March Madness May Have Begun Early This Year

Last weeks outlook was for a mild advance in SPX.of about 50 to 75 pts from the 3970 level based on strong put option support for Mon & Fri with an uncertain Wed.  Mon started with a gap & go rally of 48 pts with a decline in int rates (TNX), but later in the day receded as rates began to rally.  Rates really took off on Tue & Wed with stronger US econ data and higher EU inflation with the TNX rising to almost 4.1% and the SPX began to fall sharply hitting 3928 early Thur.  The last time rates were this high was early Nov when the SPX was at 3900 which had prompted my outlook for SPX 3900 at TNX 4%+ by mid Mar and SPX 3800 with TNX 4.5% May-Jun, but rates were rising much faster than expected.  By Thur noon the SPX was diverging from bonds rising to 3950+ as rates stayed the same, then about two hours before the close Fed head Bostic indicated the Fed is likely to stick to 25BP (0.25%) hikes and stocks took off with the SPX closing at 3995.  The rally continued all day Fri to the high of the weekly target of SPX 50-75 pts from 3970 at 4047, and the middle of the SPX OI target of 4025-75.

It's possible this was just a strong short-covering rally of those short looking for the SPX 3800 by Mar 8 predicted by BofAs M.Harnett mentioned last week.  One thing I agree with Harnett about is that "war is inflationary", only my comparison is Vietnam rather than WW2 (more in conclusion).  Some of the prominent EW analysts including Avi and Pretzel Logic see this as the beginning of a diagonal to SPX 4300 by Apr, but sentiment as shown below continues to show lack of sufficient bearish sentiment to support a strong rally (10%+).  A few have joined my ranks looking for an extended trading range, including iSPYETF and Exec Spec, while one, Ed Yardeni is looking for SPX 4800 by YE 2023 based on the Jan effect and a strong economy.

In the Tech/Other section this week I look at the LT charts for the 10/20 year bond yield curve and NYSE Adv/Dec vol which both seem consistent with the 1967-70 analog with continued higher rates but no recession until 2025.

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.  SPX ETF sentiment continues to decline, while volatility sentiment rose modestly.  Little change in options sentiment leaves overall sentiment very close to a Sell and no support for a rally.

Update Alt EMA.  ST EMAs remain on a Sell.

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.  Declining volatility sentiment is offset by increasing volume sentiment for a slightly positive composite.

Update EMA.  A spike in vey ST sentiment at the Wed lows has reversed back to neutral.

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.  Similar to the above, sentiment only spiked briefly last week and has reversed to slightly negative.

CITI Surprise Inflation Index for Mar shows a broad increase in inflation for the West, esp EU, while China's deflation is spreading (possibly due to offshoring with risk of US conflict over Taiwean?).  This may encourage more CB stimulus from China, however.

Bonds (TNX).  Bearish sentiment in bonds the turmoil in bonds last week had little effect on sentiment with ST EMAs nearing a weak Sell at -1 SD.  Higher rates are 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.  ETF sentiment remains modestly positive, while overall sentiment remains slightly negative.

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.  Very little improvement here as dumb money continues to chase stocks.

With the sister options Hedge Spread as a ST/INT indicator (outlook 1-3 mns), bearish sentiment shows a modest pickup, mostly in techs shown below, that may lead to modestly higher prices before a downturn.

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),  bearish sentiment has reached the levels of the Dec highs before a drop from 4100 to 3750 and is  likely to limit any upside.

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 continues to be the favorite hedge/short and should continue relative strength relative to SPX on rallies, but remains vulnerable to higher rates.

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 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 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 4047, options OI for Mon is moderate with strong put support below 4000, but $OI call resistance is likely to push prices toward 4000.  Target range 4000-25.

Wed has smaller OI where SPX has a similar bias toward 4000 or a little lower.

For Fri stronger OI has put support starting at 3950 and call resistance at 4100 with 4000-50 mostly straddled.  Target near BE at 4025, range 4000-50.

IV. Technical / Other

This week I wanted to take a look at the LT history of the INT/LT US T-bonds (10/20yr) which as pointed out before indicates that over the past 35 years of rate cycles has averaged 0.98-.99 at rate cycle peaks and still has a ways to go.  I am assuming this means that LT inflation epectations are under control at that level.  Note that "alternation" suggests that this time will be a rounded top, ie, higher for longer (two years) before a pivot and a recession in 2025.

The LT NYSE adv/dec volume has apparently topped, but that compared to mid-2020 an SPX top may be 1-2 yrs away.  This is probably a coincidence, but the SPX topped at the same level as the NYSE adv/dec vol for 2012.

Looking at the INT, 5 year chart, the SPX topped at the same level as the mid-2020 vol data.  Is the recent top an indication that there will be a retest of the ATH?

Conclusions.  After looking at the increase in the recent EU inflation data, I found that the largest increase was in food, particularly vegetables, grains, and beef.  As discussed in this article, Ukraine has become as the "breadbasket of Europe" and that much of the shortages of food are due to sharply declining exports from that region.  This has made me rethink the dynamics of the Ukraine-Russian war, as previously I had been in the camp of Martin Armstrong since geographically Ukraine seems of little import.  However, as the above article shows the most fertile and productive land is in the south-east, the exact land that Russia is laying claim to.  The strategic importance then becomes clear, if Russia controls south-east Ukraine, this will give them a strangle-hold on Europe as they will control the food supply as well as a current major supply of energy.  If this is true then the military commitment of the US and EU could be commiserate with the Vietnam war from 1965-75 with similar inflationary consequences.

Back to the markets, the possibility of a decline into mid-Mar before a "surprise" FOMC 25BP rate hike on Mar 22 has been turned upside down with last weeks news release.  Since the SPX proved somewhat stronger at the lows of 3928 vs 3900 target, the potential upside may stretch higher to 4125-50, but I maintain the same general range as a target (3925-4125) thru mid-Apr before a decline to lower lows.

Weekly Trade Alert.  SPX options OI is showing fairly strong resistance from 4050-4100 with a possible drop to 4000 mid-week before a move up to 4025-50 Fri.  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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