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. 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.
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.
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.
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.
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
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