Goldilocks Confirmed, for Now

Three weeks ago, after the jobs report, I posted that signs of an improving economy (Goldilocks), including jobs data and ISM reports, would offset fears of a "hard landing" due to Fed rate hikes, and that a rally of several months was likely after the CPI report.  Last weeks Q3 GDP showed a vast improvement over the last two quarters at +2.6%, confirming Goldilocks for a few months.  In the mean time the SPX has continued to rally, now up 14% for the month.  The expected target of SPX 3850-3900 for EOM was met much quicker than expected with Mon announcement of R.Sundak as new UK PM (Oxford uni, MBA Stanford and GS hedge fund manager) sending UK pound and bonds soaring.  This apparently was exactly what Wall Street wanted although I wondered how hedge fund management qualifies you as a politician, but I guess he and his wifes $700M makes him almost as qualified as Trump was to be US Pres.  Research showed that a PM is essentialy the King/Queen's right hand man/woman much like the Hand on Game of Thrones.

The late week rally toward SPX 3900 was met unexpectedly when the early rally was mostly erased with Wed/Thur weak EPS from tech giants GOOG, MSFT and AMZN, while APPL saved the week on Fri.  More rally is possible early in the week, but ST sentiment is now at a Sell, and a reversal is likely soon.  A couple of articles by D.Tokic summarize my outlook on Fed rate hikes and the outlook for SPX/SPY and TLT with both FF rate and TLT expected to rise to 5%+ (to view disable javascript).

The Tech/Other section this week is rather long.  First an update of the VIX call indicator which reached a Sell last week, and second the introduction of a new indicator based on the SPXADP (adv/dec percent).  I want to use the SPXADP Indicator to start doing regular updates on Twitter.

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.  Only a minor drop in bearish sentiment this week.

Update Alt EMA. Little change.

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.  A Sell signal was reached last week, but could be early as in mid-Aug with a consolidation into CPI Nov 10, then a pop & drop when comparing sharp drop in sentiment from June SPX lows.

Update EMA.  This does look like late July or possibly late May where b0th saw a consolidation before more downside.

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 drop in hedging has moved this indicator to an area where other bear market rallies ended this year.

CITI Surprise Inflation Index for Oct. I have not looked at this for a while, but it may give some indication why CA reduced their rate hikes (very sharp drop in infl), while the US has shown a much slower decline. Also, China is interesting as they are showing deflation, possibly due to continued Covid lockdowns and cheaper Russian oil, and are not likely to see the same bond problems as the US and UK,EU.

Bonds (TNX).  Bearish sentiment in bonds .  Note upper range was extended to show how much higher bearish sentiment was in 2018 than today, so a major turn around is unlikely soon.

Update.  The upper range was extended to show how high bearish sentiment reached in 2018.  Bearish sentiment increased slightly, but would need to go much higher before a major turn in rates.  TNX may need to go 1.0-1.5% higher.

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 consolidation continues.  If I am right about the political landscape discussed last week the big breakout won't be until after the 2024 election when weak dollar policies are implemented.

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 rally looks like it is supported by dumb money and not sustainable.

With the sister options Hedge Spread bearish sentiment as a ST/INT indicator (outlook 1-3 mns), hedging has dropped sharply, but remains a positive influence.

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, very little change here.

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.  A sharp drop in both NDX 3x ETF and ETF option sentiment similar to Apr and July EPS periods, but price fell in Apr and rose in July before a decline, so no direct indication.

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 Nov 4. 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 3901, options OI for Mon EOM is large and last weeks 150 pt rally wiped out most of the put value lowering OI$ BE to 3650 from 3910.  Some pullback between 3850-900 is expected by the close.

Wed has very small OI where SPX has call resistance between 3850-900 so a move to 3850 or lower is likely.  The large call position at 3950 should provide strong resistance on the upside.

For Fri strong call resistance is at SPX 3900 and 3950 with little put support until 3750 indicates the potential for a drop to 3800 or lower with a strong jobs number if bonds react negatively.

