Unemployment Continues to Surprise the Bears

Last week I was looking for a ST top around SPX 4130 based on ST sentiment and "simple TA" and the Tue high was 4133 before a drop to 4070 Thur AM then a bounce into the close to 4100.  Fri jobs data came in as expected and futures indicated a move to SPX 4115, but bond futures seemed to open late after ES closed and by noon EST the TNX rose from below 3.3% to over 3.4%, and continued higher rates are likely to pressure stocks next week.  EPS season begins next week with major banks reporting Fri.  Apr opt exp OI continues to point to a low around SPX 4010, the 4th wave "simple TA" target from the SPX 3810 low.  Fri continued strength in employment with low unemployment at 3.5% indicates a likely May 3rd Fed rate hike before a pause.  Supporting my outlook for a continued rally into late June, a recent ZH article by Market Ear summarizes SPX performance after a final rate hike.

This week I want to look at some of the other views out there.  Starting with Avi, his 27th triangle wasn't too bad on the upside, but the downside target of the low SPX 3900s early Apr was too pessimistic as expected.  More importantly in what seems to be a first, Avi gave a "crash" warning (no J/S) for the Fall with a target of SPX 2700 (daily/grn c).  This is apparently due to his research in the banking sector and the outlook for a 2008-09 outcome, but Jamie Dimon (JPM CEO) in his recent share holders report indicated only limited expected risk from recent banking problems.  For those interested in AI, Phils StockWorld has been covering its usage for writing the past few weeks and Fri looks at use in art and cybersecurity.  Speaking of cybersecurity, Der Spiegel (no J/S) takes an in depth look at Russian plans for cyber-warfare that can target corporations and infra structure should escalation continue with NATO.

Sometime in the next 2-3 weeks (after taxes), I plan to update the Investment Diary to include links for the past research comparing the current economy and markets to the late 1960-70s and late 1990s.

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 was little changed for the week.

Update Alt EMA.  Bearish sentiment was little changed for the week.

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 bounced early in the week, then fell closer to the official Sell level.

Update EMA.  Bearish sentiment is off the recent lows but lower than last weeks close.

The ST VIX Calls & SPXADP remains near the strong Sell level, so a 3-4% pullback is likely the next 1-3 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.  An increase in hedging (mainly NDX) has pushed sentiment back to neutral, but lower prices are likely before a Buy level is reached.

Bonds (TNX).  Bearish sentiment in bonds is consolidating near the weak Sell level.

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 was little changed for the week with ETF sentiment at 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.    Bearish sentiment continued to fall below the weak Sell level.

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

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 was little changed for the week.

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.

A moderate increase in the ETF option put-call spread increased sentiment to the weak Buy.  The NDX may be setting up a large IHS if a move up to 13.7k is seen in June.  This would imply a retest of 11k in the Fall (SPX 3700-800) before a move up to test the ATH in 2024.

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 14. 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 4105, options OI for Mon is moderate with call resistance at 4100 and above with put support starting at 4050.  Some downward bias is expected.

Wed has somewhat larger OI where SPX OI is very small with downward bias toward 4050-4100..

For Fri stronger OI, but put/call overlap between 4075-4125 could point to some volatility in that range, but OI and OI$ favor the bears.

For Fri Apr 21 AM strong OI where large straddle at SPX 4000 may act as a magnet.

For Fri Apr 21 PM moderate OI shows a similar position to AM, where SPX call resistance extends down to 4010, while strong put support resides at 4000.

IV. Technical / Other - N/A

Conclusions.  Last week went pretty much as expected with no "crash" and some late short covering ahead of the Fri employment data which came in as forecast.  Low volatility may continue as this puts more pressure on the bears with a targeted pullback by the Apr 21 opt exp around 4000 as indicated by the SPX options OI.  A prelim look at the EOM Apr 28 shows a move back to SPX 4050-4100 is possible before the May 2-3 FOMC.  If markets do rally after a May Fed rate hike and pause, the strength of the rally is likely dependent on what happens to INT rates (TNX) as I think they will continue to rise.

Weekly Trade Alert.  Expect a choppy market with a downward bias as no definitive signs are provided by this weeks OI.  Wed CPI and Fri bank EPS will provide the best oppty for a sizeable decline.  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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