Having been completely eviscerated by the stock market bulls the last two weeks, I feel like sitting in the corner for a couple of weeks and licking my wounds. My economic crystal ball is also off line after missing last weeks CPI drop. At least my calls on bonds have been spot on with the breakout from the TNX 3.7-3.8% two weeks ago and last weeks move back to the same area as support. One EW analysts, Dr. A.Shure (no J/S), has done better with a call for a top in the SPX Wed between 4500-10 and is now looking for a drop into Aug (4250-4300) before a final move up into Oct (4600-50). Not my preferred scenario, but we'll have to wait and see. One outcome that has not gotten much attention is the sharp drop in the US $ to below 100. The drop coincided with a rally in oil prices from $67 to 77/bbl the last two weeks. With Aug slated to begin Biden's refilling the oil reserve (SPR) after a 50% drawdown since 2020 (back to 1983 levels), oil is likely to continue its recent rise. The BRICS Aug target for a gold backed currency may also contribute to US $ weakness. Both are likely to reverse the current downward trend in US inflation.
ST sentiment has reached the weak Sell level where a 2-3% pullback is likely the next 2-4 weeks, and the above indicators regarding the oil reserve and potential currency turmoil makes Aug a likely candidate. FOMC July 25-26 may also be a contributor as well as earnings reports the next few weeks.
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 about the same as in July 2021 which was followed by an SPX 100 pt pullback in Aug, a higher high early Sept, then a larger decline into Oct.
Update. Bearish sentiment reached the weak Sell level (2-3% pullback in 2-4 wks) early last week and the late weeks rally left it mostly unchanged.
Update EMA. Bearish sentiment is also just below the weak Sell and the sharp spike down July 3rd appears to be due to the very light volume. The 1-2day expect rally lasted all week.
Update EMA. Bearish sentiment, extreme options FOMO levels have pushed this indicator to new lows that could remain low for months as seen after the Apr-May 2020 sentiment.
Update. Bearish sentiment retreated as gold and the PMs benefited from the weak US $ and GDX rallied almost 10% to $32 after dipping below the $30 support level.
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 has reached the Sell level the same as Mar 2021 and this may mean near term volatility.
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 continues to fall
and is now at the level of May 2021.
Bearish sentiment is falling sharply and is now near the level of May 2021.
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 July 21. 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 4505, options OI for Mon is moderate with the potential to fall to put support around 4475.
For optn exp PM moderate OI shows call resistance down to 4450-75 (likely range) with put support at 4400, but over 4440 there is little overhead resistance.
IV. Technical / Other
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 remains neutral.
Tech / Other History
Click dropdown list to select from the following options:2023
2022
Conclusions. Bull markets typically end in blowoff tops as we have seen time and time again over the past 25 years, but I had been hoping that this time would be different or at least not this fast. The main reason is that INT/LT sentiment has been slow to decline, likely due to the expectation of an imminent recession with the inverted yield curve. To reach sentiment levels comparable to the Jan 2022 top, this implies that the SPX needs to go to 5-6K or the top needs to stretch into late 2024.
Weekly Trade Alert. A moderate pullback is likely to SPX 4450-75 followed by more upside before a larger decline in Aug.. 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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Arthur it's funny that you mention 5k-6k now as I too think we are going to get a blow off top. Too me the year long correction (bear market) ended last year at the October lows because the moving averages have all turned back up now and are bullishly aligned.
ReplyDeleteSure, something crazy could happen and cause another flash crash like 2020 I guess, but the technicals tell me we are are going up big soon. I think we have one more good pullback into the end of September and after that we blast off.
Your read of the market with the options was very accurate during last year when the market was going down and only having bear squeezes, but now we are in a "buy the dip" mode instead of "sell the rips", so that's likely why you went "off line" last week.
My upside target for this current rally is 453.46 on the SPY as I have a FP (fake print) showing that level (4550 SPX). It was put out on stockcharts for just one day (June 28th) and removed afterwards. It should be hit this week and pierced a little. Then a 100-150 point (SPX) pullback should happen into August.
Then another move up into mid-September (double top?) followed by a drop to fill the gap on the ES at 4325 from June 9th-11th when the contract rolled from June to September and produced that big move up. Rarely do we get gaps on the ES Futures as they run 24 hours day basically, but there's a few hours each weekend they are closed, and this happened then... plus the contract roll.
People talk about SPX gaps but they really don't matter that much from what I've noticed. The gaps on the ES do though... so before we blast off to 5000+ I do think that gap will be filled, and late September or early October is the most likely time to do it from a Seasonality point of view.
Red.
Great call on the SPX 4550 level, Avi also had 4550-65, so we could see a decent pullback. Both the 1966-68 and 1998-2000 markets started slowly for about 12 mns then had a 6 mn blowoff which was what I was expecting. Now I'm thinking this may be reversed. If I am right about bonds, when TNX goes over 4% toward 5%+ this will provide a headwind to stocks, but will likely cause bondholders to switch to stocks.
DeleteThanks Arthur. I exited my long today from 6/29 and got short. I don't think it will be an easy short as the big trend is up I think, so this should just be a nice pullback to 4400 or so I'm thinking. But the month of August looks tough to trade from a Seasonality point of view. There could be a lot of chop down around that low area until late August or early September when another nice move up should start.
ReplyDeleteBut the real problem is that late September to early October is bearish, another pullback could happen there too? Really hard to know for sure but I'm very bullish into the end of the year and will be focused on those long setups the most.
On your statement "when TNX goes over 4% toward 5%+ this will provide a headwind to stocks, but will likely cause bondholders to switch to stocks."... it seems to contradict each other. A "headwind to stocks" would mean to me that it's going to be hard to go through... meaning up. Did you mean "tailwind" as the other part about "causing bondholders to switch to stocks" looks bullish for stocks.
The market could certainly go down big later this year instead of up big like I'm thinking. Anything can change for sure, but the way I see the charts right now they are super bullish and each pullback is likely to be bought with higher highs to follow. We shall see I guess.