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

Article Index 2019 by Topic, completed thru EOY 2020.02.04
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