Is a Bond Market Crash Possible?

SPX options OI and slightly positive sentiment were of little help last week as oil prices continued to soar hitting a high of $95/bbl before reversing sharply Thur.  The bond vigilantes were in full force as well as TNX rates spiked to 4.6% driving the SPX down to a spike low at 4238 Wed.  Most probably don't know much about the 1970's "bond vigilantes", but this was a name given to the institutional bond investors who sold large holdings of bonds when oil prices rose sharply due to higher inflation expectations.  The result was that they forced the Fed to raise ST int rates to reduce demand and lower oil prices and we may be in the early stages of something similar.

Sept goes to the EW analysts who were looking for a drop to SPX 4250-70, but the outlook for the rest of the year (SPX 4700-800) will be highly dependent on int rates, which are not looking favorable.  On the one hand by several measures bonds are as oversold as they were in 1969, while there is an anomaly of extreme buying by both hedge funds and asset managers (ZH Prem).  We also have an unusual comment by Jamie Dimon last week that he doesn't think the markets are prepared for 7% int rates.  Does he know something we don't?  As a result, I have prepared a special Tech/Other section looking at several bond sentiment indicators, including a ST trend analysis since May that indicates the potential for a drop to 4.25% and a look at the COT data discussed in the ZH Prem article.  I should also point out that MW Prem is no longer available thru Brave browser, but is in Tor (default settings).  Parts of ZH Prem are accessible using ancient tech, circa 2000, that doesn't render the overlay, but I am afraid to say more since it may result in a MW Prem repeat.

Sentiment remains a mixed bag with the ST composite near neutral, but the VIX call & SPXADP just below a strong Buy.  Other INT indicators are largely unchanged, but the Hedge Spread continues to show hedging at the strong Buy level.

I. Sentiment Indicators

The INT/LT Composite indicator (outlook 3 to 6+ months) has three separate components. Starting Aug 26, 2023 SPX options are removed due to extreme 0DTE volume distortions. New weights are ETF put-call indicator (30%), SPX 2X ETF INT ratio (40%), 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.

Update Alt. Bearish sentiment rose early in the week, but the fell to neutral by EOW.

Update Alt EMA. Bearish sentiment declined below the neutral level.

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 rose above the weak Buy then retreated by EOW.

Update EMA. Bearish sentiment EMAs are lagging somewhat, possibly due to the orderly decline.  Something similar happened Apr-May 2021, so outcome is uncertain.

The ST VIX calls and SPXADP indicator bearish sentiment moved above a weak Buy, similar to the Aug lows.  A bounce is possible to about SPX 4400.

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 reteated back toward neutral.

Bonds (TNX).  Bearish sentiment retreated sharply to near the weak Sell, in spite of the breakout over 4.5%.  Strong complacency is not normally a good sign

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 continues to drop, even with the decline in PMs, much like bonds.

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 rose slightly.

With the sister options Hedge Spread as a ST/INT indicator (outlook 1-3 mns), bearish sentiment spiked to a new high, but we may be looking for a repeat of the Dec 2022 setup is there is to be a rally to ATHs.

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 fell sharply back to the weak Sell.

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 rose sharply above neutral with a spike in ETF options sentiment.

For the SPX combining the hybrid ETF options plus SPX 2X ETF (outlook 2 to 4 mns) produces an indicator where, in this case, ETF options are a proxy for the SPY options.

47Bearish sentiment for SPX is more bullish than for NDX at a weak Buy, but SPX ETF sentiment fell.

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 Oct 6. 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 crossa.

With Fri close at SPX 4288, options OI for Mon is small with put support up to 4300, but may run into resistance around 4325.

Wed has very small SPX OI where 4300-4340 is neutral and prices may rise higher.

For Fri moderate SPX OI and strong put support up to 4300 should keep prices higher with only minor call resistance until 4400.

For Fri PM monthly opt exp strong put support at SPX 4300 and 4315 should keep prices elevated.  With no call resistance until 4400, a supportive jobs report could help prices rally toward 4400.

IV. Technical / Other

Last week I mentioned that I had only an INT/LT bond sentiment indicator, so this week I want to look at the daily TNX price trend as a possible ST indicator.  Since May, the TNX has been following predictable path with 4-6 week rallies of around .5% followed by about a 1/3 retrace over 2-3 weeks.  If the pattern continues, rates could drop to the TL around 4.25% by mid-late Oct.  This could support a rally to SPX 4500+, but is likely dependent on oil prices.  Very ST 4.5% appears a support and must be broken first.

