Short Term Sentiment is Becoming Frothy

The biggest surprise last week was that stocks and bonds moved in the opposite direction.  The job openings (JOLTs) number Tue was weaker than expected, bringin out the recession crowd, and int rates (TNX) fell from the 4.3% level to 4.1% by Wed.  Stocks fell with the SPX dropping below the 4550 target before rebounding.  Thur both stocks and int rates rebounded and with the Fri jobs report coming out stronger than expected (by everyone else).  As bonds fell with rates back to 4.25%, stocks rallied making a new recovery high intraday at 4609, eclipsing the July high of 4607.  This will likely cause the bears to capitulate as trend followers think prices will continue higher just as sentiment is warning of a crowded long trade.  A significant pullback is expected, probably in 2024 Q1. 

The biggest changes in sentiment were in the hedge spread with a sharp decline to a weak Sell (ST) and a huge decline in DJIA (YM) futures (COT) dropping from + 2 SD to neutral and NDX (NQ) dropping to -.5 SD from neutral (SPX remains neutral).

It was almost exactly one year ago when I had a special section in Tech/Other as to why I thought the inverted yield curve as a perfect recession indicator for 2023 H2 was likely to fail and why the unemployment numbers were more important and were likely to mirror the low numbers of the late 1960s.  Last week MW ran an article about a Fed recession indicator called the Sahm Rule that is based on the unemployment numbers and this weeks Tech/Other takes a closer look.  Hint,no recession.

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 continues to decline with the overall LT composite at -.5 SD.

Update Alt EMA. Bearish sentiment continues to fall, but remains well short of a weak Sell.

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 last week, but remains below neutral.

Update EMA. Bearish sentiment rose last week, but remains below neutral.

The ST VIX calls and SPXADP indicator bearish sentiment remains below the weak Sell, so continued volatility is expected.

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 has fallen sharply led by a decrease in hedging, but remains well short of the July price highs.

Bonds (TNX).  Bearish sentiment remains at the strong Sell level.

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 as prices dropped from 245 to about 230, but remains below 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 remains near the weak Sell level.

With the sister options Hedge Spread as a ST/INT indicator (outlook 1-3 mns), bearish sentiment fell sharply with the ST (grn) reaching the weak Sell level.

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.

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 drop, but remains above the strong Sell level seen in July.

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, but down sharply from the neutral level last week.

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 15. 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 4604, options OI for Mon is moderate with support/resistance around current levels, so it may be a tight range day.

Wed has somewhat smaller OI where SPX has put support a 4550 and resistance at 4600, so some downward pressure is likely.

For Fri AM strong OI with huge ITM call positions at straddles between SPX 4400 and 4550 could pressure prices as low as 4500 with negative economic surprises.

For Fri PM strong SPX OI shows strong put support at 4525 and call resistance at 4600 that likely define a possible range.

IV. Technical / Other

The Sahm Recession Indicator signals the start of a recession when the three- month moving average of the national unemployment rate (U3) rises by 0.50 percentage points or more relative to the minimum of the three-month averages from the previous 12 months.

As the chart below shows with a line at .5, the unemployment rate (UR) remains short of the .5 level.  This includes Dec 8 data with the UR at 3.7%.  As I had pointed out almost exactly a year ago when I challenged the validity of the inverted yield curve as a predictor of a recession in the current period, the UR data is much more accurate, although ST, than the yield curve.

This chart shows the Sahm Rule on a natural log scale (base e, 2.72) which cuts down the effects of the huge spike in 2020.  In this case the log(e) of .5 is -.69 and the current value is about -1.2.  This shows the start of a recession almost exactly when the Sahm Rule crosses the line and is normally several months before a recession is identified..  (Note log of negative values is undefined, log(e) of 1 is 0)

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 neutral at +.25 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.  Next weeks big economic news will be the CPI/PPI on Tue/Wed with CPI expected to be lower, but core higher, so a tossup.  Bearish sentiment is falling fast and the huge ITM call positions for Fri SPX AM exp may provide fuel for the ST pullback indicated by the VIX call indicator.  However, a larger decline is likely to be posponed until the new year.

Weekly Trade Alert..  A negative surprise is possible pushing the SPX down to 4500-50 by Fri open, but the large ITM calls are low enough to make the probability a tossup.  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

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