Supply-Chain Issues, No Fireworks for the Markets

Last weeks outlook was mostly a bust as a move up to SPX 4100 was expected before a pullback to 3800.  The Fedphoria faded fast as the early move up to SPX 3950 then quickly reversed as continued weak economic data stoked recession fears, and the SPX fell back to 3740 Wed before bouncing back to 3825 by the EOW.  The net result was a reversal back to my previous outlook for a rounded bottom and as discussed in the conclusion section this would likely target only the SPX 4100 area by the expected ST top on July 15 +/-.

An interesting article came out last week where the large EOQ SPX put positions were identified as hedges by a JP Morgan Hedged Equity Fund (JHEQX, currently about $13B NAV).

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.

Update 3X ETFs. In this case the SPX 2X ETF INT ratio (SDS/SSO) is replaced by thr 3X ETF INT ratio (SPXU/UPRO).  I am showing the component view to point out the extreme low for the SPX options spread similar to early 2020, although the ETF spread is usually a sign of greater danger as in Dec 2018 and Jan 2022.

Update EMAs.  Here the peak in sentiment was similar to the May SPX lows that saw a ST rally of 350 pts.

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.  Volume components remain strong providing support for prices, while low UVXY warns of continued volatility.

Update ST EMAs.  Here, a brief dip in sentiment has now reversed and should support a rally this week.

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 (base data 2018-22).  Bearish sentiment is now approaching neutral for the ST/INT outlook.

Bonds (TNX).  Bearish sentiment in bonds fell sharply last week as weak economic data caused strong bond buying.  The rally in TNX rates so far seems to follow the EW "impulse" category with the 8/2020-3/2021 rally of 1.25% followed by a 38% retrace before the "c" or crash wave of 2.25% and a 38% retrace would target 2.7-2.8%.  A final 5th wave equal wave 1 then targets 4%, possibly late 2022 or early 2023 and may coincide with an INT low in SPX.

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.  A break in the HUI below the previous low at 230 could result in a waterfall if it continues to fall, and sentiment is showing little support as it has fallen from the last HUI peak at 280.

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 DM/SM bearish sentiment has weakened over the last two weeks and may be pointing to a more serious decline than expected after mid-July.

With the sister options Hedge Spread bearish sentiment as a ST/INT indicator (outlook 1-3 mns), remains moderately strong.

This week switching to 3X ETFs. Taking a look at the ETF ratio of the INT term SPX INT (3X) ETFs (outlook 2 to 4 mns), bearish sentiment remains at the Buy level.

Using the TNX plus ETF sentiment shown for the HUI as the NDX sentiment with the interest rate effect.  The INT term NDX ST 3x ETFs + TNX (outlook 2 to 4 mns) bearish sentiment using the faster EMAs also shows a decline, but still very strong level.

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 8. 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 plus $ volume.

With Fri close at SPX 3825, options OI for Tue is small with a high P/C, but most of the puts are far OTM.  Near TM calls 3800-25 may limit upside with first resistance at 3850.  Initial weakness is expected but a positive close is possible.

Wed has small OI where SPX has put support at 3800 and call resistance at 3875.  A move to 3875 is possible.

For Fri strong put support up to SPX 3925 is likely to push prices higher and a move over 3950 could reach 3975+, then reverse to close near 3950..

For optn exp Fri overlap of puts and calls between 3900 and 4100 make finding a specific target difficult, but a range of 4000-4100 seems likely with a late fade possible.

IV. Technical / Other - N/A


Conclusions.  ST bearish sentiment remains fairly high, and in retrospect, weakness into an end to the weakest 1st half for equities and bonds in over 150 years should be expected.  Some strength is still expected into mid-July, but probably no higher than SPX 4100.  Earnings season starts mid-July and will be the next big hurdle for the markets.  With employment still high, EPS may not be that bad, but forward guidance will be watched closely.  Currently, I don't expect significant new lows, but a retest of SPX 3640 or even 3500 is possible.

Weekly Trade Alert.  Options OI for SPX indicate a slow start to the week, but by Fri we could a meet or beat the recent highs at 3950.  SPX 4050-4100 is possible the week of July 15th.  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

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