Last week was expected to show early strength with weakness starting after the FOMC on Wed, but late Wed news of more banking problems from PacWest accelerated the selloff to just two days, testing the previous lows at SPX 4050. As indicated due to large ES short positions (COT), sharp reversals from downturns were to be expected and Fri reversed the entire PacWest selloff on positive job growth and APPL EPS data. The ST SPX price behavior is almost identical to the First Republic Bank and may/or not indicate another test of the SPX 4195 area after some initial weakness (SPX ~4100) before a continued downtrend in May. Positive CPI on Wed may do the trick.
Most of the sentiment indicators have shown some improvement, but remain below the levels that would support a breakout over the SPX 4200 level. More weakness is expected overall until late May although as pointed out above there may be a ST pop next week. To improve readability, I have started bolding the current comments to make it easier to skim over indicator descriptions.
This weeks Tech/Other section starts a review of the most important economic indicators covered since last Dec which resulted in me ignoring many of the "end of world" calls made by the bears.
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 improved only slightly, more downside is expected.
Update. Bearish sentiment reached the weak Buy level, but remains well below preivous ST lows.
Update EMA. Bearish sentiment likely needs the LT EMA to reach a weak Buy or 1 SD before a larger rally.
Update EMA. Bearish sentiment shows some improvement, but likely 2-3 weeks away form a Buy.
Update. Bearish sentiment is unchanged as prices remain near recent highs.
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 moved up to the weak Buy level and seems to be following the pattern of late 2019.
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 improved slightly with an uptick in options sentiment offset by lower ETF sentiment.
Bearish sentiment improved slightly, but remains near 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 May 12. 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 4134, options OI for Mon is small with a slight negative bias toward the 4100-25 area.
For Fri AM optn exp May 19 strong OI show strong put support at SPX 4050 and call resistance at 4200 with a bias toward 4100.
IV. Technical / Other
A couple of weeks ago I mentioned that I wanted to review past economic data, possibly using the Investment Diary Section, but instead I decided to spend a few weeks reviewing some of the charts here. The majority of the charts are from Dec 10, 2022. Charts include inflation, TNX rates, fed funds rates and yield curves from the 1960s - the last inflation cycle following the start of the Vietnam war in 1965. The war between Ukraine and Russia may be a similar instigator. Most who are using the 10 Yr T-bond / 3 mn Treasury as a yield curve predictor refer to the FRED model which unfortunately starts in 1980. So it turns out to be a perfect predictor of recessions, but only in a low/declining inflation environment. As I showed, using other data going back to 1960s, the 1966 inflation surge from near zero resulted in Fed hikes and an inverted yield curve 3 years before a recession, well beyond the 10-19 mns since 1980. The 1970's also showed a wide divergence with much steeper inversions before a recession.
The chart below shows the CPI vs the TNX where I showed that after the initial inflation surge there was about a 38% retracement and from last years high of about 8.5% that would be around 5% today which is where we are. Also TNX rates fell only modestly, hence the 3.5% support which has also worked out well.
The next chart looks at the US unemployment rate vs the TNX rate. Many have argued that higher borrowing rates would cause the economy to collapse with some even arguing that the US govt would have trouble as interest costs would exceed the budget. However, the economy keeps chugging along with unemployment continuing lower exactly as happened in the late 1960s. It is puzzling, but as mentioned a couple of weeks ago the "expectations" of things returning to the recent past has kept rates lower than they should be compared to inflation plus seniors who typically keep high liquid balances are suddenly getting high rates of return.
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 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. One side we seem to having a growing number regional
banks having liquidity problems that depress stock prices, while on the other
side we have a large number of short sellers (ES) with itchy fingers that are
willing to cover with the first sign of profits - who will win? The
biggest surprise so far is that all of the banks having problems are in CA.
Can this somehow be concentrated in the high risk, startup tech sector?
Until I see the banking problems go nationwide or signs of an economic downturn,
the preferred scenario remains a late 1960's-1970's inflation surge with similar
results, ie, no recession/SPX 20% selloff until late 2024-25. The 2ndQ GDP
showed a slowdown to 1.1% growth, but closer analysis showed most of the
weakness came from inventory drawdown which means 3-6 mns later a pickup in
manufacturing to replace inventory.
Weekly Trade Alert. Next week is a tossup with TA showing a
possible retest of recent highs, while ST & INT sentiment still shows some
downside is likely before a push to an INT top. 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
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