Mayhem in the Bond Market

Markets seemed to be going according to plan thru the Wed FOMC with the expected 0.75% rate increase and the TNX rising to 3.6% early then backing off by EOD and the SPX closed at 3790.  As shown in Tech/Other the June 15th FOMC marked the top of the runup in rates before a significant pullback and similar action was expected this time.  Thur saw an unexpected 20 BP jump in rates with TNX up over 3.7% and stocks became unhinged, and a continuation of higher rates on Fri resulted in a full retest of the June lows.  There seemed to be little news other than rate hikes in Europe, so the cause remains a mystery.  Obviously, the expected range of 3800-4100 did not hold, but ST sentiment did not support a turn by Wed and prices continued lower.

The current sentiment remains somewhat mixed with the longer term Hedge Spread.now at a stronger Buy than the June SPX lows, while the ST indicator has reached the Buy level of the May lows, but well below the level of the June lows.  Tech/Other shows charts for the TNX comparing June/Sept FOMC rate movements and the LT 10/20 year ratio that shows higher rates are still likely.  Also, the VIX call indicator has reached a Buy so a rally is likely over the next 1-4 weeks, but more work may be required below SPX 4000 before a breakout, possibly after the mid-month CPI report.

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. 

A small improvement was seen as stronger option sentiment was offset by weaker ETF sentiment.

Update Alt EMA. LT sentiment remains below neutral.

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 finally reached a Buy after the strong down moves of Thur-Fri, so a rally may start at any time, but may be temporary similar to May.  More backing and filling for a week or two may produce June type of sentiment.

Update EMA.  The strong Sells from mod-Aug and early Sept turned out to be more effective than expected with current sentiment similar to the May SPX lows.

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 has reached the levels of the May SPX lows.

Bonds (TNX).  Bearish sentiment in bonds has actually become weaker as rates rallied, indicating little relief from higher rates is expected soon.

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 fell, led by ETFs, as the possible consolidation between 170-90 similar to early 2018 looks possible.

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.  High dumb money bullishness continues to warn of trouble ahead LT.

With the sister options Hedge Spread bearish sentiment as a ST/INT indicator (outlook 1-3 mns), hedging is now somewhat higher than the June SPX lows and is likely to limit any downside from here.

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 fell as option sentiment rose for little change.

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.

Combined sentiment rose to new highs.

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 30. 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 for Dec exp.   A new addition is added for OI $ amounts with breakeven pts (BE) where call & put $ amounts cross.

With Fri close at SPX 3693, options OI for Mon is very small above 3600 and there could be upward pressure to SPX 3750.

Wed OI is also very small where SPX has put support up to 3750 and may move higher.

For Fri strong put support extends up to SPX 3800 and may move higher with the JPM ETF collar at 3575 and 4000.

IV. Technical / Other

The VIX call indicator has worked well as a ST Buy/Sell and just reached the Buy level.

The June 15 FOMC marked a high in rates with a sharp runup, while Sept was more gradual into the FOMC with a surprise surge after.

Looking at the 10/20 year rate ratio we saw a new high for 3022 at 95%, but usually peaks did not occur for rate hiking cycle until the ratio reaches 98%+.  The peak in rates prior to the 2008 financial crisis occurred in 2006, so the risk of a serious crisis may be 1-2 years away.

Conclusions.  I am sure that a lot of readers are somewhat disappointed that I am not in the "crash now" camp, but I try to follow sentiment as much as possible and currently the only "crash" potential shows up in options.  So if you believe "this time is different", then perhaps, otherwise not likely just yet.  Sentiment is showing that a more likely scenario is 2006-08 where the 10/20 year rate ratio showed a peak in rates well before the financial crisis and that a peak in rates is still ahead.  Incrementally, higher rates do mean a lower present value of earnings, so prices should be moving lower, not higher as rates increase.  ST sentiment is showing that a moderate rally is likely to occur in Oct and the strength of the rally will depend on how sentiment fares between then and now.

