Is Goldilocks on the Horizon?

Last week was somewhat topsy-turvy where higher prices were expected by the EOW based on last weeks ST Indicator Buy and the prior weeks VIX call indicator Buy, targeting the SPX low-mid 3600s, but a sharp drop in rates amid rumors fo another "Fed pivot" sent stocks soaring above the 3750 area expected by Oct 21 optn exp, only to come crashing down to the SPX mid 3600s with positive payroll data.  As mentioned several weeks ago, I expected to see some improvement in the economy reducing the risk of a recession which we saw with ISM and NFP data, but the stock market chose to focus on increased risk of "no Fed pivot".  This weeks bodn (TLT) sentiment shows a sharp increase in bearishness that may lead to lower bond rates for a few months and would likely coincide with lower inflation data.  Improvement in CPI on Wed may offset the reaction the the jobs data and actually could start the outlook for the "goldilocks scenario" of a soft landing with lower inflation and no recession - at least for a few months.

The Tech/Other section this week takes a closer look at the LT NYSE UPV/DNV volume ratio comparison between today and the 2008-09 bear market.  As noted on several occasions, stocks have seen strong buying over the last several months even as stocks fell.  The same pattern occurred in 2007 with a peak in Dec that appears to have coincided with the current "breath thrust" seen on Mon & Tue.

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 was seen last week.

Update Alt EMA.  Sentiment is mainly sideways.

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 move up early in the week moved sentiment toward neutral.

Update EMA.  For the very ST (grn), the Mon/Tue rally produced a Sell.

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.  The INT outlook remains moderately positive.

Bonds (TNX).  Bearish sentiment in bonds increased sharply as the volume in TLT fell about 40% for the week, indicating that a rally is likely (lower rates).

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.  Prices remain the same range as early 2018 as bearish ETF sentiment is increasing.

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.  This indicator continues to consolidate below neutral.

With the sister options Hedge Spread bearish sentiment as a ST/INT indicator (outlook 1-3 mns), sentiment fell sharply after Mon & Tue rally.

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, a sideways trend continues..

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 and combined sentiment declined sharply, but remains near a Buy..

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 14. 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 3640, options OI for Mon is small with moderate put support from 3550-600 and a move to 3700 is possible.

Wed has small OI where SPX some put support between 3575-700 and first call resistance at 3750.  Wed has CPI data released and ther may be a rally.

For Fri strong put support extends up to SPX 3700 with call resistance at 3800.

For optn exp Fri Oct 21 AM strong SPX put support extends up to 4000 where 67K contracts make up almost 33% of total put $OI.  I doubt SPX 4000 is reached. but 3800-900 is possible.

IV. Technical / Other

This week I want to review the LT NYSE volume indicator, NYUPV/NYDNV, particularly comparing the 2006-10 period to today.  I have previously discussed the strength in NYUPV over the last few months even as the market fell, indicating strong BTFD.  The same thing was seen in 2007 with a peak in BTFD in Dec, several months after the Oct high.  Note the 100D SMA at 2.6 (red) the same level reached last week.

In 2022, BTFD has been particularly strong the last few months based on speculation of a "Fed pivot" or an end to the hiking cycle.  In 2007, the Fed was actually cutting rates for most of the year, but belief in the "Fed put" has become so ingrained that today the anticipation of a rate cycle change caused the same level of buyiing.  We appear to have peak BTFD last week.  The importance of this compared to 2007 is that peak BTFD occurred in the early stage of the bear market, meaning much more to come.  Timing comparisons are difficult if today is a higher degree (SC), but may indicate a local bottom soon, then a multi-month rally (Apr-May) before the real fireworks begin.

Conclusions.  Over the past several months I have been puzzled by the strong BTFD, or NYUPV, but the comparison to 2008 indicates that this part of the topping process.  After 20+ years of being bailed out by the "Fed put", the dumb money investors have finally come to believe that the Fed will never allow stock prices to fall for more than brief periods, but last week may have seen peak BTFD.  A lot depends in the ST on the CPI results released next Wed and some relief in price increases seems to fit in with the current sentiment setup, especially in bonds.  The outlook for the next several weeks is still mostly up into Oct optn exp with the large put position at SPX 4000 making a range of 3800-900 likely with 4000 possible.

Weekly Trade Alert.  Some weakness is possible early in the week but a move to SPX 3700 or higher is expected by EOW.  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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