Wearing Down the Bears

Last weeks outlook was for a mildly positive bias due to increased put buying and hedging although ST Composite was mildly negative.  Wed CPI was viewed as mildly positive as the overall number was unchanged at 5.0% and CPE fell to 4.5%, both annualized.  The result was a modest rally of about SPX 31 pts for the week.  The last three monthly optn exp (May-Jul) were the start of a modest pullback of 2-3% and this month looks likely to follow the same pattern.

The ST Composite is still slightly below neutral but it did not prevent the continuation of several rallies in stair-step fashion as discussed below.  Two of the INT/LT indicators (Composite and DM/SM) are showing similar patterns seen leading to the Feb 2020 top and could mean an INT top is only a few weeks ahead.  One INT indicator (VIX Buy & Sell) discussed in Tech/Other still shows that a lower Skew is likely before a top.

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 has rebounded the last several weeks since the July pullback and has now turned down similar to the move into the Feb 2020 top.

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 remains below neutral, but as seen Jul-Aug and Nov 2020 markets can still rally in a stair-step fashion.

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.

With FOMO indicators at neutral, relatively strong hedging (below) is keeping this indicator in a modestly positive mode.

The ST EMAs indicate this pattern more clearly.

Bonds (TNX).  Bearish sentiment in bonds remains very weak as last weeks indications of a leveling off of inflation at the 5% annual rate and weak consumer confidence made bonds more attractive.

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.

Another successful retest of the 240-260 support level as the HUI retested the low of 250 last seen in March prior to the recent pickup in inflation, although ETF bearish sentiment remains at very low levels.

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).

Similar to the INT Composite, the hybrid DM/SM indicator showed a strong move downward last week similar to the move into the Feb 2020 top, indicating that an important INT top may be only weeks away.

And the sister options Hedge Spread bearish sentiment as a ST/INT indicator (outlook 1-3 mns) reached a weak Buy level mid-week similar to that seen at the late July lows as soaring put buying will likely support a final move into an important top.

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 20 monthly option exp.

With Fri close at SPX 4468, options OI for Mon is modest with surprisingly low P/C and a break below the 4460 call delta support level could fall as low as 4425.

Wed has somewhat smaller OI where SPX P/C increases to 164% and no call resistance until 4475 suggests that early week weakness will be quickly reversed..

For Fri low P/C and straddled positions below 4475 indicate a possible repeat of the last three monthly opt exp which started pullbacks in mid-May, Jun and July.  A pattern of alternation with June suggests a possible 2%+ pullback to the early Aug low around 4370 in late Aug.

IV. Technical / Other

This week I wanted to take a brief look at the VIX Buy&Sell components (SKEW and VXV/VIX). The last time I looked at these components was June 12 and the conclusion was the markets were similar to Aug 2018 and that an INT top was not likely until the component dif function had dropped to 0.0, ie, Skew and VIX/VXV sentiment were equal.  Below you can see that Skew has fallen (sentiment up) and VIX/VXV has risen (down), but a significant gap still remains.

Looking at the dif func compared to Aug 2018 and Jan 2021, the low Skew did not result in a correction until the dif func dropped to 0.0.

Conclusions.  The market's sole function at this point seems to be that of wearing down the bears. Current sentiment reminds me a lot of Aug-Sept 2018 when the call for a pullback into Oct due to negative "seasonality" kept the markets afloat into Oct when the call became one of positive "seasonality" and we all saw the result during Oct-Dec. This setup is looking very similar.

Weekly Trade Alert.  The last three monthly optn exp started a modest pullback and sentiment seems to support that outlook. SPX options OI indicates that a high mid-week around 4475-85 may be followed by a 2%+ pullback to about 4370 by EOM.  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
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