Will They or Won't They?

The pullback last week was somewhat less than expected by the EW analysts (SPX 4200, act 4160), but the result was a sharp decline in bearish sentiment which happened to coincide with the SPX 61.8% retracement of the 2022 decline (4311, act 4322).  While its too early to judge the significance, many sentiment indicators now match that of the Sept top of 2020 which resulted in several months of consolidation before a more lengthy bull market phase.  This followed a very strong rally phase off the Mar 2020 pandemic lows and resulted in a 10% correction or about a 30% retracement of the move from SPX 2200 to 3600.  While a 10% decline would be about the SPX 3800 level that many are expecting, a 30% retracement of the current rally would only result in a move to SPX 4050-4100.  I expect the later to hold with lows in the Sept-Oct time frame.

Much of investor sentiment over the last six month has over a "pivot" or "pause" based on the argument that the Fed had raised too much, too fast and a severe recession was just around the corner.  So far, however, the US has escaped a recession based on a surprisingly strong consumer sector resulting from strong jobs growth in the services area and record credit card usage.  In the EU, which has suffered from much higher fuel and food costs due to the Ukraine-Russia conflict, they have entered into a recession with two quarters of negative GDP at -0.1% growth each - the mildest recession possible.  Even with fairly robust growth (Q1 GDP revised up to 1.3%) and "sticky" inflation, the Fed is still more likely to adopt a "hawkish" pause for several months (ie, data dependent).  However, investors may be surprised to find that prices fully reflect that result and a "sell the news" is more likely.

The put/call analysis scheduled fpr this week is delayed to next week due to a review of several volatility indicators that indicate a ST/INT top/consolidation that may last into Sept/Oct when econimic activity is expected to make a turnaround..

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 continues to hover around the weak Sell level.

Update Alt EMA.  Bearish sentiment dropped sharply last week after a brief spike upward previously.  Although at a lower level, the drop from last year's peak of 4.5 SDs is about the same as Sept 2020.

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 turned down from neutral, but remains in a consolidation mode (minor trend changes).

Update EMA. Bearish sentiment VST (grn) has gone from positive to negative and is at a similar level as Sept 2020.

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 moved sharply lower matching the level of ST tops (2-4wks) since June 2022.  A pullback of several weeks is likely.

Bonds (TNX).  Bearish sentiment declined slightly last week, but remains near the Sell as a rounded bottom still seems likely.

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 is mildly positive based on strong ETF sentiment, up from neutral the prior week.

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 turned down very sharply and may indicate that a larger decline of 10%.

With the sister options Hedge Spread as a ST/INT indicator (outlook 1-3 mns), bearish sentiment moved modestly lower, matching the lowest levels since June of 2022 and increasing the possibility of a 5-10% pullback.

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 remains near the neutral level from below, while Sept 2020 was near neutral from above and may indicate a smaller pullback.

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 continues to decline, nearing the lowest level since the Jan 2022 top except for Dec 2022.  The meltup expected in 2024 appears to have accelerated due to AI mania and has now retraced 67% of the 2022 decline.  Future performance is likely to match that of 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 June 16. 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 4299, options OI for Mon is moderate with strong call resistance at 4300 and put support at 4200.  A drop to 4175 or lower is likely.

FOMC Wed has small OI where SPX has strong put support at 4160-80.  Anywhere between 4200 and 4325 is possible with a bias toward 4250-75.

For EOQ Fri AM strong OI and a very large $OI indicates a strong incentive for dealers to drive prices lower toward SPX 4200.  A "sell the news" is likely with a Fed "pause".

For EOQ Fri PM moderate/strong OI shows a very strong bullish bet on a breakout to SPX 4300-400 with a Fed "pause" while contrary opinion indicates a selloff is more likely to 4250 or lower.

For EOM strong OI in calls over SPX 4300 will likely push prices lower toward 4200-4250.

IV. Technical / Other

This week I want to look at several of the volatility indicators which were pointed out a couple of weeks ago which worked well in earlier periods. The first is the SKEW and VIX term structure (1 mn VIX/ 3mn VXV).  I had been looking for a drop to the Mar 2022 level, but the sharp rise in the SKEW now matches the Sept 2020 SPX top that preceded a consolidation period for several months.

The second is the INT Volatility composite which part of the overall INT/LT composite.  Here, we see a stairstep decline since the SPX Sept 2022 low that now also matches the Sept 2020 SPX top.

The rhird is the ST VIX Call Indicator with SPXADP.  Here, sentiment has passed the weak Sell level after consolidting near neutral for several weeks that is somewhat similar to Sept 2020.

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 showed a sharp reversal last week, but remains a strong BUY.

Conclusions.  Last weeks move to SPX 4300+ was a week earlier than expected and resulted in a significant shift in bearish sentiment with options OI indicating a move well into the 4300-400 area next week for opt exp and FOMC.  As a contrarian this looks likely to be setup for a reversal to catch all of the newly converted bulls off guard.  One example is a well-respected EW analyst, that had been predicting a wave 3 decline to SPX 2700-3000 since Nov 2022, to switch to looking for a wave 3 advance to SPX 4450.  Current sentiment indicates that a pullback will likely be a "pause to refresh" that could last several months in a 5-6% range of SPX 4050-4300 until economic clouds clear up.

Weekly Trade Alert.  Stock prices may hold up until Wed FOMC, but a ST move toward SPX 4200 is likely as a "sell the news" event on a Fed pause in rate hikes.  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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