Weekly Trade Alert.  Next week looks like a move to SPX 3800+ is likely 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

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Markets Remain in Limbo

Two weeks ago I indicated that a Fall rally was unlikely due to weak sentiment and that a range of SPX 3800-4100 was expected for the next several weeks from the current 3920.  Since then we hit a high last Mon at SPX 4120 and a low Fri at 3840.  The decline was so rapid, especially Tue with the disappointment from core CPI and a 200 pt drop in SPX, that sentiment measures (10 day avg) do not fully reflect price trends.  However, options OI show that lower prices are still likely thru EOM and probably for the next 2-3 weeks before any sustained rally can begin.  If the potential IHS continues to hold RS at SPX 3800, it may support a C wave rally matching the 700 SPX pt rally from the June lows of 3620 that would target SPX 4500.

Much of the decline in SPX was due to the rapid collapse on the bond market much like the June FOMC and the start of QT at 50% which will be doubled next week.  This is an example of front-running by banks and other financial inst which sell bonds lowering prices before the Fed sells and then buys them back at lower prices when the Fed sells.  As a result TNX rose from 2.5% early Aug to 3.5% last week.  We saw the same thing in reverse with QE.  The Fed accepts this as a way of funneling money into the financial sector, but it can roil the markets ST.  TLT options OI for Dec shows the potential for TNX to fall back to 3% after the runup is over and this will likely support stocks.

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.  Sentiment still seems to be following the pattern of the last half of 2021.

Update Alt EMA.  Sentiment improved marginally back to neutral ST.

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.  ST sentiment is still moderately negative, so any bounce may be temporary and more backing and filling is likely.

Update EMA.  Tue saw an extreme Sell matching the SPX 4300 high that probably contributed to the sharp selloff.  Sorry, I have been too busy to do daily updates.

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.  A sharp increase in hedging helped the medium term sentiment improve to near the levels of the May low, but lower than the June price lows.

Bonds (TNX).  Bearish sentiment in bonds surprisingly continued to fall as rates rose and will likely limit any retracement.

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.  Both sentiment and prices are near the levels of early 2018 where a consolidation around the 180 level was seen before a final flush lower after bearish sentiment fell back to neutral.

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.  We finally saw what the dumb money was capable of last week as a gush of optimism pushed prices higher in anticipation of lower inflation with the CPI release only to have price hammered lower when inflation proved to be much harder to tame as I have been saying all along.

With the sister options Hedge Spread bearish sentiment as a ST/INT indicator (outlook 1-3 mns), rose sharply last week pushing sentiment to levels of the May SPX low and just below the June low.  This will likely limit any downside.

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, a moderate improvement was seen, but still looking like late 2021.

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.  NDX sentiment is similar to the May and June lows.

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 23. 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 for Oct exp and TLT for Dec qtrly exp.   A new addition is added for OI $ amounts with breakeven pts (BE) where call & put $ amounts cross.

With Fri close at SPX 3873, options OI for Mon is small with moderate put support at 3800 extending up to SPX 4000.  A VST rally to 3900+ is likely.

Wed has somewhat larger OI where SPX has weaker put support over 3925 that may limit any rally to 3925.

For Fri strong put support extends up to SPX 4000 and a rally to that level is expected.

For Sept 30 EOM, very strong call resistance still exists at SPX 4000 with put support at 3800 and 3900, so EOM is expected to be in the range of 3950-4000.

Using the GDX as a gold miner proxy closing at 24 has strong put support at 23.5 with call resistance from 25.5 to 26.5 so some limited upside is likely.

Currently the TLT is 107 with the TNX at 3.45%, negative delta hedging may keep prices depressed, but similar to the June QT, front-running has likely pushed prices below equilibrium and some upside to about 113 (TNX 3%) is likely.

IV. Technical / Other - N/A


Conclusions.  So far at least, the SPX has followed the expected path of a 3800-4100 trading range similar to May, but I certainly can't rule out lower prices.  Hedging does indicate that downside should be limited, while ST indicators are still somewhat negative and some backing and filling between SPX 3800-4000 is likely.

