Bulls Stampede as Bears Cower

Ouch.  A time out worked for the bears who otherwise got trampled by the bulls hooves, but I try to play both sides when possible.  The week started as expected with Mon & Tue up 7 then down 7, but with little news a rally of almost 150 SPX pts followed Wed-Fri.  My preconception of a sideways move into mid-April and recent options OI success led me to ignore some simple TA.  From the Mar lows at SPX 3810, the SPX rallied to 4030 (+120) then fell to 3910 (-120).  If C=A then the next move up is to 4130.  If an impulse, then possibly down to SPX 4010 then up to 4230, although 3 or 5 up may extend.  This weeks options OI looks out thru the Apr 21 AM exp where a very large straddle (80k puts&calls) at SPX 4000 actually supports the expected pullback in mid-Apr to that level.

Next week is shortened by Good Fri so any reaction to Fri job report will have to wait to next week with CPI to follow on the Wed 12th.  Jobs are expected to fall from 300k to 225k while CPI is expected to remain around 6%.  Bond sentiment is showing strong investor bullishness as many seem to expect that rates (TNX) will fall if the Fed pauses or pivots, but the opposite happened in 1998-99 and will likely repeat if job strength and persistent inflation occur.

LT/INT bearish sentiment is little changed and is likely not reflecting the effects of last weeks late rally, but the ST indicators, both ST Composite and VIX Call & SPXADP indicate that a ST top is likely next week.

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 declined, but will probably take a few days to reflect last weeks gains.

Update Alt EMA.  The faster moving EMAs show that a few more days of strength (EOW) are possible before a ST 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 declined sharply to just shy of a weak Sell, so a ST top is likely this week.

Update EMA.  ST EMAs (grn) have reached the weak Sell, indicating buying exhaustion, but LT (blu) remains near neutral, so an immediate reversal is unlikely

The ST VIX Calls & SPXADP has reached the strong Sell level, so a 3-5% pullback is likely the next 1-4 weeks.

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.  With the ST (grn) at a weak Sell and LT (blu) neutral a few more days of topping are likely before a downturn.

Bonds (TNX).  Bearish sentiment in bonds fell sharply last week as rates hovered around 3.5%, so higher rates are likely, it's only a question of when.

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 declined to near the weak Sell with ETF sentiment dropping to neutral.

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 brief spike in ST sentiment played out as a warning for a rally, but has now turned back down.

With the sister options Hedge Spread as a ST/INT indicator (outlook 1-3 mns), bearish sentiment remains above neutral and any pullback should be a buying opportunity..

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.

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 turned down slightly, but remains above 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 breakout over 13K means that the NDX will likely target 13.7k before an INT top as sentiment remains modestly positive.

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 6. 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 4109, options OI for Mon is very small, but 4100 can be important as above is pos delta hedging, below neg.  First support is 4050.  Likely small range, neg bias.

Wed also has small OI where SPX is above put support, but possible negative bias.

For Thur (closed Good Friday) stronger OI, but most of puts are out of money, and similar outlook to Mon due to +/- delta hedging at 4100. Above 4100-50 possible, below 4050-4100.

For Fri Apr 21 AM opt exp strong OI with small P/C and $3B call value should be negative.  Large straddle of 80k P&C at 4000 makes it a target for dealers.

IV. Technical / Other - N/A


Conclusions.   Avi's leading diagonal outlook on Mon did a pretty good job so far, targeting SPX 4070-4100, but his pullback to the low 3900s early-mid Apr looks a little pessimistic.  After testing SPX 4000-30 several times, the breakout above seems to have triggered a major short-covering rally.  Such rallies can be somewhat relentless and both the steady advance throughout the day Wed-Fri and the relatively low volume indicate lack of selling which can drive such rallies.  I hate to rely on TA, but it does seem to work best in short-covering rallies.  So that being said a pullback to SPX 4000 or a little lower by mid-Apr could provide the next trigger point for another short covering rally.

Weekly Trade Alert.  Next week could provide a ST top, possibly SPX 4120-40.  Since payroll data comes out on Friday, the weekend delay will likely soften any immediate response and the CPI on Wed is likely to be the more important pivot point.  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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