Sentiment Signals for Market Investmentsby Arthur Knopf, Financial Economist and Contrarian: February 2022

Saturday, February 26, 2022

Wartime Blues - Sell the Rumor, Buy the News

As the US/NATO and Russia squared off, neither side was willing to budge, and Russia decided to call the other side's bluff and now the Ukrainians are paying the price. Somewhat interesting that the spring of 2008 was when Russia invaded Georgia, to the south, but it was quickly forgotten due to the financial crisis.

Obviously my "negotiation outlook" was off the mark, but two weeks ago I (Call Me Skeptical) gave an "invasion target" of SPX 4100-200 (act 4115). My primary call for the week was there would be several daily swings of SPX 100 pts and by my count there were 6 in 4 days, highlighted by Thur 1st hour low of 4115 followed by a 180 pt rally. Longer term, since Jan I had been looking for a complex bottom. The Tech/Other Section takes a look as to how this may play out with comparison to 2018.

As mentioned in the Fri AM update (good for about SPX 50 pts), the ST Composite reached a Buy level at the Thur close, but the final volume data was not available until 30 min after the next days open. In the Tech/Other Section arguments are shown for a ST consolidation (SPX 4250-.400, +/-50), while the SPX 2x ETFs are compared to the Aug 2017 period before a 5 month melt up of 20%.

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.

Update. Bearish sentiment reached a strong Buy led by the SPX ETFs and Vol measures, while options (SPX and ETF) are lagging that may mean more choppiness ST.

Update EMA. Bearish sentiment is the strongest of the last 4 years after Mar 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%.

Update. A ST Buy was generated, but note this does not rule out choppiness as seen in Sept and Dec 2020.

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.

Update FOMO. The options components are lagging and may indicate choppiness ahead.

Update EMA. Strong hedging continues to keep the ST/INT composite on a strong Buy.

Bonds (TNX). Bearish sentiment in bonds continues to hover at the mid-2019 levels similar to where int rates paused at 2%. IHS pattern still in play but it may take a year or more for rates to reach 3%.

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.

Update. Range for HUI of 250-85 from Mar OI for GDX still holding, while sentiment continues to fall.

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).

Update. The sharp rise in bearish sentiment is being fueled by the SPX ETFs shown below.

And the sister options Hedge Spread bearish sentiment as a ST/INT indicator (outlook 1-3 mns) remains in the strong Buy area that should limit losses as positions are covered on declines..

Taking a look at the ETF ratio of the INT term SPX INT (2X) ETFs (outlook 2 to 4 mns) as bearish sentiment, I had to increase the SD range to show the extent of bearishness which is quite extreme. Tech/Other shows the results following a similar occurrence in Aug 2017. Sentiment reached a level slightly higher than Mar 2020.

The INT term NDX ST 3x ETFs (outlook 2 to 4 mns) bearish sentiment also exceeds that of Mar 2020 but is well below Dec 2018 price bottom

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 Mar 4.

With Fri close at SPX 4385, options EOM OI for Mon is large with strong put support near 4200 and moderate support up to 4350. Call resistance starts at 4400.

Wed has very small OI where SPX puts & calls show a lot of overlap between 4250 and 4350 and could see some whipsaw between 4250 and 4325 if prices fall below 4350.

For Fri moderately strong OI could push prices could push prices back to the SPX 4350-4400 area where positions are mostly straddled. Over 4400 and 4450 is possible.

For EOQ strong put support is at 4500-25, while call resistance is building at 4550 and 4600.

IV. Technical / Other

This week I will look at several comparisons to 2018, first a retest of the spike lows spent a couple of weeks consolidating before beginning a rally that in 2022 could be into the FOMC (Mar 15-16) or EOM before a second retest. From the Apr lows it took 5-6 mns to the Sept-Oct highs.

