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

Saturday, August 27, 2022

Jerome Powell, Not to the Rescue

Fridays sharp decline was not unexpected as SPX options showed straong resistance levels at 4200 and 4100 and the open at 4200 quickly turned into a route as J.Powell's speech at Jackson Hole debunked the hype about a turnaround in Fed hiking policy any time soon. The result was almost a SPX 150 pt decline to 4058 from the early level of 4200, and the current weeks outlook is that an early decline to SPX 4000 is possible, but by EOW a rally above 4100 is likely.

The continued decline in bearish sentiment in bonds has me wondering if the weak economic outlook (negative GDP) may be drawing to a close and with the help of moderating oil prices, a combination of moderating inflation and modest pickup in growth may be the impetus for a final blowoff rally.

A look at the VIX call indicator in Tech/Other shows a reversal in the ST Sell..

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 Alt. In this case the wts for the SPX 2X ETF ratio (SDS/SSO) and SPX puts & calls spread are adj to equal as in the DM/SM section for SPX ETFs. Composite remains very low with an increase in volatility offsetting a slight decline in ETF sentiment.

Update Alt EMA. Very ST shows a moderate increase in sentiment, similar to last half of 2021.

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. Sentiment shows a moderate bounce but no Buy yet.

Update EMA. Still near -1.0, EMAs indicate more weakness likely to EOM.

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. Sentiment remains slightly negative near -0.5, so a sharp bounce is unlikely.

Bonds (TNX). Bearish sentiment in bonds has dropped sharply, indicating the potential for higher rates ahead.

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. Bearish ETF sentiment continues to rise amd should support prices at the current level.

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 spike to lower lows reversed strongly and I am still looking at mid 2018 and late 2020 as a sign of an INT top in several months.

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

For the SPX, I am switching to hybrid 2X ETFs plus SPX options. Taking a look at the INT term composite (outlook 2 to 4 mns) as bearish sentiment, options sentiment remains at low extremes while ETF is moderately positive.

For the NDX combining the hybird ETF options plus NDX 3X ETF sentiment with the interest rate effect, (outlook 2 to 4 mns) bearish sentiment shows similar extremes between ETF and options as in late 2020 which resulted in a choppy market until options sentiment rose. Note QQQ options are optimal, but are N/A and are included in ETF options.

Update. Not much change here.

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 Sept 2. 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 4058, options OI for Mon is small with strong put support at 4075. An early decline is possible toward SPX 4000 but should then reverse sharply to close over 4075.

Wed EOM has somewhat larger OI where SPX has net call resistance at 4100 and prices are likely to remain between 4050-4100.

For Fri NFP jobs data may remain strong and with little call resistance below 4200 and moderate put support up to 4150 could result in a strong rally.

IV. Technical / Other

Just a quick update on the VIX call indicator which warned of a pullback a couple of weeks ago. The indicator has moved up to +1.5 SD, but still short of a Buy. A bounce may be near.

Conclusions. Many EW analysts are looking for a collapse in the SPX to 3000 or lower by Oct similar to Trader Joe, but although a couple of LT indicators are pointing in that direction, overall sentiment does not seem to agree at this time. My preferred scenario is a LT bear market, similar to 2000-2002 but lasting 3-5 years, that may not end until int rates stop rising and the Fed has successfully reduced its balance sheet. Note, long weekend ahead for Labor Day.

Weekly Trade Alert. An early drop to SPX 4000 is possible early in the week, but a reversal back to the 4100-50 area is likely by the EOW. 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

Long term forecasts

© 2022 SentimentSignals.blogspot.com

Saturday, August 20, 2022

Late Summer Fade

After being surprised by the breakout to the upside following the minor decline in the CPI the previous week, last week the SPX moved in a more predictable pattern where a 50 to 100 pt pull back was expected. Following an early week push to SPX 4325, a low of 4220 was seen on Fri which worked out to be down 105 from the high and 60 pts from last week. Sentiment indicates that more downside may be expected thru the end of the month.

I have been puzzled about extreme readings for the SPX put-call spread for the past several weeks and a drill down is provided in the Tech/Other section. One of the biggest differences between the put/call ratios and put-call spread is that the spread is calculated to show the effects of option volume. As the chart shows INT bottoms tend to start with very low volume while tops occur at high volume, and volumes are now at record highs compared to the last five years. Combined with the DM/SM indicator (both can be months early) evidence is beginning to mount for the 162% extension of the 1200pt drop from Jan to June for wave C which could be SPX 2500 if a top is reached near 4500.

Update Alt. In this case the wts for the SPX 2X ETF ratio (SDS/SSO) and SPX puts & calls spread are adj to equal as in the DM/SM section for SPX ETFs.

The volatility and ETF measures are starting to roll over while option measures are near record low sentiment as the composite approaches the Sell level.

Update Alt EMA. EMAs shown that the overall decline in sentiment is gradual and can last a few weeks/months before a top.

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 produced a lower low for sentiment while the late decline produced only a mild rebound, hence likely more decline ahead.

Update EMA. EMAs show a sharper decline and rebound so a 1-3 day bounce is possible.

