Are Stocks Destined for Lower for Longer?

The SPX seemed to be following the prescribed path with weakness thru mid-week to 4000 or lower (3970) before a bounce back to 4025 or higher (Thur AM 4018) before news of a liquidity crisis at Silicon Valley Bank (venture capital) hit the news.  As a bank run and fear of contagion spread, the stock market dropped hard into late Fri, hitting a low at SPX 3848.  Bank stocks as a whole (BKX) were down over 10% for the week  with the collapse of SVB on Fri.  I admit knowledge of the banking sector is a weakness of mine, but I doubt this a sign of widespread contagion similar to the securitized mortgage crisis of 2008-09.  However, Avi has been warning of potential bank liquidity problems for several months, although this may also be enough to cause the Fed to be more cautious with rate hikes.

Several of the longer term indicators, including the INT/LT Composite, Dumb/Smart Money and SPX ETFs and options, remain near recent lows in bearish sentiment so several more weeks of bottoming in the SPX 3750-3850 area are possible before a sustained rally.

Tech/Other takes a closer look at the SPX options put-call spread components that are included in the INT/LT composite, DM/SM indicator and SPX ETF/options indicator, and why it may not be as bearish as it seems.

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.  The swiftness of the Thur-Fri decline may not have been long enough to reflect changes in sentiment, but low levels of bearishness are still a cause for concern.

Update Alt EMA.  Bearish sentiment continues to decline, but may need a sharp decline (blowoff) before a final top.

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 rose on top of a strong surge in UVXY $ Vol, but is likely to move higher before a sustainable low in SPX.

Update EMA.  Very ST there could be a bounce for a few days (op exp wk), but is not likely sustainable.

VIX calls & SPXADP.  Sentiment is neutral after a brief surge Thur.

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 spike in hedging on Fri may lead to a ST reversal, but sentiment should be higher for a sustainable low.

Bonds (TNX).  Bearish sentiment in bonds remains near the weak Sell level and rates are likely to continue higher when the current crisis passes.

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.  Gold stocks remain in a tight range with a small increase in bearish sentiment.

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.  Bearish sentiment remains at the Sell level.

With the sister options Hedge Spread as a ST/INT indicator (outlook 1-3 mns), bearish sentiment spiked very ST (grn) to the Buy level but likelky needs for INT sentiment to catch up before a sustainable bottom for SPX.

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 sentiment continues to continue to keep this indicator at the Sell level (see Tec/Other for discussion), while ETF sentiment remains neutral.

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.

The majority of the hedging remains to be seen in techs and are therefore expected to outperform SPX.

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 Mar 17. 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.

With Fri close at SPX 3862, options OI for Mon is moderate where delta hedging may offset put support.  Expect range 3850-3900.

Wed has smaller OI where SPX has only modest put support over 3825 with a wide possible range.

For Fri AM strong OI $ in puts is likely to push prices to SPX 3950+.

For Fri PM strong put support extends up to SPX 3900 with a likely range of 3900-4000.

For Fri EOM strong call resistance in the SPX 4025-75 area is likely to limit any upside, and 3950-4000 seems likely.

IV. Technical / Other

This week I wanted to take a closer look at the SPX options.  In late 2019 and 2020 we saw a spike in volume of SPX options before the market top and we are seeing an even larger one in 2023 as reflected in the SPX options spread.  One thing that is different is the P/C ratio.  The 2020 and 2022 tops saw the P/C ratio rise to 1.75+ before a top and todays ratio of 1.25 is more indicative of the early stages of a rally as in the second half of 2020, hence the preference for a trading range with a blowoff top before a large decline (20%+).

Conclusions.   The SVB collapse was unexpected and may have accelerated the decline to SPX 3800 expected by May/June.  The potential change in sentiment is not likely reflected in sentiment measures due to the rapidity of the decline, but my overall outlook for a trading range INT remains unchanged,

Weekly Trade Alert.  There is likely to be a bounce to SPX 3925-75 for opt exp week, but it could be volatile with lower lows first.  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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