Mayday or May Day?

Last week was tough as SPX moves were more determined by news of certain stocks/sectors and less by option OI or other sentiment although the general trend remained the same.  The early week news about 1st Fed Bank woes were enough to continue the SPX skid to meet the VIX Call Sell level at 3-5% from 4170 to 4050 late Wed and again had the bears calling for SPX 3000 or lower.  However, positive EPS from MSFT and generally supportive Q1 GDP lit a fire under the market Thurs AM and caused a complete reversal of the prior two days losses by EOD.  I tried to post an update just below 4100, but a change in Twitters logon protocol threw me for a loop and it took 20 min to logon.  However, the warning of a ST bottom was still good for 60 SPX pts or about 50% of the rally, and the expected move to test SPX 4170 instead came at EOW.  The update showed extreme short ES futures positions and the vertical moves the last hour on Thur were indicative of ES short covering.

This weeks sentiment is somewhat mixed with a slightly positive outlook ST, indicating a possible retest of the SPX 4195 high by FOMC Wed, but more negative INT, supporting a lower low below 4050 in May, probably 4000 or lower.  Interestingly WS B of A's M. Harnett agrees with me with the recent "Sell above SPX 4200" (hack, top), so it makes the contrarian in me think something else may happen.  The recent move up in NDX puts it back on track for the 13.7k target from 13,250 for the IHS, with the recent trend of 3 NDX pts per 1 SPX pt, this would put the SPX at +150 or about 4320 (for June).  This would be a great objective to meet the EW targets for an INT top (-10%+).

This weeks Tech/Other looks at the trend in M2 money supply to address the latest bear porn that negative M2 growth means a 1929 collapse is just around the corner and an in-depth look at the ES futures sentiment discussed in last weeks update.

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 (40%), 2nd the SPX 2X ETF INT ratio (30%), 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.  This week breaks SPX options into volume adj (1/B-A) and traditional spread (A-B).

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 fall this week lead by volatility measures and ETFs.

Update Alt EMA.  Sentiment remains near the weak Sell level, likely limiting gains.

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 sharply on the fall to SPX 4050 the fell to just below neutral.

Update EMA.  Bearish sentiment is back to the weak Sell level.

Looking at the VIX Call & SPXADP indicator.  Bearish sentiment remains below neutral and a second leg down similar to Feb-Mar looks likely.

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.  Bearish sentiment briefly spiked then fell back to neutral.

Bonds (TNX).  Bearish sentiment in bonds remains near the Sell level while a rounded bottom ("cup and handle") near 3.5% for several months looks likely before a move to higher rates.

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 turned up slightly with gold's failure to breakout over $2000.

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 below the weak Sell level but well off its low.

With the sister options Hedge Spread bearish sentiment as a ST/INT indicator (outlook 1-3 mns), hedging remains near the weak Buy level and may limit the expected pullback in May to about SPX 4000.

A new composite SPX options indicator uses both the volume adj (1/B-A) and P/C equivalent spread (A-B) to compensate for the discrepancy between the two.  This replaces the old SPX options indicator for the SPX ETFs + options below and the INT/LT composite. No chart.

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, the drop in ETF sentiment put combined sentiment to the same level as before the second leg down in Feb-Mar.

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 dropped below neutral then bounced at the EOW, possible continuation to IHS target of 13.7K for an INT top in June looking more likely.

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 May 5. 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 4169, options OI for Mon is moderate, if 4160 holds pos delta hedging can push to 4200, if not possible drop to 4125.

Wed has very small OI where SPX sentiment is similar to above, but lower put support indicates greater possibllity of a decline to 4100-25.

For Fri stronger SPX OI indicates greater likelihood of a decline to at least the straddle at 4100.

This is from 04/14 just to show JPM Eq Fund hedges, for Fri June EOM put collar at 3885, call collar ar 4325.

IV. Technical / Other

First, I want to address a topic of several articles I saw last week supporting the idea that the current negative money supply (M2) growth was a harbinger of 1929 or worse. In fact when looking at the last 10 years trend in M2, what you see is a huge bulge in M2 after 2020 due to various stimulus and QE programs and more recently a return toward the LT trend. Actually, M2 remains stimulative while above the trend.

