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
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