The Big Thaw

Most of the analysts were very bearish for the beginning of 2023, expecting a repeat of 2022, and I am glad that I was not among them.  My expectations were for a rally into the Thur AM CPI release, but the overall strength was more than expected and the early weakness consisted mainly of a retracement of Mon gap open thru early Tue.  A target of SPX 3950-4000 was given for optn exp week due to the huge straddle at 4000 on the AM exp and the SPX is already there.  The bears may get a respite soon, however, as last weeks rally has moved the ST indicators to a strong Sell indicating that a sharp decline of SPX 200+ pts is likely over the next 2-4 weeks.  With the FOMC Jan 31/Feb 1, an initial decline after optn exp next week may be followed by another move over SPX 4000 at the FOMC before the real decline begins.

The Tech/Other section takes a look at two volatility indicators, the ST VIX calls & SPXADP plus the INT/LT VIX term structure (VIX/VXV) and SKEW.

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.  A small change in volatility and offsetting changes in SPX options and ETF sentiment resulted in little change in overall sentiment.

Update Alt EMA.  A slight decline in bearish sentiment ST and still at the warning level.

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 sharp drop in bearish sentiment due to extreme low volume in UVXY have created a strong ST Sell.

Update EMA.  EMAs show that the low sentiment is persistent with levels now approaching that seen before the Sept 2022 decline.

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 decline in bearish sentiment, mainly due to the rapid unwind of hedges shown by the hedge spread, leaves the ST risk very high.

Bonds (TNX).  Bearish sentiment in bonds is relatively unchanged as rates retraced most of their recent rise although the 3.5% support level seems to be holding.

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.  Several articles late week indicated that China has been a strong buyer of gold and is diversifying out of US bonds.  The rise in gold continues to follow the SSEC higher.

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.  Sentiment remains very low at about mid way from the high and lows of the past two weeks.

With the sister options Hedge Spread as a ST/INT indicator (outlook 1-3 mns),  bearish sentiment reversed sharply from the extreme hedging at the beginning of the year, indicating that much of the recent rally is due short covering as the hedges are unwound.

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, ETF sentiment remains high while options is very low keeping sentiment in a tight range.

For the NDX combining the hybrid 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.

Much of the hedging appeared to be in the NDX as many were expecting a further breakdown, while the double bottom around 11k seems to be holding.  Overall, sentiment remains high.

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 Jan 20. 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 3999 options OI for Tue is small, but showing strong call resistance at 4000 and range of 3950-4000 is possible.

Wed has very small OI where SPX shows potential range of 3925 put support and 3975 call resistance.

For Fri AM strong OI with the huge straddle at SPX 4000 a potential target, leaving last weeks expected range of 3950-4000 still valid.

For Fri PM strong call resistance at SPX 4000 remains consistent with the AM target of 3950-4000 although lower is possible.

For Tue Jan 31/EOM strong OI shows a vacuum between put support at 3900 and call resistance at 4025, possibly due to the FOMC Tue/Wed.

IV. Technical / Other

This week I wanted to take a look at two of the volatility indicators.  The first is the VIX call & SPXADP indicator which shows a strong Sell due to very high VIX call buying and a low SPXADP.  Here, sentiment matches the ST volume/UVXY indicator, indicating that a sharp decline of 200+ SPX pts is expected in the next 2-4 weeks.

The INT/LT volatility indicator using the VIX term structure remains positive, however, so a ST decline is unlikely to be the beginning of a new bear market leg lower.

Conclusions.   I am sure that Jan has not started the way the bears expected as many continue to look at the future as a continuation of the near term past.  However, last week seemed to show enough capitulation by the bears as shown by the hedging measures to allow for a sharp decline in the SPX over the next few weeks, although LT is still expected to continue a positive bias.

Weekly Trade Alert.  Next week may prove to be a disappointment for all, as the price target of SPX 3950-4000 was given last week and still seems in effect.  Late Jan and early Feb are expected to show more volatility.  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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