Update EMA. Similar to above a very ST bounce is possible.

Bonds (TNX). Bearish sentiment in bonds continued to fall even as rates rose and may provide a base near the 3% level.

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. Sentiment was little changed for the week as the expected limited upside gave way to a move back to 200 as rates rose.

Update. As pointed out previously, spike lows in sentiment tend to proceed tops by several months, but so far for the previous tops, the depth of the following decline seems to be proportional the depth of the spike. A bigger decline than from Jan-June may be indicated.

With the sister options Hedge Spread bearish sentiment as a ST/INT indicator (outlook 1-3 mns), this indicator shows that hedging continues to be moderate and supportive of current levels so ST decline should be limited.

For the SPX, I am switching to hybrid 2X ETFs plus SPX options. Taking a look at the INT term composite (outlook 2 to 4 mns) as bearish sentiment, ETF positions are likely hedges with high speculation via options. Composite now at the Sell level and may limit gains.

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 Aug 26. A text overlay is used for extreme OI to improve readability, P/C is not changed. Also, this week includes a look at the GDX & TLT for Sept exp. A new addition is added for OI $ amounts with breakeven pts (BE) where call & put $ amounts cross.

With Fri close at SPX 4228, options OI for Mon is small and conflicing OI and OI$ show a likely range of 4200-4250.

Wed has somewhat smaller OI where SPX and similar OI and $OI indicate a range of 4200-50.

For Fri stronger OI shows a more negative bias, so a similar late week fade is possible. Support appears to be near 4150 with a range of 4150-200.

For Aug 31 EOM, very strong bullish sentiment shows a likely range of SPX 4100-200.

Using the GDX as a gold miner proxy closing at 25.2, increments of .5 are not shown, but strong put support should support at current levels or higher.

Currently the TLT is 113 with the TNX at 2.99%, both the 118 and 120 targes were met when the TNX dropped to 2.75 and 2.5%, but the late rebound in rates nullifies delta hedging and a move to TLT 115 or TNX 2.8-9% seems most likely.

IV. Technical / Other

This week I want to look at the SPX Put-Call spread components to see why we are seeing the most extreme levels from 2018. Remember that the put call spreads are somewhat unique compared to the put/call ratio due to the built-in adjustment for option volume. Below you can see that each of the INT tops since 2018 were preceded by extremely high option volume and the higher the volume the larger the following decline, while INT bottoms saw very low volume (not this time). Looks like a setup for a larger C wave decline, but the topping pattern may take a few months as in late 2019.

Conclusions. Wacky sentiment extremes are making conclusions to reach, but evidence appears to be building for the conclusion of a bear market rally likely by EOY following by an even stronger decline than seen earlier this year. No one has seen this kind of inflation in 40-50 years, and while most seem to be expecting an easy path back to "normal", reality may turn out to be anything but.

Weekly Trade Alert. More weakness is expected during the week, most likely late in the week with lows near SPX 4150 possible. 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

Long term forecasts

© 2022 SentimentSignals.blogspot.com

Saturday, August 13, 2022

OOPS!

Last week closed at the top of the expected SPX range of 3950-4150, but the expected pullback was limited to a retest of the 100D SMA at 4110 Tue. I had been expecting some type of meltup, but likely in Sept-Oct, however, the Wed CPI report showing a slight decrease in inflation from 9% to 8.5% sent stocks and bonds soaring. Surprisingly, bonds (TNX) reversed most of the gains by the end of the day as it appeared that getting only 2.5% in interest did not look much better when you are only losing 6.0% a year rather than 6.5% in real dollars. The breakout appeared to be short covering, rather than a flood of buying due to low volumes.

Perhaps we didn't really have a bear market as a recent study by BofA Global shows that US household.equity 2-year avg flows never turned negative and are now at the highest since the 1990s. Perhaps, Avi is right and a push to new highs is necessary to suck in every last retail dollar before a real scary bear market begins. One indicator that supports this view is the LT NYSE UP vol/DN vol ratio shown in the Tech/Other section and mentioned several weeks ago. We are now in a very similar pattern to that following the Dec 2018 20% decline.

Update Alt. In this case the wts for the SPX 2X ETF ratio (SDS/SSO) and SPX puts & calls spread are adj to equal as in the DM/SM section for SPX ETFs. This indicator continued to decline with the biggest decline in the volatility component as ETFs were unchanged.

Update Alt EMA. The very ST spike lower is likely to produce a SPX 50-100 pt pullback.

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. This indicator remains near a Sell.

Update EMA. The very ST spike to the Sell level may indicate a 1-3 day pullback is near.

Update EMA. Here also, a spike low may preceed a very ST pullback.

Bonds (TNX). Bearish sentiment in bonds remains in a modestly positive trading range.

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 finally started to move up, reflecting an improvent in sentiment, but gains may be limited to low 220s.

Update. This may be several months early but sentiment has now matched the Sell level of the Dec 2021 SPX highs.