Next I want to look at an S&P 500 futures (ES) sentiment measure mentioned in last weeks update, the weekly COT (Commitment of Traders) report. As taken from another source this shows net short position at 12 year highs, meaning a short squueze is likely, but the format is difficult match to ES performance. However, a more useful format is available at barcharts.com.

I plan on making this a permanent fixture of Tech/Other (for now) as S&P futures are a third venue of stock sentiment in addition to options and ETFs, and in particular the non-commercial/commercial spread represents a dumb money/smart money indicator. As explained in investopedia, commercial investors (red) are institutions and are smart money, while non-commercials (green) are speculators such as hedge funds and are dumb money. Here is the current  barchart graph for the S&P 500 (top) and trader positions (bot) with positives as net longs and negatives as net shorts.  Bearish sentiment is represented by the spread and is positive if red > green (Buy) and negative if green > red (Sell).

Below is this weeks chart.  What is mosr interesting is that the current Buy is stronger than the early 2022 Sell.  Does this mean a new ATH?  Looking back at 2018 and 2019, positions were much smaller and were less reliable as an indicator, so hard to tell.

Conclusions.  Next promises to be fun with FOMC Tue-Wed and jobs data on Fri.  Will next week begin the "Sell in May"?  Mon starts with Manufacturing ISM and PMI that are likely to be weak, while Wed is services data that may be strong and start a reversal, and the next weeks CPI and PPI are likely to be important.  After the the May FOMC the next meet is mid-June, and although I think the last hike for a while is next week, the Fed will likely play "wait and see" for more data before announcing a pause.  So a pause before a "pause" may lead to some ST disappointment, but setup a more dynamic move in June.

Weekly Trade Alert.  A ST move toward the SPX 4195 area Mon-Wed seems likely before a May downturn with 4100-25 possible by Fri.  The strong ES futures short position is a warning that sharp reversals are likely with any downturn in May, so no time to be complacent.  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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A Tale of Two Inflations

Last weeks title "No Pullbacks Allowed" said it all.  I had been expecting a small pullback to about SPX 4000, but the only ST bearish indicators were the VIX Call indicator which is right about 75% of the time and the large OI straddle at SPX 4000 that becomes less effective as it becomes farther OTM.  Short-covering rallies can be more tricky and many who took longer dated shorts expecting the crash to SPX 3000 by EOM June  (top, hack) are likely becoming nervous and use every dip to cover.   One perma bear who claimed to have taken 40-50 short positions Apr 11-12 ar SPX 4120-30 and announced a buy and forget mode made me particularly skeptical about a near term pullback.  It looks more like the SPX will maintain the 4110-70 level thru May 3 FOMC with a possible pullback to 4000 mid-late May with seasonal selling and likely uptick in inflation following the bounce in oil prices and last weeks surprise strength in PMIs.

Exec Spec had a particularly good article this week regarding the disconnect in inflation expectations as many investors seem to believe that the Fed has done too much with a ST return to lower inflation and lower rates while a more objective view shows that inflation remains a LT problem.  I still think that the Fed is likely to pause after one more hike in May, but more hikes are likely in early 2024 as inflation remains "sticky".  Wider acceptance of the SVB crisis being solved similar to the 1998 LTCM crisis with a following liquidity blowoff makes it more likely that a retest of the SPX 3700-800 in the Fall is necessary to setup a 2024 election rally.

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 (40%), 2nd the SPX 2X ETF INT ratio (30%), 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.  This week breaks SPX options into volume adj (1/B-A) and traditional spread (A-B).

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 indicates a ST pullback is due, but as seen in mid-2018, 2019 and 2021 the topping process can take several months allowing for a continued advance.

Update Alt EMA.  Bearish sentiment continues to favor a ST pullback that may be part of a LT topping process.

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.  ST bearish sentiment improved somewhat last week and may favor a bounce.

