All Your Heart Could Desire

Last week went as well as could be expected as weakness was expected by mid-week with a possible low target for the SPX at 4050, and the week started with an early Tue rally to 4180 after many of the bears on Wall St and elsewhere who had been looking for a drop to the low 3000s early in 2023 switched to ST bullish targeting 4300-400.  But the rally began to fizzle late Tue and dropped to a low Fri AM to SPX 4060 before a closing rally to 4090.  The main reason for the decline was a turnaround in techs as int rates rose strongly during the week with the TNX rising to 3.75%, retracing over 1/3 of the decline since the Oct high at 4.35%.  I have been warning of higher rates for the last two weeks.

Next week is optn exp week with CPi and PPI on Tue/Thur.  Most seem to be expecting the SPX to go higher, while options OI for SX indicates a more likely drop with a very large straddle at 4000 the likely target.

Discuss.

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.  Overall bearish sentiment remains in a sideways trend with ETF and volatility declining while options sentiment is rising.

 

Update Alt EMA.  The sideways trend continues.

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.  Last weeks selloff has moved sentiment to  slight positive, but is likely to move higher before a turnaround,

Update EMA.  Very ST a bounce is likely Mon/Tue before a resumption of the downturn.

Another ST indicator with VIX calls and SPXADP shows similar sentiment.

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.  ST/INT sentiment shows very little change in sentiment, indicating that lower prices are likely over the INT term.

Bonds (TNX).  Bearish sentiment in bonds remains largely unchanged, indicating that a continued rise in rates is likely.

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 sharp decline of over 10% the past 10 days saw a sharp rise in ETF sentiment, but headwinds are still likely if rates continue to rise.

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 seems to be forming a long basing period as in 2021.

With the sister options Hedge Spread as a ST/INT indicator (outlook 1-3 mns), bearish sentiment remains near neutral.

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, options and ETFs continue to converge from the unusual pattern with extreme options bullishness and high ETF bearishness.  This is one of the main reasons while I doubted a continuation of the bear trend over the ST.

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.

Bearish sentiment continued to fall last week and is now slightly below neutral.

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. A new addition is added for OI $ amounts with breakeven pts (BE) where call & put $ amounts cross. I just noticed that I forgot to use 2023 in titles.

With Fri close at SPX 4090, options OI for Mon is moderate with put support up to 4100+ and call resistance at 4125.  An early week move over 4100 is likely.

Wed has smaller OI where SPX put support moves down to 4050 but call resistance is also higher at 4150, so an increase in volatility is expected with the CPI/PPI data.

For Fri AM strong $OI is likely to push the SPX toward the the large straddle at 4000.

For Fri PM moderate OI shows a bounce back to SPX 4050 is likely.

IV. Technical / Other - NA


Conclusions.  My INT out is pretty much unchanged as the decline is likely to continue into May/June with a potential counter trend rally from Mar thru mid-Apr.  Reflecting on the longer term trend, it was only 8 years ago in 2015 when the SPX traded in a 10-15% range for most of the year before a breakout rally into the 2016 election.  I doubt if Trump2 is possible, but given Biden's low rating, a DeSantis+TX senator has a very good chance to win and the markets might rejoice in 2024.

Weekly Trade Alert.  A possible repeat of last week with early strength to SPX 4100+ and a late week swoon to SPX 4000 or lower before a last minute rebound.  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
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