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

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