Update EMA.  Very ST bearish sentiment spiked higher and may lead to a retest of recent highs.

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.  An increase in hedging pushed sentiment back toward neutral.

Bonds (TNX).  Bearish sentiment in bonds remains near the Sell level.  INT sentiment may be forming a "cup and handle" with a rounded bottom for the cup pointing to a 4%+ rate by Fall that may coincide with a correction in SPX.

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 continued to find strong resistance at $2000 as stronger PMIs indicated "higher for longer" Fed policy.  The Aug Buy for the ETF sentiment resulted in a 50%+ rally, but overall sentiment is near levels of several INT tops.

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 has reached the level of the Mar top.

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

A new composite SPX options indicator uses both the volume adj (1/B-A) and P/C equivalent spread (A-B) to compensate for the discrepancy between the two.  This replaces the old SPX options indicator for the SPX ETFs + options below and the INT/LT composite. No chart.

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 remains above the levels of recent ST tops.

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 NDX seems to be losing support as the hedging favorite with sentiment falling back to 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 Apr 28. 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 May and TLT for June exp.   A new addition is added for OI $ amounts with breakeven pts (BE) where call & put $ amounts cross.

With Fri close at SPX 4134, options OI for Mon is small indicating put support/call resistance at 4100/4150.

Wed has somewhat smaller OI where SPX shows wider support/resistance at 4050 and 4170.

For Fri EOM, strong OI shows stronger call resistance over SPX 4100 and another straddle at 4100 that may act as a target.

Wed May 3 FOMC has very small OI so far, but shows SPX call resistance over 4125, so its possible that overly optimistic "pivot" investors are disappointed and start the long awaited pullback to 4070 or possibly 4100 by the end of May.

Using the GDX as a gold miner proxy closing at 33.6 shows strong call resistance at 35.5 and minor put support until 29.  Prices may fall further.

Currently the TLT is 104.4 with the TNX at 3.57%, Avi's recent calls for lower rates and TLT targeting 120 looks like a consensus with strong call resistance over 110 and no put suooprt until 102.  Possible range seems to be 100-110.

IV. Technical / Other - N/A


Conclusions.  Last weeks action was lackluster, but lacked the typical distribution volume seen for a significant top.  We may see a seasonal pattern of weakness starting early May, but a higher high, possibly SPX 4250+ seems likely into the mid-late June on higher volume for an INT top.  To me the SPX 3800-4200, or extended, range remains likely thru the EOY.  Fall SPX weakness may result from a combination of slower growth and higher inflation, ie stagflation, while a recession is unlikely if unemployment remains below 4%.

Weekly Trade Alert.  ST sentiment is showing a bounce is possible to start the week, possibly to test the recent highs at 4160-70, but a pullback toward 4100 is likely by the EOW.  Next weeks FOMC coul be critical for a larger break below 4100.  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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No Pullbacks Allowed

Last weeks performance by SPX was somewhat stronger than expected as the C wave off 3810 extended above 4130 aided by moderating inflation and int rates (TNX).  Much of the Mar inflation drop can be attributed to the 20% drop in oil from around $80/bbl to 65 by mid-month esp PPI), but the recent cutbacks by OPEC have more than reversed that to $82/bbl.  Bearish sentiment in bonds (TBT/TLT) continues to drop and higher rates are ahead.  The only direct guidance for last week was for potential weakness Wed (CPI) and Fri (bank EPS) and both days started strong on "good news", but then saw a 50 pt drop in SPX before a late recovery.  So a 50/50 on the outlook.

This weeks ST/INT sentiment is showing a significant drop in bearish sentiiment that is more likely to support a move toward SPX 4000 by Fri.

The Tech/Other section takes a look at several LT volatility indicators that show similarity to the mid-2018 and mid-2019 periods that ended in blow-off rallies by the EOY, although I am still hoping for a more extended period of consolidation for SPX.  Most of the current strength in NDX seems to be "AI" related, while 2024 should be more "cybersecurity upgrade" related to Windows 11.

