Will March Madness Upsets Spread to Stocks?

Last weeks call for a rally into the FOMC based on the ST Composite (capitulation volume) worked out well and even surpassed expectations (SPX 5200 possible) with an intraday high of 5261.  J. Powell is becoming somewhat of a conundrum as his speeches, since the "pivot" last Nov, have seemed like "happy talk" that were later talked down by other voting members of the FOMC.  Remember that he was a career attorney and investment banker before joining the Fed as chairman, while other FOMC members are career economists, and I feel that he is trying to be like Alan Greenspan who used obfuscation (confusing language) to be noncommittal, while Powell lacks the economic knowhow.  Next week we get several other FOMC members speaking, so we will see if the recent pattern continues.

Surprisingly with last weeks explosion higher, rather than clearing out the shorts, there was an explosion in put buying, especially in ETFs, that has turned several of the INT indicators bullish.  The hedge spread VST actually reached the strong Buy level as the ETF put/call jumped to 2.4 on Fri, the highest since Oct 11, 2023 when the SPX was in the 4300s and the SPX was down 300 pts from the July high.  The INT/LT Composite is looking a lot like it did in early 2021 with a year and over 600 pts before the Jan 2022 top, and a similar run could take the SPX to about 6000.  The ETF put buying could be due to some bearish calls by some of the EW analysts, for example, Dr Shure (no J/S) is expecting a wave-3 Mar top in NDX, followed by a wave-4 decline of about 10% in Apr.  This was similar to my outlook before the jump in bearish option sentiment which now is likely to limit the downside.

Next weeks market moving news besides the Fed speakers is the revised 2023 Q4 GDP on Wed and PCE inflation Good Fri AM (both expected unchanged) with probably more "happy talk" from Powell in the PM if PCE is bad.  Note, intros to ZH prem can be read using Chrome "reading mode".

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 improved from a weak Sell toward neutral.

Update Alt EMA. Bearish sentiment jumped all the way from a weak Sell to neutral (VST).

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 declined toward neutral.

Update EMA. Bearish sentiment dropped sharply back toward the weak Sell level.

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 improved significantly aided by the Hedge Spread and remains similar to the last half of 2021.

Bonds (TNX).  Bearish sentiment continues to retreat, now lower than in 2020 with rates 4% higher.

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 sharply as gold exploded higher with Powells "happy talk", but the HUI remains stuck in a range.

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 at the weak Sell level.

With the sister options Hedge Spread as a ST/INT indicator (outlook 1-3 mns), bearish sentiment exploded higher Fri with a huge jump in ETF put buying with the VST (grn) at a strong Buy and INT (red) at a weak Buy and probably means any pullback will be limited to 5000+.

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 at the weak Sell level.

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 jumped sharply as ETF put/call ratios rose and is between neutral and a weak 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 rose to just below 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 Mar 28. A text overlay is used for extreme OI to improve readability, P/C is not changed. Also, this week includes a look at the GDX & TLT for Apr exp.   A new addition is added for OI $ amounts with breakeven pts (BE) where call & put $ amounts cross.

With Fri close at SPX 5234, options OI for Mon is moderate with the potentail for a drop below 5200, but strong put support starting at 5150.

Wed has smaller OI where SPX has put suooort up to 5250, so any Mon losses could be reversed.

For Thur EOM/closed Good Friday strong SPX OI shows put support up to 5200 and call resistance at 5225 & over.  The straddle at 5000 is so far OTM that it may have little effect.

Using the GDX as a gold miner proxy closing at 29.6, strong call resistance 30 can make a rally difficult, and put support is at 28.

Currently the TLT is 94 with the TNX at 4.22%, prices could go higher with 93-5 the most likely range where strong put support is at 90 and call resistance at 98.

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 of + 1.25 SD, NQ (NDX) remained Neutral at -0.5 SD, YM (DJIA) is a moderate Sell at -1.5 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.  What are the limits of AI?  J.Mauldin this week makes an interesting observation that most are overlooking the energy intensiveness of using the AI supercomputer chips.  I asked "Ask AI" (which research showed to be a non-profit Israeli firm) for more data and found that over the last 10 years AI energy usage has doubled every 3-4 months (Moores law) and extraplolating, in 5 years will be using about 90% of the worlds current energy production.  What will that do to the green movement?

Weekly Trade Alert.  SPX could drop below 5200 Mon-Tue, but are likely to bounce back toward 5250 Wed-Thur.  Some weakness late Thur is possible before Fri PCE.  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

© 2024 SentimentSignals.blogspot.com