Can Stocks Survive a Bond Market Crash?

The bond market mayhem continued last week with a spike up to 4% in the TNX Mon before Britain announced a bond purchase program (QE) to offset the stimulus effect of the energy relief package announced last week to help consumers offset sky high energy costs.  The relief was short lived as Tue drop in TNX rates to 3.7% was followed by a SPX 100 pt rally back to the 3730s on Wed, but as rates rose Thur & Fri the SPX dropped to new lows for 2022 at 3585.  Everyone is talking about a stock market crash, but the bond market is looking more "crashy" to me with the TLT down more than 30% from last Dec and 40% from the 2020 high.  My INT TLT target was par (100) that was hit Mon, but a 50% decline to 75 (TNX 5.5%) is starting to look more likely.  The last true bond market crash was in 1937 as a result of the stimulus following the depression of 1930s which also caused a 50% stock market correction.

Sentiment remains mixed with only a small improvement in LT sentiment, while ST/INT sentiment is supportive of a rally.  However, int rates remain a wild card as discussed last week and higher rates will likely lead to lower stock prices.  BofA's  M.Harnett (Prem) feels that rates will continue to rise into Nov causing the SPX to drop to the low 3300s before a pivot of global CBs at the G20 meeting Nov 15.  This also agrees with the EW outlook of  Trader Joes expanding diagonal target in the low 3300s.  If rates continue to rise with the TNX over 4%, this seems very likely.

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 was little changed for the week.

Update Alt EMA.  Sentiment improved slightly, but 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 saw a spike high early in the week with strong capitulation (NYDNV /NYDEC), but retreated later in the week.

Update EMA.  Sentiment remains well below that of the June 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.  Overall, sentiment remains positive due to strong hedging.

Bonds (TNX).  Bearish sentiment in bonds remains weak relative to the strength in the rise in rates and is no where near the June rate peak.  Comparing the weak interest shown by foreign buyers and dealers (smart money) at the recent auctions last week to the retail sector of ETF buyers (dumb money), higher rates are likely over INT term.

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.  Comparing current ETF sentiment to early 2018, a consolidation between 170-190 was expected with actual range of 175-195.

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.  Little change here as sentiment remains very low.

With the sister options Hedge Spread bearish sentiment as a ST/INT indicator (outlook 1-3 mns) remains the only relatively positive outlook, but comparison to the LT view below, sentiment remains lower that seen at previous major bottoms.

While a LT view of the Hedge Spread bearish sentiment shows that prior to the 2020 stimulus period, hedging rose to the 3-4 SD level before an INT low in SPX..

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, 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.  Sentiment remains at the Buy level, but so far has not supported prices.

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 7. 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 3582, options OI for Mon is very small with moderat support at 3600 and strong support at 3500.

Wed OI is also very small with little support until SPX 3500.

For Fri strong support at SPX 3600 and 3625 may result in a rally to that level if the SPX remains over 3550.

For optn exp Fri very strong OI may result in at least a counter trend rally to SPX 3750 due to the very large dealer exposure of $6B+ in net put OI.

IV. Technical / Other


Conclusions.  The most positive sentiment indicator is the SPX options $OI for optn exp week Fri AM Oct 21 which shows a very large dealer exposure for puts.  Its possible that is the SPX can hold 3500 early Oct that there may be a significant counter-trend rally toward the 3750 level.  With the next FOMC scheduled early Nov 1-2, another large rate hike could provide impetus for a final (INT) bottom.

Weekly Trade Alert.  ST price moves with likely be determined by int rates with a potential range of SPX 3500-3650.  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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