The second chart looks at the SPX 2x ETF sentiment indicator from 2017-18. Here, we see that the SPX 2x bearish sentiment for the Aug 2017 decline at the start of Trumps trade war/sanctions with China lead to a strong BTFD oppty for a 20% rise into Jan 2018. Its really surprising that after that fakeout, the bears missed out on all other opptys in 2018. Are we seeing a similar setup for 2022-23?

One possible reason for the 2022 huge spike in SPX ETF bearish sentiment is shown below from a recent Grantham GMO reprinted in ZH. In fact, I mentioned this as my LT outlook for SC4, but this does not mean that there won't be ST/INT pain from taking a LT short position in SDS. As they say "timing is everything".

Conclusions. All in all, last week went pretty much as expected with the exception of the invasion of Ukraine Wed nite. I was expecting some type of compromise or at least a 5 to 10 year hold on NATO expansion, but it seems to me that the military industrial complex insists on always having some bogeyman, whether be the Ayatollah in the 1970s and 80s, Sadamm in the 1990s and early 2000s, or bin Laden/ISIS until recently, to justify the $100s of billions spent on warfare every year. Now we have Putin.

Surprised at the SPX 2x ETF sentiment I looked at historical periods and found the same run up in bearish sentiment at the onset of Trumps trade wars with China. Ultimately the bears were proven right but not before suffering a large drawdown on short positions as the ST result was a 20% melt up into a final high. I doubt if many stayed around to celebrate. A comparable rally based on current sentiment would be 20-30% from recent lows or SPX 4900-5300, likely by the mid-term election.

Weekly Trade Alert. I seem to be wrong every time I say this, but the next week or two is likely to be range bound from SPX 4250-4400, +/-50. A rally is possible into opt FOMC/exp week to about 4500 with a decline to follow then a push over 4500 by EOM Mar. 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

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Saturday, February 19, 2022

A Possible Thaw before a Melt Up

Last week I gave no specific guidance other than a likely range of SPX 4350-4500 with Mon starting off with a decline to 4365 before a sharp turn around into Wed to 4485 then likely Russia/Ukraine concerns over the three day weekend took the SPX back down to a low Fri of 4327.before closing at 4349. We may be seeing a "weekly war cycle" that lasts a couple of more weeks where optimism over a peaceful resolution early in the week gives way to fear of holding a long position over the weekend.

INT/LT sentiment has continued to rise while ST indicators are not yet supportive of a rally. More downside/consolidation early next week may begin a ST turn around. Next week I will take a closer look at the 2018 analog where high bearish sentiment resulted in a new ATH (as a b-wave) before a sharper decline. We may see something similar in 2022.

Update. Here, the INT/LT Composite has continued to climb, resulting in the highest bearish sentiment since Mar 2020 and led by the SPX ETFs.

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%.

Update. The ST Composite moved up sharply from neutral but remains well short of a Buy signal.

Update ema. Looking at the LT from 2018, the recent move in sentiment above the 2021 levels may just be a return to normal before the "negative real int rates" since Mar 2020. Here, looking at the comparison to 2018 mentioned last week Feb 2018 saw an increase from -1 to 4SD (+5), while Oct 2018 went from -1 to 3.5 SD (+4.5) and Jan 2022 only went from -3 to +1SD (+4), so the 2022 decline so far has been milder sentiment wise.

Bonds (TNX). Bearish sentiment in bonds remains slightly elevated as int rates do seem to be consolidating near the 2% level as expected.

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.

Update. The HUI seems to have broken out from the 240-260+ price range while sentiment has retreated, but this may only be temporary depending on how the Russia/Ukraine situation works out.

Update. Starting a levels near those seen in Dec 2019, bearish sentiment is nearing that seen during the Mar 2020 crash.

And the sister options Hedge Spread bearish sentiment as a ST/INT indicator (outlook 1-3 mns) which started at lower levels than other major declines of 2018 and Mar 2020, but has advanced similar amounts to Feb and Oct 2018, but less than Dec 2018 or Mar 2020. So higher levels are expected as the (LT) decline progresses.