For optn exp Fri, Nov 18 AM, there is a slight negative bias where the BE at 3825 has proven effective at monthly exp the last couple of months and indicates a range bound market.

IV. Technical / Other

The VIX Call Indicator reached a Sell level matching that of the late Mar and early June tops and just short of the mid-Aug top, the one false signal was early Aug (a week early).   A 75% hit rate this year.  Jan was only a moderate Sell.

Similar to the VIX call indicator options sentiment was measured compared to an over bought/sold indicator only in this case replacing NY DEC/ADV with SPXADP.  For dumb money, calls were used for SPX, ETF and VIX options, since Equity P/C is considered smart money, puts were used.  Similar to the SPX ETF indicator, combined sentiment is 50% SPX 2x ETF and 50% options.  I am calling the result the SPXADP ETF/Options Indicator.  This indicator seems to work equally well as LT, INT and ST, but I am considering it as mainly ST/INT.  Below is the ST/INT composite where we now see bearish sentiment at about the same level as the late Mar top.  The SPXADP was a popular indicator of OntheMoneyUK, one of my favorite EW analysts until he stopped posting in mid-2021, possibly a covid victim/RIP.

Below we see the ST/INT EMA sentiment is similar to that of the mid-Aug top which also showed a double-dip similar to the VIX Call indicator.

Below is the ST view.  Due to the mild drop from recent sentiment highs, this seems more comparable to the late may-early June period where a two week consolidation took place before a larger decline, so we may see a range of SPX 3800-3900+ until Nov 4 jobs data or Nov 10 CPI.

Looking at the LT view, results are comparable to other LT indicators as well.

The following week will show a ST Indicator as a composite of the SPXADP and VIX Call indicator.

Conclusions.  Most of the bears on Wall Street have now switched to ST bullish with SPX 4000-4200 as a ST target with the 200D SMA near 4100 as the most likely target, but ST sentiment is warning that pullback is likely soon.  Comparison to other periods with similar sentiment show that a consolidation of SPX between 3800-900+ is likely for 2-3 weeks first and could possibly see a pop&drop around the Nov CPI release on the 10th to 3950+.  Next week could be relatively mild with a pullback to SPX 3850-900.  Extreme bullishness for Fri jobs data and monthly optn exp using options Oi indicates strong resistance above SPX 3900.

Weekly Trade Alert.  Could be relatively calm week with some downside expected to start by Mon close targeting SPX 3850-900 area.  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

Crash, What Crash?

Another topsy-turvy week in the markets with daily swings driven mostly by financial markets in the UK.  Mon saw a surprise about face from the PM Liz Truss which resulted in a soaring pound and UK bonds which feed into US markets with higher bonds and lower dollar which pushed the SPX over my weekly target of 3700+ to 3762.  Then Wed a surprise resignation by Truss sent markets in reverse resulting in US rates rising to 4.3% with a strong $ and the SPX fell to 3650ish by Thur.  A well timed rumor of a possible "Fed pivot" sent stocks soaring and rates tumbling Fri with the SPX back to 3750.  So a somewhat similar range, but stronger upside than expected.  Next week may be similar with an early range of SPX 3700-50 and an EOM surge to 3800-50.

Its hard to believe that a $45B spending plan by the UK could cause so much turmoil in the markets, but in an inflationary environment, more stimulus is like throwing gasoline on a fire.  As I pointed out last week the big surprise of 2023 may be the cost of peace in Ukraine and its effect on markets as the immediate effect is likely to be a relief rally due to lower inflation expectations, but the World Bank has estimated a reconstruction cost of $350B.  Even if lower inflation expectations offset half the effect, there should a 4-5 times multiple of the recent UK effect.  As a historical aside, Russia has been very effective in using winter as a war time ally, most notably in defeating the France/Napoleon invasion in the mid 1800s and the Germany/Hitler invasion in the mid 1900s.  Will they have the same success with Ukraine/NATO?

