Summer Doldrums May Lie Ahead

Last weeks outlook proved very useful thru Thur, especially Mon as early weakness was expected to turn positive by the close and an initial selloff to SPX 3750 recovered to up 5, or 3830 by the close.  Also both int rates (TNX) and gold stocks (HUI) started out weak with TNX bottoming at the exact 38% retrace level of 2.75% before reversing sharply to 3.1% by Fri, recovering half of the last three week pullback in three days, while the HUI started the week with an 8% selloff before recovering somewhat later.  The big reversal in rates was due to the Services ISM data which remained positive (no recession), while last weeks Manufacturing ISM data was likely negative due to a strong US$ (up 10% this year) which made exports (50% of sales) more expensive.

The stock market responded positively to the better economic outlook, resulting in a move to SPX 3900 by Thur close, but Fri strong jobs numbers increased the prospects of a hawkish Fed and prices only reached 3920 before a pullback, lower that the 3950+ target.  Next week is likely to continue higher but may fall short of the previous SPX 4050-4100 level to only 4000-50 due to higher rates.

Over the past few months, I have discussed the unusual bearish sentiment that has been shown between the extreme bearishness of the SPX 2X and NDX 3X ETFs and the put-call measures which show the opposite sentiment, especially for the SPX.  Two weeks ago I decided to replace the SPX 2X ETFs with 3X ETFs, but after further consideration a hybrid option/ETF for the SPX (similar to the DM/SM indicator) was chosen as a better alternative and is shown in the DM/SM section.  Historical comparisons back as far as I could go are shown in the Tech/Other section and only one other example of current extreme differences between SPX ETFs and options was found (2012).  Further adjustments to other composites will be made over the next couple of weeks to reflect the changes.

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 UVXY $ volume.

Alt. In this case the SPX 2X ETF INT ratio (SDS/SSO) is replaced by thr 3X ETF INT ratio (SPXU/UPRO).
Update.  Sentiment remains in mildly positive territory.

The ST Composite as a ST (1-4 week) indicator includes the NYSE volume ratio indicator (NYDNV/NYUPV & NYDNV/NYDEC) and the UVXY $ Vol/SPX Trend. Weights are 80%/20%.

Update.  Last week saw a continued drop in sentiment, now back to neutral that may limit upside.

Update EMA.  Very ST, some weakness may be seen to start the week, although LT EMA (blu) indicates higher prices are likely before a Sell is generated.

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 EMA.  ST/INT sentiment has fallen below neutral, indicating that a ST/INT top is near (June 15 +/-  Bradley turn).

Bonds (TNX).  Bearish sentiment in bonds has whipsawed with rates indicating that a breakout above the 3.5% high is not expected at this time, but may be tested.  FOMC July 26-27.

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.  Looking at the raw data, ETF sentiment is back to neutral. but higher rates make the composite muidly negative.

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.  DM/SM has weakened sharply and may indicate that a sizable drop is nearing.

With the sister options Hedge Spread bearish sentiment as a ST/INT indicator (outlook 1-3 mns) has now fallen back to neutral.

This week I am switching to hybrid 2X ETFs plus SPX options. Taking a look at the ETF ratio of the INT term composite (outlook 2 to 4 mns) as bearish sentiment, remains mildly positive, but the striking difference between ETF and options is puzzling.  (Hedged but playing ST dips?)

Update EMA.  This composite has done a better job of capturing sentiment at INT highs and lows than the SPX 3X ETFs.

The INT term NDX ST 3x ETFs + TNX (outlook 2 to 4 mns) bearish sentiment using the faster EMAs also still shows a strong Buy.

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 15. A text overlay is used for extreme OI to improve readability, P/C is not changed. A new addition is added for OI $ amounts with breakeven pts (BE) where call & put $ amounts cross.

With Fri close at SPX 3899, options OI for Mon is very small, but low P/Cs and BE may indicate some pullback is likely.

Wed has much smaller OI where SPX is more likely to be influenced by Fri AM optn exp Oi which is net positive.

For optn exp Fri AM strong OI with strong put support up to SPX 4000+, and strong P/Cs and BE indicate a late week rally to 4000-50.

For Fri PM moderate put support, but sizeable call resistance between SPX 3900-4000 could push closing prices down to 4000 or lower by the close.

IV. Technical / Other

Looking at the historical bearish sentiment of the SPX 2X ETFs and the put-call measures show only one extreme divergence in late 2012 which turned out to be positive for the SPX, but was also at the beginning of a long period of easy money unlike today.

A closer look at the 2015 period was made for performance purposes.  No discernable patterns in divergences between put-calls and ETFs are seen.

The close correlation between gold and the inverse TNX rate was the main reason why the HUI gold stock ETF indicator was combined with the inverse TNX rate.  For most of 2016 thru early 2020, gold moved inversely with rates.  For 2016-18 this meant a range of 1200-1400 for gold, but a strong breakout occurred with the pandemic late 2019.  As TNX rate inverse has now declined back to 2018 levels gold has not followed yet, but a possible drop to about 1400 or the previous breakout level is likely.  This could mean a drop in the HUI to the low 100s.

Conclusions. US economic growth outlook seems to be all over the place as manufacturing data and consumer spending seem to be indicating a slow down while last weeks service sector data and employment showed that the economy is still strong.  It is important to realize that services make up about 75% of the US economy with the rest about equally divided between government and manufacturing.  The strong dollar has hurt manufacturing by raising export prices, but helps consumers by lowering import prices.  Compared to 2021 where $3T was added to the US economy by the $2T Biden stimulus package and the third Covid-relief check, 2022 has no stimulus so a large decline in spending and some reduction in GDP (about $30T) is to be expected and only indicates a return to normal.

Unfortunately this is not good for the markets because it means that the Fed rate hikes are having little effect, although the general outlook is that there is about a 6 month delay before economic effects are seen, which is why many times the Fed will pause after a series of initial rate hikes.  I still expect to see this pause by the end of the summer with a melt up in stocks before the election, probably after some reduction in inflation is seen.  The recent drops in gold and oil as well as lumber and copper may be an early indication.

Weekly Trade Alert.  After layoff announcements by Netflix and Tesla, I was surprised by the strength in the jobs data and the subsequent rise in rates (TNX) has tempered my upside projections near term.  Now looking for SPX 4000-50 possibly by early Fri.  Some weakness is expected early Mon and late Fri.  Updates @mrktsignals.

Investment Diary,  Indicator Primer, Tech/Other Refs,
 update 2021.07.xx  Data Mining Indicators - Update, Summer 2021,
 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

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