With the sister options Hedge Spread bearish sentiment as a ST/INT indicator (outlook 1-3 mns), sentiment remains supportive of higher prices as hedging remains slightly above neutral.

For the SPX, I am switching to hybrid 2X ETFs plus SPX options. Taking a look at the INT term composite (outlook 2 to 4 mns) as bearish sentiment, ETF sentiment was little changed while options sentiment is testing earlier lows, pulling the composite downward.

The combined options/ETF sentiment remains unchanged with strong options hedging offsetting declining ETF sentiment.

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 Aug 19. 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 4280, options OI for Mon is very small and the 4250 and 4275 may provide oppty for delta hedging, but it could be pos or neg.

Wed has very small OI where SPX is likely to be more influenced by Fri OI.

For Fri optn exp AM are mostly hedged straddles, but the OI $ amount provides an almost $3.5B incentive for dealers to try to move prices to the downside.

For Fri optn exp PM strong put support is at SPX 4100-25, while the 4125-50 area is an important support resistance level. Upper call resistance resides at 4400-25.

IV. Technical / Other

This week I want to look at the LT NYUPV/NYDNV ratio, where a strong move in up vol relative to down vol has been indicative of sustained rallies since 2018. The current move looks a lot like the move off of the Dec 2018 lows. There may be a pause at the current level as seen in May-Oct 2018.

Conclusions. After the last Bradley turn failed, I decided not to mention the next one, but there is a major Bradlye turn on Mon Aug 15, so this may indicate a high. Looking at the overall sentiment picture, however, I doubt that the final highs are in. Following the 2018 example, the markets may continue to trade in a range, supported by weaker inflation that still remains high, and forces the Fed to continue to raise rates. A final blowoff could follow a Fed pause in rate hikes.

Weekly Trade Alert. Very difficult to call with options exp week, but a pullback of 50-100pts seems more likely that a continued rally. 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

Long term forecasts

© 2022 SentimentSignals.blogspot.com

Saturday, August 6, 2022

Good News or Bad News

Last weeks outlook was mostly a hit with an Aug trading range expected from SPX 3950ish to 4150. There were more gyrations early in the week with weak economic numbers and a decline to SPX 4080 before a rebound to a high of 4170 midweek, while TNX rates fell to the targeted 2.5% level before rebounding sharply on the strong jobs report. Personally, I was surprised at how well the SPX held up Fri, but traders seemed to focused on buying the industrials and ignoring the possible reversal of the "Fed pivot" to lower rates.

No major changes in sentiment as ST indicators continue to support a 2-4 week pullback to the low to mid 3900s. With the 50 day SMA rising to 3950, this may provide some support. Currently options OI shows the greatest risk options exp week of Fri Aug 19th.

Update Alt. In this case the wts for the SPX 2X ETF ratio (SDS/SSO) and SPX puts & calls spread are adj to equal as in the DM/SM section for SPX ETFs. Overall sentiment remains near neutral similar to the June SPX top with ETF sentiment continuing to decline as options rises.

Update Alt EMA. Now about the same as the June SPX top.

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. Sentiment rose slightly but still similar to the June SPX top.

Update EMA. Same as above.

Update EMA. Sentiment is little changed and remains below neutral.

CITI Surprise Inflation Index for Aug, I haven't reported this for a few months as "surprises" are hard to define and don't show a high correlation with "actual", but with CPI and PPI out next Wed/Thur it does not look like there will be any negative surprises (lower infl).

Bonds (TNX). Bearish sentiment in bonds remains modestly positive but has fluctuated wildly with last week reaching the second pullback target at TNX 2.5 early then rebounding back over 2.8% with Fri jobs report.

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. Overall sentiment seems to be leveling out near 0, with prices apparently keying on the US $.

Update. Sentiment continues to decline and remains the strongest agrument for the current rally as a "bear market" rally with new lows ahead likely late 2022 or early 2023.

With the sister options Hedge Spread as a ST/INT indicator (outlook 1-3 mns), bearish sentiment remains modestly positive although well off the levels of the May and June SPX lows and remains supportive of higher prices.

For the SPX, I am switching to hybrid 2X ETFs plus SPX options. Taking a look at the INT term composite (outlook 2 to 4 mns) as bearish sentiment, it has declined to levels that supported declines this year.

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 Aug 12. 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 4145, options OI for Mon is very small with SPX rallying past put support at 4100 with 4175+ the main area of call resistance.

Wed has smaller OI where SPX has minor support at 4050 and resistance at 4150.

For Fri strong resistance shows up at SPX 4150 while put support drops to 4025.

For optn exp Fri moderate call resistance exists above SPX 4050, so there may be a suprise optn exp week decline.

IV. Technical / Other - N/A

Conclusions. There is no clear indication of an imminent decline and it is possible that the month of Aug becomes a rolling decline between SPX 3950-4150+. The biggest risk appears to be optn exp week of Fri 19th Aug with a potential target of SPX 4000-4050.

Weekly Trade Alert. Early next week could see a rally back to the SPX 4170s, but should decline to 4100 or lower by EOW. 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

Long term forecasts

© 2022 SentimentSignals.blogspot.com