Did Anyone Sell in May?

Admittedly, last weeks meltup was a bit of a surprise with both Dem Biden and GOP McCarthy spreadng "false claims" of a near term debt ceiling agreement which powered the SPX and NDX to new highs for the year.  I should have paid more attention to my "Deja vu 2015" scenario since the high for May and the year was made on optn exp Fri May 21.  One thing to note for 2015, if similarities continue, is a difference between topping patterns for the NDX and SPX as the SPX topped in May 2015 while NDX topped in July.  With the recent rise in int rates (TNX) and NDX exceeding the price objective at 13.7k, this time may be different with NDX topping first.  Also notable was that tests of the highs came in both June and July during optn exp week before the Aug optn exp week collapse.

Two weeks ago, I was expecting a retest of the Feb highs at 4195 or better to reset bearish sentiment as most EW analysts consider this as a reversal level pointing to the SPX 4300+ level.  Although this may be true, I expect it more likely to be a fakeout that falls short, perhaps to ~SPX 4250.  In any case, due to the similarities noted to the mid-2015 topping period (also a pre-election year), this weeks Tech/Other section covers three of the best indicators for that period (hedge spread, INT Volatility, and VIX Call indicators) and compares them to todays markets.

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 spread 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 is back below the weak Sell level and may lead to weakness next week.

Update Alt EMA.  Bearish sentiment continues to work its way lower, but could fall considerably lower before an INT top similar to 2021.

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 was near the Buy level last week, but has now reversed and may mean some weakness ahead.

Update EMA. Bearish sentiment has moved to slightly negative.

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 continued to fall as weaker hedging was not a factor last week.

Bonds (TNX).  Bearish sentiment remains near the Sell level as int rates rose sharply as hints of a debt ceiling solution surfaced.

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 remains below neutral as debt ceiling rumors seemed to reverse a broad spectrum of safety trades including bonds, gold and the dollar.

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 at the warning level of a weak Sell, but several months of SPX strength may remain.

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

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 continued to fall sharply, now below neutral and lower than the SPX, and prices may start to lag SPX.

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 26. 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 4192, options OI for Mon is moderate.  Call resistance is high at 4200.  Above SPX 4185 a move back to 4200 is possible, below support is at 4175.

Wed has somewhat smaller OI where SPX could push to 4210+ if over 4185, but put support drops to 4100.

For Fri strong call resistance at 4200 down to 4150 will likely keep prices down for the week with 4150 or lower likely.

For EOM May 31, strong SPX OI shows strong call resistance at 4200 and little put support until 4150..

IV. Technical / Other

Following the comparison to the mid-2015 period, I wanted to look at some of the indicators that fared best during that period and compare them to today.  One significant difference was that this was the end of a two year bull phase from 2013, while 2023 follows the 2022 bear phase which means that current hedging is upwardly biased.

The first indicator is the hedge spread, here we see the lower bias similar to 2021, but it still performed well particularly in the more volatile last half of the period.

The second indicator is the INT volatility indicator where I was looking for a trigger point for the sudden pickup in volatility.  Here, we see the Dec 2021 (bot) sentiment lows were similar to Dec 2014 (top) and current levels are not too different than mid 2014 and that the spike higher in June 2022 was similar to that of Feb 2016.

The third indicator is the familar ST VIX call indicator.  It's difficult to make comparisons between the two periods other than to say the indicator worked equally well in either period.  The current pattern of lower highs and lower lows does look consistent with mid-2015.

The following uses barcharts.com as a source and discusses S&P futures (ES) as a third venue of stock sentiment in addition to options and ETFs.  The non-commercial/commercial spread represents a LT bearish sentiment (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 (Tues)  barchart graph for the S&P 500 (top) and trader positions (1st 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).  Sentiment is a strong BUY.

Conclusions.  Comparisons to May 2015 are interesting and suggest a drop down to SPX 4150 by EOM and 4100 early June.  With NFP on June 2, another strong jobs number may be catalyst for a downturn.  Looking for a 2-3% range of SPX 4100-4120+ thru a mid-June high for optn exp/FOMC, then a larger pullback into early July.  This would seem to imply another Fed rate hike in June or delay in the debt ceiling agreement.  Note surprises/rumors regarding the debt ceiling are likely to swamp other indicators.

Weekly Trade Alert.  Weakness below SPX 4185 could extend down to 4150 by EOW, EOM.  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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