Taking a look at the ETF ratio of the INT term SPX INT (2X) ETFs (outlook 2 to 4 mns) as bearish sentiment, top to bottom has advanced about the same as Mar 2020.

The INT term NDX ST 3x ETFs (outlook 2 to 4 mns) bearish sentiment has increased by more than any decline since 2018 with the exception of Dec 2018.

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 Feb 25. Also, this week includes a look at the GDX and TLT for Mar exp.

With Fri close at SPX 4349, options OI for Tue is small, but shows relative strong put support at 4300, 4350 and 4400 and call resistance at 4450. Any early weakness is likely to be reversed by the close with possible targets of 4350, 4375 then 4400+

Wed (23rd) has somewhat smaller OI where SPX show put support at 4350 and call resistance at 4400, so a close between those two levels is likely.

For Fri (25th) strong SPX put support with larger OI is likely to push prices over 4400, possibly as high as 4425-50.

For Mar 18PM opt exp, OI is small, but currently indicates a possible move to the 4525-75 area. Note FOMC meeting 15-16.

For Mar 31 EOQ large OI and P/C show strong put support at SPX 4525 where the consensus are expecting lower prices, while the contrary play is that there will be a positive response to the expected Fed's rate hike (possibly only .25% vs expt .5%). No call resistance until 4700.

Using the GDX as a gold miner proxy closing at 34.5 (HUI 283), the gold miners P/C is very low and the expected range is GDX 30 (put support) to 35 (call resistance) and HUI 250 to 285.

Currently the TLT is 138 with the TNX at 1.93%, successful ST resolution to the Russia/Ujraine crisis could push TLT back to 143 (put support) or TNX 2.05% with call resistance at 145 or TNX 2.15%.

IV. Technical / Other - N/A

Conclusions. In the introduction, I mentioned a "weekly war cycle" with early strength (relief rally) followed by late week weakness, but the SPX options OI is showing that this is the consensus for options players, so the contrary play is to expect the opposite.

Weekly Trade Alert. Next week could go either way and possibly both. Weakness into Wed is likely to reverse by EOD Fri, while beginning strength may reverse into Wed then again reverse again into Fri with SPX 100 pt moves possible (roughly 4325-4425). 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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© 2022 SentimentSignals.blogspot.com

Saturday, February 12, 2022

Call Me Skeptical

Last weeks stock market unfolded much as expected with an early retest of the previous Fri lows at SPX 4450 (4465) before a rally to test the previous weeks highs at 4595 (4590) before resuming a more serious downturn to test the Jan lows. On Fri, I saw the potential for one more rally attempt as long as 4450 held (omitted from update), but the mid-day warning of an emminent Russian invasion of Ukraine triggered a jump in oil and bonds and sent the SPX to the low 4400s, but consider me skeptical.

Much of Russia's concerns regarding Ukraine trace back to the 1980's when the progressive Russian leader Gorbachev agreed to the re-unificarion of Germany if the US/NATO agreed to leave the countries surrounding Russia neutral, but he forgot to "get it in writing" and as a result NATO expanded eastward, thereby violating the agreement and threatening Russian security. The second area of contention is the oil/gas pipeline Nordstream 2 which a cheaper alternative to import oil/gas from Russia to Germany and this the US/NATO views as allowing Russia to increase political pressure over Europe. My view is pretty much summed up by a recent Project Syndicate article (free version). The recent hype about an imminent war seems more likely to be false info leaked by the Russians to the CIA to pressure the US, or false info leaked by Biden's admin to make him look like a hero saving the world from Commie aggression when a diplomatic solution is announced, thereby bolstering his low ratings. Interestingly, Merriman this week discusses an astral cycle which points to an important diplomatic break through soon.

It's becoming difficult to tell whether prices or sentiment are more volatile as several important indicators have moved from extreme low bearish levels to extreme high bearish levels since the beginning of the year which may lead to a stronger/longer rally than expected (aka 2018).

