Sentiment Signals for Market Investmentsby Arthur Knopf, Financial Economist and Contrarian: October 2021

Saturday, October 30, 2021

Bulls Get the Treats This Year

Still settling in and multiple distractions keep demanding my attention. After using my laptop the last two weeks from a hotel room, this weekend I am converting back to my desktop in a new house. As a result the weekend post will be short with no options OI update.

After calling for a move in the SPX to 4650 in my mid-Oct Twitter update while many were calling for a move to 4000 or lower, every thing has gone the bulls way. The biggest surprise was the "no holds barred" outcome of the rally which has all the markers of short-covering as all early day declines seem to be quickly reversed even on bad news. With economic indicators already showing a slowing economy, a combination of supply chain issues, covid variants, and an increasingly unsupportive Fed could result in a visit by the Grinch for Xmas this year.

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 INT/LT Composite sentiment indicator continues to bounce off extreme lows (Sell) with the duration and extremes greater than the Sept-Oct 2018 top, indicating a more serious correction ahead.

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%.

ST Composite sentiment reached a Sell level the prior week as seen in Apr and early Sept with Apr's Sell almost a month before the pullback. Will supply chain problems disrupt Holiday shopping?

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.

Sentiment and conclusions are very similar that for the ST indicator.

ST sentiment is at the extreme level.

Bonds (TNX). Bearish sentiment in bonds has bounced significantly, now at the Spring highs and could means rates are about to pull back. (Due to economic weakness?)

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.

Gild miners sentiment remains near neutral as increased ETF bearish sentiment is offset by int rate pressure with the resulting outlook as more sideways action.

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).

Sentiment continues to hover near the lows.

And the sister options Hedge Spread bearish sentiment as a ST/INT indicator (outlook 1-3 mns) has declined sharply, but the LT (blue EMA) remains near neutral with the potential for several more weeks of upside/consolidation..

Taking a look at the ETF ratio of the INT term SPX INT (2X) ETFs (outlook 2 to 4 mns) as bearish sentiment, it shows very little support for any more than ST gains.

The INT term NDX ST 3x ETFs (outlook 2 to 4 mns) bearish sentiment is now nearing the levels at the Sept top.

IV. Technical / Other

This week I wanted to take a brief look at the Combined Put-Call Revised indicator (Equity + ETF + SPX), this indicator also remains at extreme levels.

Conclusions. Very little has changed in my INT outlook and with most sentiment meassures at or near low extremes, except hedging, the stock markets seem to be living on borrowed time.

Weekly Trade Alert. .Sorry, not much to say this week says the trickster. 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

© 2021 SentimentSignals.blogspot.com

Saturday, October 23, 2021

End of the Beginning, or Beginning of the End?

The recent run up to new SPX highs was somewhat stronger than anticipated with no pullbacks, but what does it mean? Over the past year I have made several references to the May 2015 ATH and the Sept-Oct ATH as important references. The Sept 2018 period was used to show that an important top was not likely at the Sept highs because of the high SKEW relative to the VIX term structure (1/3 mn ratio, see Tech Other for update), and as it turns out the recent run up following the 1 month correction from the Sept high was almost identical to the run up from the May 2015 ATH pullback as shown below. There we had a six week pullback of about 5% retraced in about a week and a half. The main difference is that the recent run up made ATHs, which IMHO is actually more bearish INT/LT because the result was even stronger capitulation of the bears. One prominent EW analyst, who had been calling for a Super cycle V top targeting SPX 1000ish, was forced to switch his outlook to an extended 5th wave blow off due to the new high. From a contrarian perspective this is even more bearish because less short covering is likely to support declines.

Most of the mildly supportive bearish sentiment discussed in last weeks outlook has now been fully reversed as shown in the sentiment indicators below, but if the May 2015 analog holds true, a 4-6 week consolidation period is likely before the start of an even sharper decline than in Sept. One interesting trend I have been watching for several weeks that supports more upside for some of the indices is the Dow transports ($TRAN or DJTA). With the DJIA making new highs, a confirming high by the DJTA (+2-3%) would give a Dow Theory buy signal and may turn out to be the ultimate bull trap for the neophyte bulls (BTFD Gen-X and Y who buy all dips). A final warning was also issued last week with the DJIA high when the dividend yield dropped to 1.58%, now below the TNX at 1.65%; this was one of the warnings seen at the summer 1987 top.

The brief blip up in bearish sentiment fully reversed last week.

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%.

A brief touch of the Sell level was seen at the Wed high, but has rebounded slightly since.

Strong FOMO and moderate reduction in hedging has brought this sentiment measure to a warning level.

With the EMAs, a sharp decline into mid-week started to reverse by the EOW.

Bonds (TNX). Bearish sentiment in bonds has creeped slightly higher following rates up, but remains below levels of recent reversals in rates.

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.

Bearish sentiment remains mildly bearish with a continued trading range most likely.

Lows in bearish sentiment were seen about two months before the Oct 2018 top and three months before the Feb 2020 top and appear to have bottomed at the recent Sept top, indicating that an INT top may be 1-2 months way.

And the sister options Hedge Spread bearish sentiment as a ST/INT indicator (outlook 1-3 mns) dclined sharply last week, indicating a ST loss of momentum as likely, but not yet at the Sell level.

Taking a look at the ETF ratio of the INT term SPX INT (2X) ETFs (outlook 2 to 4 mns) as bearish sentiment, most of the bearish sentiment has reversed from the Sept decline.