Most of Wall St and the EW community had been expecting a crash in the stock market in Oct ranging from SPX 3300 to as low as 2700, while over the last three weeks my view was that the bond market looked more "crashy" than stocks, and since the end of Sept the SPX rose 5% (3580 to 3750) and bonds/TLT have fallen 10% (104 to 93).  Tech/Other covers a LT outlook for bonds (10/20 T-bond yld) and stocks (NYUPV/NYDNV)/

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.

Little change in sentiment for the week with lower option and higher volatility and SPX ETF sentiment.

Update Alt EMA.  Sentiment remains in the range of mid-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.  The recent Buy has not been reversed to a Sell yet and may bolster markets into early Nov.

Update EMA.  A very ST Sell similar to late July was seen that may result in a pullback for a few days.

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 decline in sentiment early in the week may indicate a trading range of a few weeks of about 200 pts similar to  July.

Bonds (TNX).  Bearish sentiment in bonds rose only slightly as rates rose to new recovery highs and is not bullish for the ST/INT.

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.  ETF sentiment continues to push sentiment higher as prices consolidate, following the early 2018 pattern.

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.  A sharp downturn in bearish sentiment shows that the dumb money is buying the bottom.  One of the cycles, 10 year or 4 yr election, shows a 50% increase thru 2023.  This must be where Avi gets his SPX 5100+ target.

With the sister options Hedge Spread bearish sentiment as a ST/INT indicator (outlook 1-3 mns), the trend is down but not worrisome yet.

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, sideways sentiment continues with stronger ETF offset by weaker option sentiment.

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.

Similar to SPX with sharper increases in ETF and decreases in option sentiment, overall much like the consolidation period of late 2020.

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 Oct 31. 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 Nov and TLT for Decexp.   A new addition is added for OI $ amounts with breakeven pts (BE) where call & put $ amounts cross.

With Fri close at SPX 3753, options OI for Mon is small, but with lopsided OI$ and call resistance above, a range between 3700-50 is expected.

Wed has smaller OI where SPX shows a similar range to Mon.

For Fri stronger OI shows a negative bias with strong call resistance at SPX 3825-50 and moderate resistance from 3750-800.  Late prices may rally similar to last Fri due to large EOM OI.

For EOM Oct 31/Mon very strong OI with a large OI$ is likely to push prices toward the SPX 3800-50 range.  Much of the range of 3650-4000 is straddled and may contribute to volatility.

Using the GDX as a gold miner proxy closing at 24.3 is in the middle of support/resistance and should range between 22-25.

Currently the TLT is 93.2 with the TNX at 4.21%, 90 is the last support zone and below that could get "crashy".  This sentiment reflects a recent post by Avi, predicting a "Fed pivot" with the TLT at 130 by Apr 2023.  Ie, BTFD is very/too strong.

IV. Technical / Other

Just a quick update of the T-bond 10-yr/20yr yield ratio.  Since 1990 Fed rate cycles have topped in the .98-1.0 avg range (2001 hit 1.01), and briefly it got over .96 with the CPI release but has dropped since mainly to a strong increase in 20 yr rates.  Usually this means an increase in LT inflation expectations, but Wed auction showed a lack of foreign buyers and I wonder if this may be a negative backlash from US sanctions/asset seizures since Russia/Ukraine war started.  Why buy US assets if US govt can seize them if you consort with the enemy (Russia/China)?  In any case, higher rates are likely ahead.

The expectations of peak BTFD at the early Oct SPX 200pt romp similar to Dec 2007 seems to be justified so far, but high risk does not emerge until 100D SMA falls to 1.5 and appears to be months away.

Conclusions.   Sentiment continues to be mixed and the most likely scenario.is a trading range similar to late 2020 that may be from SPX 3650-385 or 3600-3900 until an improvement in inflation allows for a Fed pause or a resolution to the Ukraine/Russia war.  At that time a blowoff rally, possible SPX 4300-500 is likely to clear short positions before the next bear market phase, possibly mid-2023 to mid-2024, before a Trump-like election rally.  Currently, I see the final (5th wave down) after the 2024 election when the GOP tries similar stimulus (tax cuts, etc) as recent UK PM, setting off another inflation spiral + bond crash.

