Wed, the reaction of the bond market will be important, especially to NDX,

IV. Technical / Other

I have been waiting for some change in the VIX Buy&Sell components - SKEW and VXV/VIX, but so far nothing to report.

Conclusions.   No major changes with sentiment this week as ST indicators remain near neutral, while an uptick in hedging may support prices early in the week.

Weekly Trade Alert.  SPX options OI is showing some indication of a pullback toward 4400 at the EOW, but will likely depend on the CPI release Wed AM and the reaction of bonds and NDX.  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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