Update. Current INT/LT sentiment currently most closely resembles that of the Feb and Oct 2018 declines. The major difference was the Mar retest and subsequent ATH vs lower lows after the Nov lows.

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%.

Update. ST sentiment turned negative Thur but bounced back to neutral Fri.

Update. ST/INT sentiment remains largely positive and may limit losses.

Update ema. Sentiment is starting to look a lot like mid-2020, where a sharp decline and retest was followed by a move to ATHs over the next few months.

Bonds (TNX). Bearish sentiment in bonds remains near neutral as a LT uptrend in rates is likely to continue, but may pause near 2%.

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.

Update. HUI prices seem to be stuck in the 240-260+ area, while sentiment is largely unchanged. Tech/Other looks a possible positive influence from China's SSEC.

Update. Somewhat similar to the INT/LT Composite, where the current rise is about the same as Feb and Oct 2018, but here we see a stark difference with the sharp decline in bearish sentiment before the Dec 2018 meltdown vs the gradual decline after Feb and Dec 2018 before the rally to new ATHs.

And the sister options Hedge Spread bearish sentiment as a ST/INT indicator (outlook 1-3 mns) is looking the most bullish since May 2020.

Taking a look at the ETF ratio of the INT term SPX INT (2X) ETFs (outlook 2 to 4 mns) as bearish sentiment, very high sentiment comparable to Dec 2018, Mar and Sept 2020 lends credibility for some EWers calling for SPX 5000+.

I will admit after looking at this, I had to check some raw data (SMA) and you can see below the same info you see in Stockcharts for Price x Volume.

The INT term NDX ST 3x ETFs (outlook 2 to 4 mns) bearish sentiment has finally reached the Buy level that could support a rally to test the ATHs, but likely to lag performance from previous INT lows.

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 Feb 18.

With Fri close at SPX 4419, options OI for Mon is small, but has strong put support in the 4300 area and first call resistance at 4600. Below 4420, there is little support until 4350.

Wed has similar OI, where SPX has similar put support spread out from 4400 down to 4200 and some call resistance at 4600.

For Fri strong call resistance at 4500 is likely to keep prices below that level, while moderate support extends from 4400 down. If the strangle at 4450 is exceeded, a move to 4470-500 is possible.

IV. Technical / Other

This week I wanted to take a brief look at the relationship between Chinas SSEC and gold. I had mentioned the strong correlation several times and tried to add it to the data mining DB, but differences in holidays made matching dates too difficult. China has been cutting rates and this has helped both stocks and gold.

Conclusions. The recent rise in bearish sentiment for many of the INT indicators (mainly hedge spread and SPX ETFs) has forced me to raise my lower target price range to 4300-4400 with 4350 most likely unless Russia invades Ukraine then it becomes 4100-4200. There is no immediate indication of a sharp turn next week although 4350-4500 is the most likely range. The most likely source of a sharp turn around is a diplomatic solution to Ukraine, and a quiet week will support that outcome.

Weekly Trade Alert. I think this is the first week this year where I have no trade alerts. Any bottom over the next two weeks will likely be significant for a swing trade. 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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© 2022 SentimentSignals.blogspot.com

Saturday, February 5, 2022

Which Way Wanda, Covid Edition

My bias last week was for a basing period before a stronger rally but the SPX options OI turned out to be prophetic indicating that an early breakout over SPX 4450 would continue to 4550 mid-week with the Wed high at 4595 (62% retrace at 4590). The large Fri SPX call positions at 4400 (10k) and 4500 (12k) also warned of a late week reversal and Thur-Fri saw a pullback to a low Fri AM to 4450 before a 4500 close.

