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.

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.

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.

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.  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.

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.  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.

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.  Composite remains at the positive 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 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
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