Weekly Trade Alert.  Options OI indicates that a rally to SPX 4000+ is likely by Fri, but FOMC Tue-Wed may limit gains early in the week.  EOM call resistance at SPX 4000 will likely limit any gains before EOM.  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
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Will More Stimulus for EU Energy and US Student Loans Increase Inflation?

The news of an EU bailout of consumers and energy companies of $300B+ for the ongoing energy crisis somewhat distorted Mon markets.  Bonds tumbled in anticipation of greater supply and stocks tumbled into the SPX upper 3800s before a late recovery, but the rest of the week went as expected with a push to and above the SPX 4100-50 target at 4170.  Sentiment remains mixed so that a limited move higher is possible (SPX 4200+), but a direct move above the previous high at 4320 is not expected ST.

The overall sentiment picture is mixed with moderate hedging and improving inflation keeping prices near last weeks highs, while continued upward pressure on interest rates will limit advances.

A look at the very LT NYUPV/NYDNV shows similar outlooks to late 2007 and mid-2015 in Tech/Other.

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.  Sentiment bounced during the latest pullback and seems to be following late 2021.

Update Alt EMA.  Same as above.

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.  ST sentiment never reached a Buy and should limit any advance (SPX 4200s possible).

Update EMA.  Sentiment may be following the pattern of late 2021.

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 is somewhat less negative than the ST composite due to moderate/high hedging that is likely to limit any declines.

CITI Surprise Inflation Index for Sept shows across the board pullbacks and moderating inflation may support stocks for the next few months.

Bonds (TNX).  Bearish sentiment in bonds remained subdued given the sharp rise in rates, so the tug of war with stocks may be good news from inflation and the economy vs higher rates until something breaks.

This week a LT view from 2015, 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.  Its been a couple years since I showed LT sentiment, but the stimulus induced (lower rates) has been reversed, bringing prices back to the level of late 2017.  Prices need to fall at least to the 140 level or more likely the low 100s to give an ETF sentiment Buy.

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.  Sentiment reversed off the extreme lows, but remains near a Sell.

With the sister options Hedge Spread bearish sentiment as a ST/INT indicator (outlook 1-3 mns), the early Sept SPX lows generated a ST Buy and remains supportive of higher prices (SPX 4200s).

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, extreme option sentiment continues to hold combined sentiment to levels similar to late 2021.

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.  High ETF options bearishness (hedging) plus ETF sentiment has pushed NDX sentiment back to a 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 Sept 16. 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 for Dec exp.   A new addition is added for OI $ amounts with breakeven pts (BE) where call & put $ amounts cross.

With Fri close at SPX 4067, options OI for Mon is very small and positive delta hedging may keep SPX over 4050, but more likely call resistance between 4025-50 will cause the close to be below 4050.

Wed has somewhat larger OI where SPX call resistance between 4025-4100 will pressure prices lower toward 4025.

For Fri AM straddled positions are difficult to interpret, but the large net $OI call amount ($3B) should pressure prices toward 4000.

For Fri PM strong OI shows call resistance at SPX 4050 wilth small net put support starting at 4000.  A drop below 4000 is possible.

For Fri EOM Sept 30, the very large call position is likely from the JPM Hedged ETF set up at the June lows and is likely to keep prices at/below SPX 4000 at the close.

IV. Technical / Other

This week I am taking a look at the very long term view of the LT NYUPV to NYDNV, the two periods that appear most similar to the current one are late 2007 and mid 2015.  The first saw much lower lows while the second resulted only in a lower retest.  Which is more likely will depend on how volume levels hold up over the medium term.

Conclusions.  SPX options OI which showed support for an advance off of the Sept lows are now showing strong resistance thru the EOM at the 4000 level, particularly the 45K calls at 4000 most likely as a result of the JP Morgan Hedged ETF (JHEQX) discussed several weeks ago.  The most likely range thru EOM is SPX 3900-4100.

Weekly Trade Alert.  Next week appears to have little upside potential and a decline to SPX 4000 or lower is likely.  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