The stronger SPX rally and sharp reversal at the 62% retracement of the Jan decline increases the potential of a more complex bottom over the month of Feb. One possibiliy is a series of double tops and bottoms (in EW b-waves). An example, is a retest of Fri lows at SPX 4450 beore a rally back to retest the weekly highs (SPX 4580-90) later in the week, then a decline into mid-late Feb to SPX 4200-300. This weeks SPX options OI seems to support this outlook ST. The strong bearish sentiment, especially Hedge Spread (ST/INT) and SPX ETFs (INT/LT) indicates that declines are likely to be short lived.

There is also a major Bradley turn date late Mar that could be the next significant high. For the last couple of years the EU has been leading the US in covid development by 4-6 weeks and have recently seen a number of countries lifting all restrictions and the US may follow, creating some stock market euphoria. As an outlook of what may follow, M.Hulbert compared the Spanish flu pandemic of 1918 to covid 2020, interestingly US stock markets (DJIA) rallied strongly for the first two years of the Spanish flu then declined by 50% the next two years as the Spanish flu receded. But, next the roaring twenties.

Update. Bearish sentiment continues to rise, especially SPX ETFs, increasing the probability of an eventual retest of the ATHs.

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%.

Update. ST sentiment fell sharply, but remains positive. A similar pattern to Dec 2021 could mean a retest of the Jan lows on a spike below neutral.

Update. Bearish sentiment remains very strong from the Hedge Spread and SPX ETFs.

Update. The last time sentiment was this strong was July 2020, which was followed by a two month rally to new highs.

Bonds (TNX). Bearish sentiment in bonds had just moved to neutral before last Fri jump in rates. May pause around 2.0% for a couple of months but everything seems to following IHS.

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.

Update. HUI prices seem to be stalling in the low 240s while sentiment weakens.

Update. Sentiment rose sharply, with ST (grn) moving into Buy region, nearing the levels seen in Oct 2018.

And the sister options Hedge Spread bearish sentiment as a ST/INT indicator (outlook 1-3 mns) extreme Buy levels are strong indications for using BTFD.

Taking a look at the ETF ratio of the INT term SPX INT (2X) ETFs (outlook 2 to 4 mns) as bearish sentiment, current ST EMAs (grn) at +4.5SD are rare and were seen in Dec 2018 and Sept 2020. Mar 2020 obviously continued higher while Sept 2020 was followed by a low retest a month later.

The INT term NDX ST 3x ETFs (outlook 2 to 4 mns) bearish sentiment continues to lag the SPX and previous corrections, so relative weakness is to be expected.

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 July 16. Also, this week includes a look at the GDX for Dec exp.

With Fri close at SPX 4501, options OI for Mon is very small with large call OI at 4800. SPX moderate put support is 4450 and call resistance is 4600. A decline to 4450 should reverse toward 4500 by the close.

Wed has slightly larger OI with very little call resistance where SPX may be affected by CPI release, and a positive response could go to 4570 with put support up to 4550.

For Fri, moderate OI with strong call resistance at/over SPX 4600 makes a breakout over last weeks high unlikely, and little put support until 4500 could indicate a repeat of last weeks fade.

For opt exp Fri PM moderate OI and a large call OI at 4500 indicates that a close at/below 4500 is likely.

Conclusions. All indications are that the covid pandemic of the last two years is coming to an end and will result in fully opened economy. This obviously good for main street, but will it be good for Wall Street? The world governments approached the pandemic with both shock and awe by Fed and Congress that rivalled the US invasion of Iraq in 2003, and how did that turn out? The Fed is being forced to face its largess by decades high inflation inflation rates and as a result must raise interest rates. Congress has been slow to address the record deficits per capita in real terms, and rising interest rates could push them toward the 1960s result of the combined war efforts in WW2 and Korea that resulted in 90% maximum income tax rates. If the results of the Spanish flu are any guideline, we may face a very tough couple of years, then it becomes "inflate or die".

Weekly Trade Alert. Any weakness early in the week (SPX 4450 poss) should be bought with a potential mid-week retest of last weeks high (4570-90) before a late week fade (4500 possible). 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

© 2022 SentimentSignals.blogspot.com