However, another INT/LT indicator using 10 year US bond futures (TN), shows extreme buying by both hedge funds (red,top) and asset mngrs (grn, bot).  The ZH article uses the inverted asset mngrs, but since the large specs (grn,top) is similar, I am going to use that for the asset mngrs.  As you can see the last time there was a large spread (red - grn) was 2020 Q1, the exact top for bonds, and the spread now is twice as large.  The time before that was an INT low early 2019, so not perfect but still ominous. Using the TBT/TLT indicator it showed Sells for 2020 Q1 and today, while neutral early 2019.  So todays Sell is confirmed.  My outlook depends on oil.

Also, this week I wanted to look at the yield curve for 20yr/30yr bonds.  Since 1990, the Fed's int rate cycles were not completed until the long end of the yield curve showed flat (98.5%)  20yr/30yr bond yields which means LT inflation is under control.  We still don't have that, so higher rates are likely.

Finally an update for the NYSE INT/LT volume indicator, a quick look shows that a lot of damage was done in the recent decline with the indicators now at the level of Apr 2021, 9 mns before the 2022 top.  This could mean a major top in mid-2024.

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).  ES sentiment is neutral at +.5 SD, YM (DJIA) is a slightly stronger +1 SD, Dow theory may keep DJIA up thru Sept-Oct.

Click dropdown list to select from the following options:

Tech / Other History
2023
   09.22 A look at Dow Theory and a DJIA diagonal and possible similarities to late 2015    09.15 Use of Brave browser Shield for enhanced internet access to some sites    07.22 A closer look at the 1966-74 markets indicate marginal new ATHs likely around 2024 Pres election    07.08 TNX since 2020 shows bounce likely temp w/ more back&fill before rounded bottom completes    07.01 Sentiment for BKX is at warning levels, Barcharts ES sentiment is now neutral.    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 2015s rounded top    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 late 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

Other Indicators
   U.S. 10 Year Treasury Note (TNX Rate), Futures, Extended Hours    Marketwatch Economic Release Calendar    INT/LT Rydex 3x Bear/Bull Fund Ratio    INT/LT NYSE Up/Down Volume 100 & 200 DMAs    S&P 500 Historical Charts with Inflation Adjustment    DJIA 100 Year Historical Charts with Inflation Adjustment

Conclusions.  The sentiment picture remains mixed and I continue to believe that the main driver of stocks for the INT term will be int rates, and the main driver of int rates for the INT term is oil.  Using TNX for int rates, a drop to 4.25% would probably support a rally to SPX 4500+, but for that to happen oil will probably need to fall to $85/bbl.  The TNX TL in T/O shows that as a possibility.  I don't think there will be bond market crash, but a continued rise in oil to $100+ by EOY is likely to push the TNX to 5-5.5% and likely drive the SPX below 4000.  A rise in oil to $120 in 2024 will probably result in rates of 6-6.5%.

Weekly Trade Alert.  Assuming oil stays $90 or lower and TNX rates drop below 4.5%, SPX could rally toward 4400 by EOW.  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

© 2023 SentimentSignals.blogspot.com

Bond Vigilantes Are Alive and Well, Thank You

Last week lower prices were expected, but most of the guideline was a bust, so give me a C.  Bonds in particular were a big surprise as the Wed Fed's dot plot pushed any potential rate cuts to 2025 and seemed to shock bond investors, sending the TNX close to 4.5% Wed-Thur.  Unfortunately, this blew up the "handle" I was looking for and increases the risk of higher int rates and lower stock prices sooner than expected.  My INT outlook remains an SPX 10 to 15% correction (4150 to 3900) by EOY/early 2024 dependent on TNX int rates <5% or >5%.  Even more worrisome is that bond sentiment increased, but only to the neutral level (very ST) which only produced a short consolidation the last time it occurred in June.

There were several positive developments last week that could still support a rebound back to the SPX 4500-4600 area, but likely requires the TNX to retrace back to 4.25% or lower.  First, both ST Composite and VIX calls & SPXADP indicators reached the weak Buy level, and the Hedge Spread indicator remains at the strong Buy level.  Next, the DJIA futures (YM) COT data reached the weak Buy level of +1 SD.  Finally, next weeks SPX options OI is showing strong support at current levels and indicates a move back to 4400-50 is possible.  Also, an article by Simon Thur at iSPYETF indicates his target was SPX 4320-30 and his secret indicator (SPX gap fill) means a return to 4600 is likely, but lower lows are still possible first.

