No Recession in Sight

My outlook from two weeks ago was for the SPX to remain in a trading range for 2023 between 3800-4200, but admittedly I was expecting a pullback into mid-Mar to the lower portion of the range before 4200.  Last week with the Fed raising rates only .25% and a dovish interpretation, short covering exploded, especially in techs, as the TNX fell below 3.4% and the SPX spiked up to 4194.  My macro outlook has been doing much better as Fri jobs numbers surprised many.  As MW stated "The unemployment rate (UR), meanwhile, slid to a 54-year low of 3.4% from 3.5%, the government said Friday. That’s the lowest level since 1969.  Hourly pay rose a modest 0.3% for the second month in a row, reflecting the smallest back-to-back gains in almost two years."  My analog to the late 1960's is starting to look more and more likely.

The low UR means the Fed has more business to do as one of the biggest drivers of 1960s & 70s inflation was wage inflation driving a wage price spiral, so they may continue .25% hikes into May/June.  If so the expected correction may stretch into that time frame and could reach the bottom of the range at 3800 before a summer rally as the Fed finally pauses.

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 for SPX ETFs and volatility, while options rose slightly.  The result was modestly lower sentiment.

Update Alt EMA.  This remains in a sideways pattern.

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  Bearish sentiment fell and remains in a negtative position.

Update EMA.  Bearish sentiment rose slightly.

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. Hedging continued to fall sharply pulling the ST/INT indicator to the levels which ended the bear market rallies since last Jan.

Bonds (TNX).  Bearish sentiment in bonds continues to hover at low levels as the struggle at the 3.5% support level continues.

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.  Bearish sentiment remains above the levels expected for a major downtrend, but the strength in jobs Fri helped the dollar and sent gold tumbling.

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.  The late pullback caused a small spike in sentiment, but it remains at very low levels.

With the sister options Hedge Spread as a ST/INT indicator (outlook 1-3 mns),  bearish sentiment was off the charts during Jan as the consensus was for an imminent recession and SPX drop to the low 3000s, but weakness so far has remained mostly in techs.  As a result of continued strength in the broader market hedging has now fallen to levels comparable to other bear market rallies during 2022.

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 was down while options was up with the result of little change.

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 Jan hedging appeared to be in techs and as the double bottom held around 11,000, techs rallied almost 15% over the past month and sentiment fell sharply nearing the levels of ST tops during 2022.

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 10. 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 & TNX for Mar exp.   A new addition is added for OI $ amounts with breakeven pts (BE) where call & put $ amounts cross.

With Fri close at SPX 4136, options OI for Mon is small with little put support until 4000 and call resistance at 4150.  A drop by the close to 4100 looks likely but 4110-25 puts may provide some support.

Wed has somewhat smaller OI where SPX shows similar support resistance levels with a slightly more negative bias.

For Fri stronger call resistance from SPX 4100-50 and below could push prices toward 4050.

For op exp Fri AM $OI shows a strong negative bias with a very large straddle at SPX 4000 that may act as a magnet.

IV. Technical / Other - N/A

Conclusions.   Surprising strength (short-covering) pushed the SPX to the top of the expected trading range of 3800-4200 quicker than expected, but this likely means a more drawn-out correction, possibly to May/June as the Fed continues to hike Fed funds rates to the 5-5.5% range in .25% increments.  A pause is then likely with a summer rally back to the top of the range.

Weekly Trade Alert.  Some weakness is expected by mid-week with SPX 4050 likely 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
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