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