Weekly Trade Alert.  Similar outlook as last week with early weakness, SPX 3700-50, before a late week/EOM move to 3800-50.  (Not lately) 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

Continued Uncertainty Over Rates Will Pressure Stocks

Two weeks ago I presented the consensus view of an "October crash" down to the SPX low 3300s, supported by one of the top Wall Street strategist, M.Harnett of BofA, as well as the common EW outlooks show by Trader Joes expanding diagonal. My caveat was that this would depend on the bond market and last weeks spike in bearish sentiment for bonds made me doubt this outcome.  Thurs CPI release (I misread BLS table as Wed, sorry) seemed to support the sentiment as a strong sell off to SPX 3490 was followed by an even stronger rebound up to the 3700+ Fri target as the TNX opened at a high of 4.08%, then fell to 3.85%.  The negative reaction to the high core CPI seemed to be reversed when 40% of the core which comes from shelter was interpreted as a lagging indicator (here and here), while a more current read of Sept rents showed the first decline in 12 mns.

The rebound in rates (TNX closed at 4.01%) was likely due to continued turmoil in UK bonds due to forced pension liquidation.  Unfortunately, I have very limited knowledge of the situation in the UK, but continued pressure upward in rates will likely make the more bearish ST SPX outcome more likely.  There does seem to be a growing consensus that some solution to the Russia/Ukraine problem that may be reached by Spring, and I am beginning to wonder if stocks continue to see a consolidation in the lower price range untill some resolution.  If so, there is likely to be a strong short-covering rally, but the cost of reconstruction is likely to be huge and cause more problems for bonds and eventually 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.

Net sentiment moved sideways as ETF and volatility sentiment fell and options sentiment rose.

Update Alt EMA.  Sideways to slightly lower.

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.  The strong spike in bearish sentiment the first week of Oct has fallen to neutral, providing only weak support for stock prices.

Update EMA.  Last weeks decline did little to improve sentiment.

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.  Since the late Sept lows, sentiment continues to decline and is near neutral.

Bonds (TNX).  Bearish sentiment in bonds rose to near the Sept rate high levels and may need to go higher as seen in early 2018.

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.  ETF sentiment remains at the Buy level and the consolidation similar to early 2018 continues.

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.  Strong gains are unlikely while the DM/SM indicator sentiment remains this weak.

With the sister options Hedge Spread bearish sentiment as a ST/INT indicator (outlook 1-3 mns), the sharp decline in hedging show weakening support, but prices may still rise as sentiment seems to be following the post June SPX lows.

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, sentiment is moving sideways and remains much weaker than at the June lows.

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.  ETF options sentiment fell sharply, while the NDX ETF sentiment rose for net sideways 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 Oct 21. 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 3583, options OI for Mon is small with weak support in the 3550-600 area.

Wed has very small OI where SPX put support starts at 3550 and is likely to be influenced by the large Fri OI.

For Fri AM strong has an extremely large net put/call. $OI differential, and positive delta hedging could push the SPX toward the 3700 area.

For Fri PM strong put support extends only up to SPX 3600 with call resistance at 3675 and any early move over that level is likely to be reversed by the close.

IV. Technical / Other - N/A


Conclusions.   Interest rates are likely to remain the main driver of stock prices in the ST and last weeks close of TNX over 4% increases the potential for higher rates.  Earnings season kicks off in earnest next week and earnings are more likely to be aligned with the strong jobs data and may help bolster stock prices for the next month or so, but overall gains are likely to be limited.  A ST Buy is brewing on the VIX call indicator but is only about half way there.

Weekly Trade Alert.  The last two weekly calls were met in a very roundabout way with last weeks target of 3700+ fading quickly.  Similar outlook for next week with early weakness possible and strength into Fri optn exp. Expected range SPX 3550-3700.  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