The Season of the Witch

So far the "January indicator" is not looking favorable for the stock market. Last weeks outlook was looking for a pullback in the SPX from a possible high of 4820-30 (act 4819) to the 50 SMA area 4650-700 (act 4662), although I did not expect the rapidity of the decline. In last weeks conclusions, I noted that the biggest surprise for 2021 was the bond markets indifference to the rise in inflation, but last week seemed to break the spell with rates (TNX) rising from 1.5% to 1.8% with one of the sharpest rises in several years. All may not be lost since I have noted in the past that asset allocation from bonds to stocks is typically seen at the last stage of a bull market. One comparison is 1999, where stocks fell when rates rose sharply, then rallied as rates consolidated/retraced. One factor that seemed to change was the outlook for the Fed to move up timing for increases in the Fed funds rate.

There were many divergences in the markets last week with the brunt of the decline suffered by the NDX (down 7%), while the SPX fell 3.5% and the DJIA only fell 2% (bolstered by the banks and oil stocks, up 10%).

Overall, ST/INT sentiment seems to indicate a corrective bounce ahead somewhat similar to the 38% retracement from the first leg down in Sept, while INT/LT sentiment (esp ETFs) continues to indicate bear market possibilities.  Sentiment so far does seem to favor the SPX ending diagonal outlined last week.

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.

Due to high volatility this week shows EMA sentiment.  There was an extreme low seen in bearish sentiment in the INT/LT Composite indicator early in the week, this may be similar to that seen in Sept 2018 and Dec 2020 which preceeded INT tops by 1-3 months.

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%.

An extreme low in the ST Composite was also seen and compared to the last occurrence at this level in Oct 2020, this may not be extremely bearish for the ST.

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.

The ST/INT Composite saw a strong bounce in sentiment, see EMA for more.

The faster EMAs show that a near term bounce is likely and appears very similar to the first leg down of the Sept pullback which saw about a 38% retracement before the final leg down.

The CITI Inflation Surprise Index for Jan shows huge jump for the EU, while the US and CA show flat to down inflatio surprises.  It's possible that next weeks CPI/PPI (Wed/Thur) show some inflation relief that that temporarily halts the current rise in int rates.

Bonds (TNX).  Bearish sentiment in bonds saw a retreat last week as the bond bears got it right, loading up on shorts before the latest int rate rise.  I just noticed that the TNX Rate in title & chart refers to the 10 day SMA, not the close and will try to fix over the next couple of weeks.

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 declined as the HUI fell to the 240 support level, and remember that with LT sentiment still negative, I do expect a breakdown sooner or later.

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 other INT indicators above the recent extreme spike low may be a warning of an INT top over the next 1-3 months.

And the sister options Hedge Spread bearish sentiment as a ST/INT indicator (outlook 1-3 mns) bottomed out in the same area as the first down leg in Sept and now supports a corrective bounce. 

Taking a look at the ETF ratio of the INT term SPX INT (2X) ETFs (outlook 2 to 4 mns) as bearish sentiment, SPX ETF sentiment is rapidly approaching the indifference seen in the NDX ETFs over the last two months and last week showed the result of that.  One explanation is the asset allocation from bonds to stocks, but is likely to end badly.

The INT term NDX ST 3x ETFs (outlook 2 to 4 mns) bearish sentiment remains little changed which makes you wonder if a 7% decline in a week does not effect sentiment, what will it take to reach the next Buy signal.

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 Jan 14. After Jan exp, I expect to resume OI coverage for TLT and GDX.

With Fri close at SPX 4677, options OI for Mon is moderate with clear put support up to 4700 and the first level of call resistance at 4735.  Strong put support at 4615 does not rule out a washout before a reversal.

Wed has somewhat weaker OI where SPX shows strong put support at 4560 and strong call resistance at 4800.  Moderate put support could push prices up to the 4725-50 area.

For Fri strong put support is mainly between 4450-4525 which inflates the overall P/C, but weak support over 4700 may lead to weakness back to 4700 if there is an early week rally.

IV. Technical / Other - N/A

Conclusions.  I usually get a couple of questions every year about my long-term outlook, but I stopped that several years ago because I found it counter productive (source of bias).  However, you can see below I was expecting the DJIA to top in the 36-38k area, this year I noticed that Trader Joe published a year-end review where he was looking for a Super Cycle III top which is about what I am expecting with a SC IV being a flat somewhat like the 1970's, then finally a crack-up boom (inflationary cycle) for SC V when gold will shine.

Weekly Trade Alert.  A retracement from the lows is likely to start next week that could reach the SPX 4725-50 level, but a retest of the lows is likely by late Jan.   CPI.PPI could show some relief, helping both bonds and stocks.  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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