I. Sentiment Indicators

The INT/LT Composite indicator (outlook 3 to 6+ months) has three separate components. Starting Aug 26, 2023 SPX options are removed due to extreme 0DTE volume distortions. New weights are ETF put-call indicator (30%), SPX 2X ETF INT ratio (40%), 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.

Update Alt. Bearish sentiment was relatively unchanged for the week at a slightly positive +.5 SD.

Update Alt EMA. Bearish sentiment remains near the neutral level.

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 increased sharply later in the week.

Update EMA. Bearish sentiment spiked higher with the very ST (grn) matching the June pullback to SPX 4430 and is in between the weak and strong Buy levels.  A bounce is likely soon.

The ST VIX calls and SPXADP indicator bearish sentiment reached the weak Buy level.

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 remains near a weak Buy courtesy of the high level of hedging.

Bonds (TNX).  Bearish sentiment improved to near neutral, matching the level seen in June which resulted in a consolidation for several weeks.

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 dropped sharply as the spike in oil over $90/bbl caused a rush into long ETFs.  Previously, I had identified the mid-2018 as a potential analog and the recent drop in sentiment to neutral increases its likelihood.  A drop to a weak Sell may trigger a sharp selloff.

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 near a weak Sell.

With the sister options Hedge Spread as a ST/INT indicator (outlook 1-3 mns), bearish sentiment remains very high at just below a strong Buy.  An up trend for several weeks is possible.

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 is relatively unchanged.

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 remains near neutral with positive options sentiment and negative ETF sentiment.

For the SPX combining the hybrid ETF options plus SPX 2X ETF (outlook 2 to 4 mns) produces an indicator where, in this case, ETF options are a proxy for the SPY options.

Bearish sentiment for SPX is more bullish than for NDX.

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 Sept 29. A text overlay is used for extreme OI to improve readability, P/C is not changed. Also, this week includes a look at the GDX for Oct and TLT for Dec exp.   A new addition is added for OI $ amounts with breakeven pts (BE) where call & put $ amounts cross.

With Fri close at SPX 4320, options OI for Mon is moderate with high P/C ratios and suggests a move back to SPX 4350 or higher with call resistance at 4400.

Wed has smaller OI where SPX call resistance moves up to 4450 and put support up to 4400, so 4400+ is possible.  However, if below 4350, delta hedging can push down to next support level at 4250-70.

For Fri very strong put support exists up to SPX 4400 with call resistance at 4450.  100k+ puts were added since last week and the JPM calls at 4665 were cutoff (but are probably worthless) and the high BE indicates SPX 4400+ is likely.

Using the GDX as a gold miner proxy closing at 28.8.  No puts in sight, so there is little support until 23, but delta hedging may push prices back toward 31-32.

Currently the TLT is 91.4 with the TNX at 4.44%.  Here, no calls in sight as most were at 110-120.  Similar to GDX little support below, although delta support could push back toward 95.

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).  ES sentiment is neutral at +.5 SD, YM (DJIA) is positive at +1 SD, a weak Buy.  Dow theory may keep DJIA up thru Sept-Oct, but the potential diagonal seems to have failed.

Click dropdown list to select from the following options:

Tech / Other History
2023
   09.22 A look at Dow Theory and a DJIA diagonal and possible similarities to late 2015    09.15 Use of Brave browser Shield for enhanced internet access to some sites    07.22 A closer look at the 1966-74 markets indicate marginal new ATHs likely around 2024 Pres election    07.08 TNX since 2020 shows bounce likely temp w/ more back&fill before rounded bottom completes    07.01 Sentiment for BKX is at warning levels, Barcharts ES sentiment is now neutral.    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 2015s rounded top    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 late 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

Other Indicators
   U.S. 10 Year Treasury Note (TNX Rate), Futures, Extended Hours    Marketwatch Economic Release Calendar    INT/LT Rydex 3x Bear/Bull Fund Ratio    INT/LT NYSE Up/Down Volume 100 & 200 DMAs    S&P 500 Historical Charts with Inflation Adjustment    DJIA 100 Year Historical Charts with Inflation Adjustment

Conclusions.  Between a rock and a hard place.  Higher int rates remain the biggest risk to stocks for the ST and unfortunately are the hardest to predict.  My S/L bond ETF indicator works well for the INT/LT, but I haven't found anything.for the ST.  So if int rates (TNX) consolidate, there is enough bearish sentiment to support a rally of several weeks, but even if lower lows are seen first to the EW target of SPX 4250-70 next week, it's unlikely that SPX 4700+ will be seen this year.

