Expecting More Volatility

I have been indirectly warning about the potential for a move to SPX 5100 using the Apr EOM options OI, but certainly did not expect to see it so soon.  The trifecta of increased ME uncertainty between Israel/Iran, a higher than expected Tue MOM CPI at 0.4% for the third month in a row, and a disastrous Wed 10 year T-bond auction was enough to break last weeks SPX lows just below 5140, sending TNX rate to 4.6%.  Tue did, however, manage to reach the minimum upside target of 5200-25 with an open of 5225, but then fell sharply in reaction to the CPI news before closing near 5210.  Wed news of an imminent Iran attack began a stronger selloff with a Thur recovery above 5200, but no one wanted to be long over the weekend as US threatened reprisal against Iran on any attack of Israel causing a brief spike in gold and oil and the SPX cratered to 5110.

Sentiment is somewhat mixed as the ETF put/calls dropped significantly from last week sending the Hedge Spread and other dependent indicators lower.  One significant change was the VIX Call and SPXADP indicator as the Fri near 100 pt drop in SPX sent the VIX call buying to 4x the daily average and the indicator to just shy of a strong Buy.  The last time this happened was Feb 12 when the Jan CPI inflation came in at 0.4% and the SPX dropped 100 pts in one day.  The SPX then rallied for several days for a partial recovery before retesting the lows, and then a larger rally followed.  This may mean one or more retests of the SPX 5100 or lower area as optn exp Apr 19 and Apr 30 EOM are both showing SPX 5100 area as likely.

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, INT View. Bearish sentiment fell sharply to below neutral as the ETF put/call ratios reversed lower.

Update Alt EMA. Bearish sentiment VST reached 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 continued to rise to just below the weak Buy level.

Update EMA. Bearish sentiment remains just below neutral.

The ST VIX calls and SPXADP indicator bearish sentiment jumped with the highest level of call buying since Feb 12 (4x daily avg), to just below a weak Buy.  Many of the previous spikes occurred near bottoms or saw sharp retracements before more downside.

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.

Bonds (TNX).  Bearish sentiment remains at low extremes.  J.Dimons comments that rates could reach 8% in JPM Chase annual report seems fitting.

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 for ETFs continued to rise to well over the weak Buy 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 saw a sharp jump to over neutral VST.

With the sister options Hedge Spread as a ST/INT indicator (outlook 1-3 mns), bearish sentiment dropped sharply to neutral with the decline in ETF put/calls .

With the conflicting ST/INT indicators, I decided to try a new composite of the Hedge Spread, NYDN Vol, and SPXADP as a ST/INT indicator (outlook 2-6 wks), bearish sentiment is similar but slightly more positive than the ST/INT composite.

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 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 fell sharply with the drop in ETF put/calls while NDX ETf sentiment remains lower than the Jan 2022 top.  A sharp drop is possible.

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 nearing a weak Sell.

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 Apr 19 & EOM. 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 5123, options OI for Mon is moderate with most put support at 5050-65 and call resistance over 5260.  Absent any negative news a move to the mid-5150s is possible.

Wed has smaller OI where SPX is slightly positive to the mid-5150s.

For Fri AM strong SPX OI has a modest P/C, but the huge straddle at 5000 should cause a negative bias below 5100 with the BE at 5070-90 a target..

For Fri PM modest SPX OI has a slight negative bias due to the ITM calls toward 5100.

For Tue 30th EOM modest SPX OI has seen increased put support below 5100 but remains biased toward 5100..

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 neutral at +0.0 SD, NQ (NDX) remained neutral at 0.0 SD, YM (DJIA) is a moderate Sell at -1.75 SD, Dow theory no longer supports DJIA.

Conclusions.  Overall sentiment remains mixed, but looks similar to mid-2021 which ended in a 4-5% correction in May after a somewhat volatile Apr.  A gap from Feb just below SPX 500 could be the target.  Problems in the ME remain a major uncertainty.  I really wonder how long the Fed/Wall Street will continue the fantasy that cutting ST rates (which is inflationary) will calm the bond market.  If inflation continues at current levels or higher the TNX could reach 5% this summer, and if much higher the Fed will be forced to raise ST rates as they did in 2022 after inflation rose from 0% in 2020 to over 7% in 2021.

Weekly Trade Alert.  The near strong Buy from the VIX Call & SPXADP indicator indicates that a strong upside reversal could occur at any time and is likely to fill the gap at SPX 5200, but bear in mind that Fri AM SPX options OI indicates 5100 or lower is likely.  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
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