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

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