Weekly Trade Alert.  SPX 4400-4450 is possible next week if TNX rates stay below 4.5%.  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

© 2023 SentimentSignals.blogspot.com

The Summer Doldrums May be Coming to a Close

Last weeks outlook was fairly simple, a move up to SPX 4500 by mid-week and a reversal to 4500 or lower by end of week, but the path taken was surprisingly complex.  Mon announcement of the successful development of Tesla's Dojo AI super computer resulted in a 10% jump in TSLA pushing the SPX to 4490 which faded into the Wed AM CPI report to SPX 4454.  But then when bonds rallied, stocks followed suit aided by the ARM IPO Thur and by Thur PM the SPX hit a high of 4512.  A combination of higher int rates and the peak resistance of Avi's EW outlook at SPX 4515 resulted in a steady selloff all day Fri which hit a low of 4447 and close at 4450.  Give me an A minus.  The interesting feature of the selloff was strong selling in AI stocks NVDA, MSFT and META (all down 3%), while TSLA was only down .5%.  One of the more interesting features of the Dojo computer is that at a cost of $1B, it has the computing power of a $3B NVDA AI-based computer.  It is more specialized and can't emulate a human, but most practical applications could likely be meet with the much less expensive Dojo-type computer, so we could see some turmoil in the AI market.

Overall sentiment, similar to prices, remained relatively unchanged.  ST sentiment for both ST Composite and VIX call indicator remains near neutral, so more downside is likely.  SPX ETF sentiment reached a weak Buy using ETF options only, while NDX remained at neutral.  Last Fri selloff did result in a sharp increase in bearish SPX options OI sentiment, moving BE close to 4500 for M/W and EOM support moving up to 4425.  It does not seem to support Avi's outlook (above) for SPX 4250 by EOM.  The latest bear porn, seems to be "bond vigilantes are wrong, US bonds have never been down 3 years in a row", while I distinctly remember that in 2007-08 it was "there has never been a nation-wide housing crisis in the US" as if that proves it can't happen.

This weeks outlook covers an in-depth look at the Dow Theory where the DJIA appears to be in a textbook diagonal with a 5th wave target of 36K for Oct-Nov as well as the SPX late 2015 analog which together indicate a potential drop to SPX 4350-4400 by early Oct followed by a move to 4600+ by early Nov before a more serious decline.  Links were added below for last weeks Brave browser usage (Tech/Other) as well as the after hour TNX futures which is useful to follow (Other).

I. Sentiment Indicators

The INT/LT Composite indicator (outlook 3 to 6+ months) has three separate components. Starting Aug 26, 2023 SPX options are removed due to extreme 0DTE volume distortions. New weights are ETF put-call indicator (30%), SPX 2X ETF INT ratio (40%), 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.

Update Alt. Bearish sentiment improved slightly, but remains near the +.5 SD level.

Update Alt EMA. Bearish sentiment , but remains near the +.5 SD level.

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 remains near the neutral level.

Update EMA. Bearish sentiment reached the weak Sell mid-week, but improved sllghtly by EOW.

The ST VIX calls and SPXADP indicator bearish sentiment moved above neutral, but well short of a weak Buyt.

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 remains near a weak Buy due to strong hedging.

Bonds (TNX).  Bearish sentiment saw a spike to a weak Buy and rates may temporarily fall if the Fed pauses or stocks decline.

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 retreated slightly, but longer term mid-2018 outcome looks likely.

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 rose slightly.

With the sister options Hedge Spread as a ST/INT indicator (outlook 1-3 mns), bearish sentiment saw a brief to the highest level since Feb and remains near a strong Buy.  Strong hedging will likely provide support if the market falls, reducung risk.

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 improved somewhat in both ETFs and options.

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 remains near neutral as rising options sentiment is offset by declining ETF sentiment.

