BOJ May Hold the Key for ST Market Direction

The Mon aft update showed increased SPX OI put support at/above 5100 and even though Tue CPI came in hotter than expected at 0.4% for Feb, same as Jan, the markets rallied strongly, led by the NDX.  Prices were already up prior to the announcement with techs leading the way when BOJ (Japan CB) did not raise rates from -0.1% after being negative since 2016.  However, a couple of days later Japans labor unions, which all apparently negotiate at the same time every year, announced the largest wage gains in 30 years at 5+%.  Now the BOJ is expected to raise rates any time between now and mid-Apr.  This could roil markets due to the effect of the yen carry trade.  Why is that important?  I asked "Ask AI" and got this response.

Obviously, last week was more boring than expected as hasty bears spoiled the potential excitement even though inflation was stronger than everyone (but me) expected.  So this week, I want to revisit the potential for a rounded top as seen in the SPX for 2015.  Most are focused on the diagonal forming in the SPX for 2024.  Avi G - has already begun warning about a possible SPX 25% summer decline (no J/S) as diagonals are supposed to return to their beginning (Nov low 4100), but he does think higher highs are likely with an  Apr SPX 5350 top.  However, the DJIA in 2024 broke out of its diagonal about a month ago and has since traded sideways in about a 2% range, and the NDX appeared to break down last week when int rates (TNX) turned higher on the higher inflation news.  So if the SPX follows the 2015 scenario, it may also trade sideways (currently looking like 5000-5200) until May-June.

A VST Buy was generated for the ST composite last Fri, but could be affected by the huge vol for tripple witch exp.  SPX options OI does confirm, however.  Several INT indicators are at or near a weak Sell that may indicate a drop in SPX to the low 5000s by mid-Apr..

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 remains near the weak Sell level.

Update Alt EMA. Bearish sentiment remains at the weak Sell 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 rose sharply as the capitulation component (NYDNV/NYDEC) showed strong selling, but may be affected by the 2X volume in SPX for triple witch exp.

Update EMA. Bearish sentiment VST (grn) rose to a weak Buy and may lead to ST rally to retest recent highs.

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 modestly but remains below neutral.

CITI Surprise Inflation Index for Mar shows that the trend in inflation is increasing, esp in the US.

Bonds (TNX).  Bearish sentiment is as low as it got when rates were 0.5% in 2020.  Confirming the breakout in int rates (TNX) over its MAs, oil (WTI/CL1) also broke over $80/bbl.

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 remains below neutral with HUI below the 240 triangle resistance.

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 declined slightly.

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 declined to near the weak Sell.

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 declined, now nearing 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 dropped to the weak Sell level.

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 Mar 22. 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 5117, options OI for Mon is moderate with put support up to the 5150 area and call resistance at 5175.  A rally to test recent highs at 5180+ is possible.

FOMC Wed has smaller OI, currently and will likely change, where SPX shows little call resistance above 5100, and large put support at 5k.  A wide range is possible.

For Fri stronger SPX OI with puts and calls about evenly matched around 5100 with call resistance 5150.  A  move toward the straddle at 5100 looks likely.

For EOM strong SPX OI shows increasing put support that could limit any decline to 5025-50.

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 remained flat at a weak Buy to + 1.25 SD, NQ (NDX) moved to a Neutral at -0.25 SD, YM (DJIA) is 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
2024
   02.17 A potential analog to early 2007 with early Spring and Summer pullbacks before Fall rally.    01.13 A look at LT SPX P&C, very high volume may compress range to 4650-4850 for mns, current Sell.
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    ES (S&P 500), Futures, Extended Hours +    NDX (NASDAQ 100), 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.  INT bearish sentiment is dropping, but very slowly, which probably indicates that an INT correction is likely months away and could be similar to 2015.  A Spring correction to the SPX low 5000s before a May-June top and a Summer correction of 8-10% remains the preferred outlook.  As mentioned several months ago, economic strength and higher rates (TNX) are not necessarily bad, but does favor the cyclical (DJIA) vs growth (NDX) stocks.

Weekly Trade Alert.  Both the ST composite and SPX options OI are showing the potential for early strength and possible SPX high retest.  SPX OI options are likely to change, so I will try to post updates Tue/Wed AM for FOMC.  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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