Preparing for the Artic Blast Edition

Last week went about as well as could be expected.  While most were expecting a continued downtrend, based on SPX options OI, the contrarian position was that the the SPX would rally from below 4700 to the 4775 level (for the close), and Friday's close was 4784, although spike highs were seen above the Dec 4793 high with the Wed/Thur CPI/PPI reports, topping Thru at 4802.  The following declines after the spike highs were enough to increase put support for next week, increasing any pullback target from the SPX 4625-75 level to 4650-700.  Very high options P/C last Wed with the CPCE (Equity) at 1.55, the 3rd highest of the past 6 years, pushed the Hedge Spread indicator to a ST Buy, so any pullback may be short-lived.

This week I am making some timeframe adjustments for the sentiment indicators using 4 years for the LT indicators (start Jan 2019) and two year for the INT/ST (Jan 2021).  One exception is the HUI which use three years.  The shorter timeframes increase readability.

This weeks Tech/Other section takes a look at the SPX Put/Call indicator.  Based on the extremely high volume (0DTE) and low P/C, I am beginning to think that this may limit market moves in either direction.  The result may be more of a rounded top as seen in 2015 where the SPX remains in a range of about 4% from 4650-4850 for as long as 6-8 months.

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 increased to slightly above neutral.

Update Alt EMA. Bearish sentiment increased to slightly above 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 increased to a weak Buy.

Update EMA. Bearish sentiment increased, but remains near neutral.

The ST VIX calls and SPXADP indicator bearish sentiment moved back to neutral.

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 increased to a weak Buy with the help of a strong jump in the Hedge Spread.

Bonds (TNX).  Bearish sentiment remains at the low extremes of late 2020.

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 overall moved to just above neutral with the ETF sentiment near a weak Buy.

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 above the weak Buy level.

With the sister options Hedge Spread as a ST/INT indicator (outlook 1-3 mns), bearish sentiment moved up sharply to the weak Buy 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 inched up toward the neutral line.

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 increased sharply from the strong Sell area to above the weak Sell with a strong pickup in ETF options 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 moved from a weak Sell to above neutral with a strong pickup in ETF options sentiment.

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 Jan 19. 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.  Todays charts were made a few minutes before the close, so the SPX 4780 close is an estimate.

With Fri close at SPX 4784, Mon markets are closed for MLK Day.

Wed has small OI where SPX has strong resistance at 4800 and put support around 4650 with a likely range of 4700 to 4775.

For Fri AM SPX has strong OI with a very odd straddle at 5000 where most straddle are in the middle of a trading range such as 4700 and 4750.  Upper resistance is 4800 and support is 4650, so a move to 4650-4700 is possible.3

For Fri PM strong SPX put support at 4700 and resistance at 4800 indicates a close over 4700 is likely.

For Wed EOM SPX has moderate OI where a close of 4750 or lower looks likely.

IV. Technical / Other

This week I want to take a brief look at the SPX Put-Call indicator (ratio in blue).  Since mid-2022 volume in SPX options has exploded (likely 0DTE effect) and about twice the 2020-21 level.  However, the P/C ratio has declined, indicating less direction bias.  One possible effect may be to place a price collar on the SPX, thereby reducing overall options trading profitability.  Since mid-2022 the P/C range has been 1.3 (Buy) to 1.15 (Sell), so the current level is a Sell.

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 declined slightly to neutral + .5 SD, NQ (NDX) remains a strong Sell at -2.25 SD, YM (DJIA) remains a weak Sell at -1.25 SD, Dow theory no longer supports DJIA.

Click dropdown list to select from the following options:

Tech / Other History
2023
   12.23 A quick update to the DJIA infl adj comparison presented as a possible analog Dec 2022    12.08 A look at the Feds recession indicator based on the unemployment rate using the Sahm Rule    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.  Last week produced the expect strength, but the early rally and numerous failures around the SPX 4800 area increased bearish sentiment to the point where a strong decline below 4700 is less likely.  With the seeming eagerness of ST options traders to jump in regardless of direction, this may limit moves in either direction.  The extreme volumes in both puts and calls for the SPX could indicate a limited 3-4% range for several months.

Weekly Trade Alert.  A continuation of the expected whipsaw from last week, this time downward still looks likely, but may struggle to reach SPX 4700.  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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