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

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