The INT term NDX ST 3x ETFs (outlook 2 to 4 mns) bearish sentiment has reversed even more sharply, even though the NDX did not make new highs last week and may indicate underperformance ahead relative to the DJIA.

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.

With Fri close at SPX 4545, options OI for Mon is small with modest P/C support. Prices could drop to 4515, but weak delta hedging may support prices.

Wed has similar OI where SPX could find support around 4500 and P/C support is relatively strong.

For Fri EOM shows large OI with weak P/C support and currently shows the best opportunity for a drop below SPX 4500.

IV. Technical / Other

This week I will take a look at the VIX Buy & Sell component spread, VIX (1/3mn) - SKEW. Periods where the sentiment for the SKEW (grn) lower than the VIX (1/3mn, red) as Aug-Sept 2018 were typically bullish until the spread (blue) dropped to/below 0 (current, -.75 SD).

Conclusions. The rally since early Oct has certainly caught many bears, but it may be premature for the bulls to start celebrating. Given the extremes in low bearish sentiment, more negative surprises are likely before the end of the year with possible sources being continued financial problems in China and the Fed's increased commitment to reverse its QE bond purchases. One potential positive influence ST is Wall Streets apparent goal of generating a Dow Theory buy signal with a high in the DJTA. Watch for a trading range for the next 4-6 weeks before a potential start of a 15-18% decline into Q1 of 2022.

Weekly Trade Alert. It's too difficult to tell if any consolidation maybe positive or negatively biased, or possibly both with weakness in the NDX and strength in cyclicals (DJIA/DJTA). 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

© 2021 SentimentSignals.blogspot.com

Saturday, October 16, 2021

Pretty Much as Expected

<title>Pretty Much as Expected Pretty Much as Expected

The sale of my house went well but was hectic as expected taking up much of my time the last few weeks which included finding a new home in a somewhat more rustic area at less than half the price. My outlook early Sept in my last post with the SPX at ATHs near 4540 was for a correction of 3-5% into late Sept - early Oct, and the bottom was the first week in Oct at -6%.

Surprisingly, the increase in bearish sentiment was fairly mild, especially in the options FOMO indicators and the SPX ETFs. For this reason, I see little support for some of the aggressive bullish targets of some in the SPX 4900+ range, but we may see limited ATHs of 4650 by the EOY. One of the reasons that I expected limited downside in Sept-Oct was the VIX Buy&Sell components (see Tech/Other), but recent changes indicte the next correction may be larger (10%+).

ST/INT indicators are showing that the current rally is running out of gas, and that a 50-60% retracement of the recent move from SPX 4270 (4350-80) is likely over the next two-three weeks. The trend since May had been a late-early month rally followed by an options exp week pullback which is usually accumulation (bullish INT), while the current trend maybe reversing with rallies into opt exp (distribution, bearish INT).

This composite is showing very little increase in bearish sentiment with the recent SPX decline with a setup similar to 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%.

This component gave a strong Sell at the early Sept top, and a Buy somewhat early in the mid-Sept decline, and is now nearing another Sell.

This indicator also gave at strong Sell at the early Sept top and has since only shown a weak increase in bearish sentiment. Of note is the new low for the SPX FOMO component.

The EMA version shows that weakness is is expected ST.

Bonds (TNX). Bearish sentiment in bonds has shown little change and is neutral at best.

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 HUI briefly broke thru the 240 support level, but has since rallied to upper support. A more significant decline is likely to coincide with expected weakness in SPX starting early 2022.

Only small increase in bearish sentiment on the recent pullback is a warning of more significant trouble ahead.

And the sister options Hedge Spread bearish sentiment as a ST/INT indicator (outlook 1-3 mns) is showing that hedgingnis the major form of support for the market ST/INT. There is a good chance that hedging will pullback sharply when favorable seasonality is in full swiing, setting up the potentil for a sharp pullback to follow similar to late 2015.

Taking a look at the ETF ratio of the INT term SPX INT (2X) ETFs (outlook 2 to 4 mns) as bearish sentiment, much weaker bearish sentiment is present now than before the Feb 2020 top.

The INT term NDX ST 3x ETFs (outlook 2 to 4 mns) bearish sentiment has increased more strongly than the SPX and may explain the current strength in prices with the rise in int rates.

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 Oct 22 Also, this week includes a look at the GDX and TLT for Nov exp.

With Fri close at SPX 4470, options OI for Mon is small, but low P/C over 4400 indicates that a positive open could reverse by the close.

Wed has somewhat smaller OI where SPX call resistance is stronger over 4400, indicating a decline to that area is possible.

For Fri stronger put support up to 4400 should contain or reverse early week weakness.

Using the GDX as a gold miner proxy closing at 32.5, put support at 32 and call resistance at 33 may limit movement.

Currently the TLT is 145 with the TNX at 1.58%, high P/C and no call resistance until 148 could mean some weakness in int rates and higher TLT prices.

IV. Technical / Other

During the Aug-early Sept on of the longer term sentiment measures whih did not seem to line up with the outlook of many for a 10%+ decline in the SPX was the VIX Buy&Sell component difference (SKEW and VIX term structure), but the recent trends have now reversed and now show increasing risk.

Another LT indicator, the NYSE ADV/DEC volume has not yet shown the MA drops below 1.5 seen prior to the declines since 2018, but may be following the 2007-08 pattern with a delayed dropoff.

Conclusions. .

Weekly Trade Alert. . 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

© 2021 SentimentSignals.blogspot.com