For the SPX combining the hybrid ETF options plus SPX 2X ETF (outlook 2 to 4 mns) produces an indicator where, in this case, ETF options are a proxy for the SPY options.

Bearish sentiment for SPX is more bullish than for NDX, now reaching a weak Buy.

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 Sept 22 & EOM. A text overlay is used for extreme OI to improve readability, P/C is not changed. TLT & GDX are delayed to next week.   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 small with put support extending up to 4475, while call resistance is at 4500.  SPX 4475-85 looks likely.

Wed has somewhat smaller OI where SPX has strong call resistance at 4500 and little put support until 4400.  A high BE could keep prices near 4475, and if prices spike over 4500, they are likely to reverse by EOD.

For Fri moderate OI shows a string bearish bias with P/Cs of 150%+ and BE of 4485, so 4475-85 is likely .

For Fri EOM strong OI for SPX shows increased bearishness since last week with almost 2x puts added vs puts moving BE to 4425 and strong support at 4400.

IV. Technical / Other

While the SPX and NDX charts are hard to fathom due to the AI blow-off, the DJIA looks like a straight forward diagonal (ED?) which for EW should consist of 5 waves.  This follows the Dow Theory Buy triggered in July (one, two).  Comparing recent price action between the DJIA and SPX, DJIA support at the 100 SMA of 34,250 is about SPX 4350-4400, while resistance at 36 K is about 4600-50.

I last looked at the 2015 analog in T/O 2023.05.20 and should have been paying more attention as NDX peaked in July 2015 after SPX, but both had sharp selloffs at the Aug optn exp week.  It's possible that the Sept rally continues into next week where a Fed pause (no J/S,reload) could result in a spike to a new Sept high (4520-40) if the SPX can reach 4500+ by Wed AM.  I give this a 40% prob.  If we do spike and reverse sharply by EOD, the I give a 50% prob of a continued drop to EOM or Oct jobs report Oct 6 targeting 4350-4400.  One possibility of a sharp rise to follow is the expected turn around in Q3 EPS, but if Oct jobs reverses back to 3.5% unempl rate  and inflation continues to rise the Fed may hike on Nov 1 and mid-Dec causing a more serious decline.  Note new ATHs did follow in 2016.

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).  ES sentiment is neutral at +.5 SD, YM (DJIA) is at neutral at +.5 SD, Dow theory may keep DJIA up thru Sept-Oct.

Click dropdown list to select from the following options:

Tech / Other History
2023
   09.09 Use of Brave browser Shield for enhanced internet access to some sites    07.22 A closer look at the 1966-74 markets indicate marginal new ATHs likely around 2024 Pres election    07.08 TNX since 2020 shows bounce likely temp w/ more back&fill before rounded bottom completes    07.01 Sentiment for BKX is at warning levels, Barcharts ES sentiment is now neutral.    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 2015s rounded top    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 late 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

Other Indicators
   U.S. 10 Year Treasury Note (TNX Rate), Futures, Extended Hours    Marketwatch Economic Release Calendar    INT/LT Rydex 3x Bear/Bull Fund Ratio    INT/LT NYSE Up/Down Volume 100 & 200 DMAs    S&P 500 Historical Charts with Inflation Adjustment    DJIA 100 Year Historical Charts with Inflation Adjustment

Conclusions.  Last weeks outlook was simple and straight forward, while the coming weeks outlook is likely to be wild and unpredictable.  On one hand neutral ST sentiment indicates that the volatility is likely to continue, while the strong hedging support points to limited losses.  All in all, the 2015 analog starting with the decline at the Aug optn exp seems to be appropriate with both 2015 and 2023 Aug declines of about SPX 250 pts.  The resulting outlook based on current week SPX options OI is another trip back to 4500 that could spike to 4520-40 (over EW resistance to force short covering) with Wed FOMC, followed by an even lower low than last week continuing into EOM Sept or early Oct that breaks the support level at 4400 (to get everyone short again) before a blow off rally into early Nov.  If the DJIA diagonal is valid, estimates for the SPX lows are 4350-4400 and highs to follow 4600-50.

Weekly Trade Alert.  A move back to SPX 4500+ by mid day Wed could set the stage for a spike to SPX 4520-40 if the Fed announces a hawkish pause.  A reversal by EOD below SPX 4500 wil likely indicate a continued selloff for the next 2-3 weeks to SPX 4350-4400.  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
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