Effects of Inflation Are Always Positive in the Beginning

Last weeks markets were stronger than expected as economic data supported the bullish view of an economy weakening just enough to encourage the Fed to be less hawkish, but not enough to threaten a recession.  Third quarter GDP came at 5.2%, but is indicated to drop to 2% in Q4, while PCE inflation also fell.  The combined outlook helped rates to fall with the TNX just above 4.25%, down from 5% in Oct.  So far since the Oct lows, the SPX has matched the gain in TLT at 12% which seems ridiculous since the TLT fell over 50% from the 2020 highs at 160 to 82.  If rates continue to fall to TNX 2.75-3%, this would mean a TLT 50% rally to 120 (Avi's target a few months ago), and for the SPX 50% from 4100 is over 6000.  Seems a little over optimistic to me.

One of the things to be concerned about compared to the late 1960-80's period is that the first bust of inflation typically has very benign results, primarily from the bond market expectations of the "return to normal", or in this case the ultra-low rates of the pandemic era.  This causes the nominal or market rate to be low compared to inflation producing unusually low "real" rates.  Even today with TNX rates at 4.25% and inflation at 3%, the "real" cost of borrowing is 1.25% compared to the pandemic era of 0% inflation and nominal "real" rates at 1%.  Another factor supporting the economy was an incredible amount of household wealth created by the ultra-low int rates in the inflation of housing prices by 50-100% in many areas of the country.  Higher current rates have done little to effect this wealth as home prices stayed higher, even with high mortgage rates.  I still think that "Goldilocks" is likely to be disappointed, and next weeks jobs report may be the first major surprise.

Last weeks call for a "cyclical" recovery in the DJIA and weakness in the NDX was timely with the DJIA up 3%, the NDX down 1% from weekly highs and SPX up 1%.  Bonds, however, remained strong.  For chart watchers, the DJIA rallied 6,000 pts off the Oct 2022 lows in 3 mns (A), before going sideways (B), and a similar rally (C) would put it 38K.  I doubt it, but not impossible if rates continue to fall.  Fri jobs report will likely determine strength seen thru the EOY, I could be wrong, but am still expecting relatively strong job growth.

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 retreated slightly but remains near neutral.

Update Alt EMA. Bearish sentiment retreated slightly but remains near 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 rose late in the week, but remains near the weak Sell.

Update EMA. Bearish sentiment VST (grn) whipsawed from a strong Sell to neutral.

The ST VIX calls and SPXADP indicator bearish sentiment remains between a weak and strong Sell as markets showed little reaction to BF.

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 below neutral, but well above July price highs' level.

Bonds (TNX).  Bearish sentiment remains at the strong Sell level.  Rates continued to rise for almost a year in 2018 after the strong Buy, so timing is uncertain.

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 fell with the ETF sentiment below neutral and combined at the weak Sell level.

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 around the weak Sell level and may be following a path similar to early 2021.

With the sister options Hedge Spread as a ST/INT indicator (outlook 1-3 mns), bearish sentiment remains slightly positive with the LT (blu) positive and the ST (grn) negative.

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 remains near neutral with options (0DTE) negative and ETFs positive.

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 continues to decline toward the strong Sell.

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 NDX at neutral.

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 Dec 8. 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 4595, options OI for Mon is moderate with put support at 4550 and call resistance over 4575.  An early move over 4600 will likely reverse by the close.

Wed has somewhat smaller OI where SPX again has put resistance over 4575 with smaller put support.

For Fri moderate SPX OI shows a lot of optimism with strong call resistance at 4575 and 4600.  Could see prices fall to 4550 or lower.

For Fri optn exp strong SPX OI again shows call resistance over 4550 with put support at 4525..

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 + .25 SD, NQ (NDX) is negative at -.5 SD, YM (DJIA) is a strong Buy at +2 SD, Dow theory may support DJIA thru EOY.

Click dropdown list to select from the following options:

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.  Chart wise, everything looks a lot like the rally off the Oct 2022 lows, but sentiment (ex DJIA futures) tells a different story with INT sentiment neutral at best.  Everything will likely depend on the bond market and if rates continue to fall, stocks will rally.

Weekly Trade Alert.  Fri SPX options OI shows way too much optimism for support from the jobs report (weak to support dovish Fed), and a surprise (stronger than expt) likely means a pullback to SPX 4550 or lower.  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

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