We Got the Pause, Now What?

Two weeks ago, I began warning of a Fed pause for several months which occurred in both the late 1960s and late 1990s analogs, and last week added the expectation of a 1 to 2 week rally following the decision.  However, the actual decision by the Fed seemed to catch many off guard with the expected range of int rates (TNX) of 4.5-5.0% for several months being meet in 1 week.  With the TLT rallying 6%, the SPX matched the percent move rallying over 6% or about 250 pts.  At this rate the SPX could be at 4800 by Thanksgiving, but this is exactly what short covering rallies look like.  Bond sentiment (TBT/TLT) remains a major concern, mainly due to the possibility of tax loss selling into mid-Dec, but as a LT indicator, a consolidation for several months is not unlikely.

INT/LT sentiment is largely unchanged and in some cases has improved, while both the ST Composite and VIX call indicator reached a ST Sell, indicating tha a pullback/consolidation is likely.

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 dropped slightly last week but remains over neutral.

Update Alt EMA. Bearish sentiment dropped slightly last week w/very ST (grn) below neutral.

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 reversed from a weak Buy at the BOW to below neutral EOW.

Update EMA. Bearish sentiment ST (grn) moved from a weak Buy and is nearing the weak Sell.

The ST VIX calls and SPXADP indicator bearish sentiment went from a weak Buy the previous week to a weak Sell by EOW.

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 also moved from a weak Buy to a weak Sell, mostly due to a sharp drop in hedging.

CITI Surprise Inflation Index for Nov shows a moderation in inflation outside the US, but flat for the US and up for CAN.  CPI and Tue are due Nov 14/15.

Bonds (TNX).  Bearish sentiment remains near the strong Sell area.

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 rose slightly, but remains near neutral.

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 to neutral.

With the sister options Hedge Spread as a ST/INT indicator (outlook 1-3 mns), bearish sentiment fell sharply with the very ST (grn) near neutral.

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 rose to near neutral based on the improvement in options sentiment as volume and P/C both fell.

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 also rose slightly to neutral.

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 Nov 10. 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 cros.

With Fri close at SPX 4358, options OI for Mon is moderate with call resistance down to 4285, but lower resistance over 4350 may provide positive delta hedging support.  Key pivot is at 4350.

Wed has somewhat smaller OI where SPX has a large straddle at 4300 and is an attraction point with max pain for puts and calls..

For Fri stronger SPX OI shows clear call resistance from 4350 to 4400 and will likely ne a negative influence for the week.  Expect a move to 4300 or lower. .

For Fri PM optn exp moderate OI is similar to the above, indicating strong resistance to SPX 4350+.

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 (SPX) sentiment is neutral at + .0 SD, NQ (NDX) is Neutral at +.25 SD, YM (DJIA) is a strong Buy at +2.5 SD, Dow theory may support DJIA thru EOY.

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Tech / Other History
2023
   10.21 A comparison of 5 year periods (1960s, 90s & today) for inflation and int rates (Fed funds & TNX)    09.29 A ST trend for TNX, INT/LT COT bearish for bond futures (TN), LT 20/30 yld curve    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.  A rally was expected last week with the potential for a "Fed pause", but became a monster rally of 6% as int rates (TNX) tumbled to the bottom of the expected INT range of 4.5% based on a 1% real rate and a possible 3.5% inflation expectation.  CPI and PPI in two weeks will tell us if inflation is improving.  Oil has pulled back to the low $80/bbl range, so that may be a good sign.

Weekly Trade Alert.  Both ST indicatrors and SPX options OI is indicating a pause is likely for stocks the next week or two with a possible range of 4300-50.  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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