Last weeks outlook was that the SPX was likely to waffle around current levels (3854) with headwinds provided by the large SPX call OI at 3835 and possible gap fill from the Nov CPI ramp at 3750, while options OI for Wed and Fri showed the potential for a move to .SPX 3900. As it turns out the first move was down to a SPX low of 3800 Tue then a ramp Wed to 3980, followed by lower lows Thur to a near gap fill at 3760 on news of stronger GDP and BOJ giving up on ZIRP, and then moved back to unchanged Fri (3846). Bonds took a hit, however, as the TNX rose from a low of 3.5% to 3.75% even as PCE showed more cooling of inflation. The result of last weeks volatility, however, was to increase put support around current levels and next weeks moves may be mild with an upward bias toward SPX 3900+. Sentiment also improved, especially the NDX composite and hedging, improving the INT outlook for 2023 Q1.
It's interesting to sometimes see follow up articles on topics I discuss on the WE and on Mon MW Prem had an artricle how Wall Street had their worse year-end forecast since 2008 with average YE 2022 forecast SPX at 5200+, the same as Avi. (Here is the hack version. Scroll top panel or scroll and copy/paste to see full page with Google text, data:text/html, <html contenteditable>).
This weeks Tech/Other tries to tie together some economic indicators I have been looking at with the outlook for stocks using historical stock data from Macrotrends.net. Using the DJIA, the market topped on Feb, 1966 after inflation nearly tripled following the beginning of the Vietnam war in 1965. Much of the data today looks similar and the outlook may surprise you.
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. Somewhat less bearish as options indicators became less bullish.
Update. Here we saw a sharp drop in bearish sentiment, mainly from NY down volume, may be holiday related.
Update EMA. A very sharp reversal to Sell may mean some early week weakness.
Vix Calls & SPXADP ST EMA. Some contrast here as ST sentiment only dropped to neutral.
Update EMA. Hedging is even more huge. Combined with OI put support EOY and 2023 Q1 should be positive.
Update. Little change in sentiment or outlook.
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. Some improvement, but ominous LT.
Update. A big increase in options and ETF sentiment
could leead to a significant bounce for NDX starting by EOY or early 2023 Q1.
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 July 16. A text overlay is used for extreme OI to improve readability, P/C is not changed. Also, this week includes a look at the TLT for Mar 2023 and GDX for Jan exp. A new addition is added for OI $ amounts with breakeven pts (BE) where call & put $ amounts cross.
With Fri close at SPX 3845, options OI for Mon is mainly bearish, increasing the potential for another push toward 3900.
Currently the TLT is 102.2 with the TNX at 3.75%, the larger call OI and $OI combined with the ETF low bearish sentiment tells me that retail (dumb money) is bullish, meaning large put position at 95 is smart money (contrarian). Normally, I would say 98 (TNX 4%) is the target, but if 95 puts are SM, then 95 or better is likely (4.25%). I setup a bond calculator in GoogleDocs to compare changes in rates to TLT prices. For me it loads directly into Chrome and inputs are on line 2, Coupon is a plug (3.9), bonds is maturity (20), and rate is current TNX (.0375). TLT price is in last col. Current TLT is 102, change rate to .04 and TLT is 98.
Using the GDX as a gold miner proxy closing at 28.9, some pullback is likely with support at 27.
IV. Technical / Other
This week I want to summarize the major economic factors discussed the last two weeks in one chart showing the 10 year int rate (blu), unempl rate (grn) and CPI (red). As I have discussed the armageddon that most seem to expect for 2023H1 (strong recession) is unlikely until unemployment reverses sharply. Compared to the 1960s, we seem to be at 1967 where the first ramp in inflation and int rates concluded. Over the following year infl retraced about 38% which at todays peak of 8% is about 5%. Note, however, that int rates had only a very short correction and began to rise again even as infl continued to fall. If the comparison holds and unempl remains low, a recession may not happen until the 2024 election or after.
I was finally able to find a source of historical stock price data at Macrotrends.net. In this case, I decided to use the DJIA rather than SPX due to major changes in SPX. In late 1960s and 1970s, the most heavy weighting in the SPX was oil stocks which were positively correlated with infl, while today it is tech stocks that are negatively correlated. The following is in constant dollars (infl adj), and the secular bear market lasted 14 years with a total decline of about 75%. I expect something similar this time.
This is the current dollar (nominal) chart which is much less dramatic since half of the 75% loss above was due to infl. The lowest nominal price was in 1974 with a 50% loss. The biggest reason for the seemingly mild effect on prices is that when firms can pass on inflation with higher prices this increases the growth rate in EPS making stocks more attractive. Note that after the first bear "wave" prices double topped before the 1969-70 decline and we may see something similar for the DJIA this time, but not likely for the SPX due underperformance of techs.
Conclusions. Running out of time. Next year should be interesting. I haven't felt this alone as an analyst since last year when everyone else was bullish and I was bearish. I can't really say that I am bullish, but more bullish than bearish. The Tech/Other scenario or some variation seems the most likely to me. With the recent talks of more stimulus, ie, Congress $1.7T and 14+ states sending out inflation relief checks, it seems like this madness is likely to continue for a while until everyone gets strangled by higher int rates. As Jamie Dimon (JPM CEO) said before the 2008 banking crisis "as long as the music is playing, you have to keep dancing".
Weekly Trade Alert. Next week should have a positive bias with SPX 3900+ possible. 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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