AI Mania

Last weeks outlook was for a similar pattern to the previous week with early strength followed by a late week fade with potential for high volatility around the CPI release.  The directions turned out to be correct, with the CPI somewhat higher than expected and both stocks and bonds gyrated throughout much of the day, ending with small gains.  Stocks continued to hold up well into late Thur even though int rates moved higher with a sharp increase in PPI and the TNX retracing 50% of its gains since Oct the last two weeks, but the last hour started panic selling when Fed's Bullard came out with a hawkish position supporting more 0.5% rate increases.  With the first hour of trading Fri, the SPX fell about 110 pts to 4050 from the Tue high, but remained well above the huge straddle at 4000.  SPX options OI is showing another test of that target could be seen at the Feb 28 EOM.

There has been a lot of talk recently about AI with MS Windows release of Bing's AI ChatGPT.  Several articles have shown some pretty quirky behavior.  An excellent article at Phil's Stockworld discusses some of the positive and negative results from interactions with one of the personas "Sydney", while a second discusses a hidden persona "DAN" (do anything now) and its predictions for the next stock market crash.  Finally, an example of the more traditional use of AI for algorithmic trading in the stock market at Neptune.AI.

Overall bearish sentiment has shown little change with the mild pullback in the SPX the last two weeks which paints a doubtful picture for those hoping for a move to 4300.

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.

Bearish sentiment continued to decline led by volatility measures and SPX ETF and options sentiment, indicating that more downside is likely over the ST/INT.

Update Alt EMA.  ST/INT EMAs are testing the lows of the last few weeks and indicates that the SPX 4300+ target that some are looking for is unlikely ST.

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 slight positive uptick in sentiment may make keep stocks up for a few days similar to last week.

Update EMA.  The very ST sentiment spike remains within a longer negative bias.

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.  Very little change in sentiment indicates more downside is likely INT.

Bonds (TNX).  Bearish sentiment in bonds saw a fairly strong rebound and may keep rates ST in a trading range around current levels.

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.  A strong rebound in bearish sentiment seems to be positive, but EOQ options OI are very bullish (likely dumb money), and the trend is likely sideways to down thru Mar exp.  Contrast this with Avi's recent prediction (no J/S) of an imminent breakout in gold to $2,100 ST then $2,400.

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 testing recent lows means more downside is likely.

With the sister options Hedge Spread as a ST/INT indicator (outlook 1-3 mns), bearish sentiment continues to consolidate around neutral, so there is little fuel for a short-covering 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, ETFs are little changed while options speculation is increasingly bullish meaning more downside likely for the INT.

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.

NDX sentiment has improved slightly and the NDX may outperform the SPX ST.

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 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 4079, options OI for Tue is small with moderate put support at 4075 and little net call resistance until 4150, so some upside is likely.

Wed has very small OI where SPX has overlapping support/resistance from 4050 to 4150, so not much directionality.

For Fri strong put support up to SPX 4100 and some deep ITM calls that may offer resistance indicates 4100-4150 is likely.

For Tue Feb 28, EOM strong put support at SPX 4000 and call resistance at 4200 with straddled positions in between leaves no clear call, but the BE indicates a move below 4050 is possible.

Using the GDX as a gold miner proxy closing at 28.4, strong call resistance at 30 and over and little downside put support means limited upside and larger downside risk.

Currently the TLT is 102.4 with the TNX at 3.83%, very little net support/resistance between 95 and 107 means no directional bias.

IV. Technical / Other - N/A


Conclusions.   The last two weeks have been fun, but the next two may be somewhat boring with the Feb jobs data Mar 10 and CPI/PPI Mar 14/15.  Last week I mentioned 2015 as a potential analog for 2023 and a closer look shows a rounded top that lasted for several months, so any decline may drag on for a while.

Weekly Trade Alert.  A consolidation week is likely with SPX 4075-4125.  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

© 2022 SentimentSignals.blogspot.com