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

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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