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 (40%), 2nd the SPX 2X ETF INT ratio (30%), 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.  This week breaks SPX options into volume adj (1/B-A) and traditional spread (A-B).

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 fell last week, nearing the levels of the Dec 2022 highs.  Note the similar range in sentiment to mid-2019 before the blowoff top into 2020.

Update Alt EMA.  Bearish sentiment fell last week,similar to the Dec 2022 highs.  Note the similar range in sentiment to mid-2019 before the blowoff top into 2020.  A ST top is likely soon.

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.  Sentiment remains near the weak Sell, so any pullback is not likely to exceed SPX 4000.

Update EMA.  Very ST (grn, red) shows a weak Sell, some weakness is expected next week.

Strong buying of VIX calls may mean a sharp drop for 1-3 days.

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 sharp drop in hedging has pushed this sentiment indicator very close to the ST weak Sell level.

Bonds (TNX).  Bearish sentiment in bonds continues to drop sharply as many seem to be expecting lower rates or a recession.  The last time sentiment was this low the TNX was at 1.5% and rates rose over 3% before generating a Buy.  Does this mean we may see 6% in the next few years? 

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 may be having problems with $2000/oz, but HUI buying is strong, driving sentiment to the level of the early 2021 top.

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 following a higher lows and highs pattern similar to mid-2019 and is currently near the Sell level of the last two ST tops.

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

A new composite SPX options indicator uses both the volume adj (1/B-A) and P/C equivalent spread (A-B) to compensate for the discrepancy between the two.  This replaces the old SPX options indicator for the SPX ETFs + options below and the INT/LT composite.  No chart.

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 dropped below 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.

Sentiment remains near the weak Buy level.

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 Apr 21. 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 4138, options OI for Mon is very small with call resistance at 4150 and higher and only minor put support until 4050.

Wed OI is very small with minor call resistance at SPX 4125 and 4150 and minor put support at 4000.

For Fri AM strong OI and a large straddle at SPX 4000 may pressure dealers to sell down to that level with net call resistance starting at 4075 and put support below 4000.

For Fri PM moderate OI with a downward bias to SPX call resistance at 4075 and put support at 4050.  Last week increased out support at 4050 and 4100, so an AM move down to 4000-25 is likely to close higher between 4050-75.

For Fri Apr 28 EOM moderate OI indicates call resistance at SPX 4125 and higher and put support from 4050 and lower.  Likely range 4050-4125.

IV. Technical / Other

Combining two LT volatility indicators, the SKEW (OTM premiums) and VIX term structure (1/3 mn VIX), shows very similar consolidation patterns to mid-2018 and mid-2019 (0 to +2SD).  Both times ended with a blow off top and a move in the LT indicator to -1.5 SD before a top. 

Looking at two VIX indicators, VIX term structure (1/3 mn VIX) + volatility index (VIX/VVIX volatility) shows a similar pattern, although more like 2018.  Lower readings of about -1.5 SD are likely for both before an important top.

A ST/LT version combining the BPSPX & SPXADP (ST, grn) with VIX term structure + volatility index (LT, red) may prove useful and is in testing.  Here, the strong Buy at the June 2022 lows indicates the rally has more to go INT.

Conclusions.  It was only a month ago that I gave a Buy indicating that a 10%+ rally was likely by mid-late June and last week almost reached the minimum (SPX 4180) in a single month.  At the time I indicated that the SVB crisis and subsequent bailout was more likely to be a "risk on" event similar to the 1998 LTCM crisis while most were predicting a 2008-09 collapse.  Now some may feel we are approaching top since a rally to SPX 4200-300 was expected for an important EW top, but the volatility measures as LT indicators in the Tech/Other section show that more surprises to the upside may be in store.  I still think the int rates (TNX) will be an important factor and bond sentiment does not look good, but the timing is uncertain.

Weekly Trade Alert.  ST/INT sentiment and Oi are now both showing the potential for a ST drop to the SPX 4000-25 level by Fri AM, but it could be quickly reversed.  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

© 2023 SentimentSignals.blogspot.com