Is Seasonality Working This Year?

Last week started out as expected with inital weakness in the SPX to 4325 and a mid-week move back to 4375, but a combination of EOQ window dressing and predictions of a strong seasonal start to July pushed the SPX to rise above its previous ST high at 4448 to 4458.  There is a possibility that SPX 4460 will prove to be an important inflection zone.  One of the main reasons for seasonal strength in early July is a seasonal weak June due to the "sell in May" pattern, as a seasonality chart for the last 20 years shows that June typically loses 2% before a late recovery into July, while this June the SPX was up 4%.  More likely is a late start to the June weakness, starting in July and extending into Nov. (more on that at a later time)  The JPM call wall (4320) has now failed twice in a row, possibly due to too much publicity as large put hedges at 4320 offset much of the possible delta hedging effect.

ST sentiment remains near neutral, while both SPX and NDX sentiment is less supportive of a continued rally.

Tech/Other shows that sentiment for the banking sector (BKX) indicates more toubles ahead, while Barcharts ES sentiment has now dropped to neutral.

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 decline slowly, now matching the levels of June 2021 and late 2019.

Update Alt EMA.  Bearish sentiment VST (grn) has reached the Sell level the same as July 2021, but several months before a final top.

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 remained stronger than expected and still supports a positive uptrend.

Update EMA. Bearish sentiment VST (grn) strengthened early last week, but has now turned down and is mildly negative (weak Sell).

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 has completely reversed the positive spike last week and is back to a Sell level.

Bonds (TNX).  Bearish sentiment saw an upward spike last week.  Typically this means lower rates ahead, but in Jan 2021 it occurred at the beginning of a breakout upwards from a trading zone.  A breakout from 3.7-3.8% range is likely, more likely lower.

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 saw a continued spike upwards last week.  With last weeks Sepr options Oi showing support at GDX 30, HUI may be beginning a rounded bottom that may last weeks to months similar to mid-2022.  The breakout then was a +50% move, and this may result from a stimulus package from China.

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 continues to hover near the levels of Jan 2021.

With the sister options Hedge Spread as a ST/INT indicator (outlook 1-3 mns), bearish sentiment remains near the weak Sell level.

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 saw a fairly sharp move down last week as ETF sentiment began to drop below neutral.  The two options indicators continue to offset each other.

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 saw a very sharp move down last week and is now the lowest since the Jan 2022 top as ETF options joined the NDX ETFs.

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 7. 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 4450, options OI for Mon is moderate with call resistance from 4400 to 4500.  Some downward pressure is likely.

Wed has smaller OI where SPX aslo has call resistance down to 4400 and some net call resistance down to 4375.

For Fri stronger call resistance at SPX 4400 and above should push prices toward 4400.

IV. Technical / Other

I don't show this chart often because I am not satisfied with using TNX for int rate sentiment, but the current ETF (FAZ/FAS) sentiment is notable for the BKX (banking) index.  Since mid 2022, a decline in overall sentiment to -0.5 SD has proven to be a Sell, and last weeks rally with the positive stress test results has moved sentiment to that level again.  Somewhat surprising given already low prices, but more problems in the banking sector seem likely.

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 has been dropping sharply the last several weeks and is now neutral.  Last week I forgot the update.  Also the asset managers in the lower chart turned down, and in the past this was a smart money indicator.

Tech / Other History

Click dropdown list to select from the following options:
2023
   06.24 Another update to VIX call indicator using VIX P/C; how volatility (VIX) effects options pricing    06.17 OTDE Volume & Put/Call Ratio Drilldown - low volatility (VIX) ahead    06.10 Volatility indicators warning of a nearing top    05.20 A review of indicators that performed well in 2015    05.13 Comparing the VIX term structure (VIX/VXV) and volatility ratio (VIX/VVIX)    05.06 A review of the current int rates (TNX), unemployment and CPI compared to the 1960s    04.29 Addressing the negative M2 growth misconception, adding Barcharts ES outlook    04.15 Several LT/INT indicators show INT gains likely (SKEW&VIX/VXV,VIX/VVIX,BPSPX&SPXADP)    03.25 Comparison of PCE inflation and TNX rates to 1990s indicates possible tech meltup    03.18 Strong SPX volume at Mar optn exp supports Spring rally of 10%+    03.11 Low SPX P/C ratio indicates likely trading range    03.04 LT T-bonds (10/20yr) => more Fed tightening, LT NYSE Adv/Dec volume => possible ATH retest    01.28 SPX correlation w/liquidity, Fed bal sheet - Treasury Gen Acct - O/N reverse repo    01.14 Volatility indicators, ST VIX calls indicate pullback SPX 200 pts, INT/LT SKEW & VIX/VXV still bullish    01.07 Gold performance relative to int rates (TNX), and China stock market (SSEC)
2022
   12.24 Late 1960s analog, TNX,Unempl & CPI => Recession 2024-25, DJIA top Feb'66 retest late '69    12.17 A contrarian view to the consensus 2022H2 recession & bear narket low of SPX 3000    12.10 Yield curve inversion (since 1980) not perfect recess indicator compared to inflationary 1960-80    11.26 Sentiment indicators showing a sharp drop late Dec as a setup for a strong Spring rally    11.19 Sentiment indicators showing choppy move higher likely before pullback    11.05 Using the SPXADP with the VIX call only indicator improves effectiveness

Conclusions.   Last week was a surprise to the upside and I saw many comments from LT bears that are now throwing in the towel and cautiously joing the FOMO crowd.  From the view point of a contrarian, this is what you want to see to call at least a ST/INT top.  The seasonality chart in the introduction indicates several months of sideways chop before a larger move down, and this seems to fit the sentiment well with the ST indicator somewhat neutral as is the barcharts ES sentiment.  Immediate weakness is more likely in the NDX and BKX sectors as these contain the most bearish leaning sentiment.  Overall, my expectation remains an 8-10% drop to SPX 4050-4100 by late Fall.

Weekly Trade Alert.  SPX options OI indicates the potential for drop to 4400 by Fri with ISM data earlier in the week and jobs data Fri.  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

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