Mega Tech Trumps Inflation

Last weeks Google Bloggers downtime caused me to lose focus as I was able to create the chart links and main body text Sat, but conclusions and final writeup was Sun AM.  Most of the SPX movements followed the options OI guideline but the influence of META, GOOG and MSFT accelerated the moves.  Mon target of SPX 5030 was met (act 5039) before a fade to 5011, but Wed target of SPX 5100 fell short at 5089.  Late Wed AH META guidance (high capex expenses) unsettled NDX and Thur weak GDP and strong GDP PCE lead to a stronger than expected pullback to 5050 (act 4991), while a late recovery lead to a SPX 5048 close.  Fri strong PCE was largely ignored after the strong GOOG & MSFT EPS reports pushing SPX up to the Apr 30 resistance at 5115 before a closing fade tp 5100.  Next week we get the all important FOMC Tu-Wed and Mar jobs data Fri, but the SPX options OI outlook is very moribund showing that a tight range around SPX 5050-5100 is likely.  An early look at Mar 17 monthly SPX OI shows more of the same is likely with NVDA May 22 EPS a possible inflection pt.

Many analysts are still expecting a 10% or more correction for the SPX with some as high as 25% due to higher inflation and rates much like what was seen in 2022.  But most of the sentiment indicators, outside the SPX and NDX ETF indicators in the DM/SM section, are still showing too much caution (bearish sentiment).  A trading range for several months (perhaps 4950 to 5250) is more likely.  The potential for a "grey swan" is rising in the currency markets, however, as the Japanese yen (JPY) continues in free fall.  Japan has been popular for "friend sourcing" away from China with the result of multi-decade highs for the Nikkei, and China is rumored to be considering a competitive devaluation for the yuan (CNY).  For this year alone, the yen/yuan has shown a 10% decline and a 10% devaluation of the yuan in Aug 2015 was considered a leading cause of the SPX "flash crash".

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 remains just below neutral.

Update Alt EMA. Bearish sentiment remains near the -0.5 SD mark.

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 fell from a weak Buy back toward neutral.

Update EMA. Bearish sentiment declined slightly to below neutral.

The ST VIX calls and SPXADP indicator bearish sentiment fell sharply as a retest of the lows (4991) was seen beforre a stronger rally, but more bottoming is possible.

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 continues to consolidate around -0.5 SD.

Bonds (TNX).  Bearish sentiment remains at low extremes as rates rose to a new 2024 high. TNX may continue higher to fill the gap at 4.7-4.8% and then retrace to about 4.4%.

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 continues to rise sharply led by ETFs.  This may lead to higher prices for the miners, even as gold prices falter.

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 dropped back to neutral.

With the sister options Hedge Spread as a ST/INT indicator (outlook 1-3 mns), bearish sentiment fell back to neutral.

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 rose modestly above 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 shows a slight improvement, but low ETF put/calls is keeping sentiment near the 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 remains 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 May 3. 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 5100, options OI for Mon is moderate with call resistance down to 5075 and may lead to a pullback to that level, but a move over 5100 can result from delta hedging.

For Tue EOM has strong call resistance at SPX 5100 with about 20K added last week may have aided Thur-Fri rally as dealers are forced to buy futures to hedge.  This should keep prices between 5050 and 5100.

Wed has somewhat smaller OI where SPX has strong support below 5050 and little resistance upward and could rise toward 5100.

For Fri Jobs report strong SPX OI shows a likely range of 5050-5100.

For Fri 17th AM strong SPX OI shows a downward bias from current levels due to the large straddle at 5000.

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 remains below neutral at -0.75 SD, NQ (NDX) remains below neutral at -0.75 SD, YM (DJIA) remains below neutral at -0.75 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.  Last week was a gift for volatility junkies, but the next few weeks should see a tighter trading range.  I am not sure if anyone noticed but Jan EPS season started with an SPX 2% pullback then rallied for six weeks.  Apr EPS season started with a 5% pullback.  What happens next is anyone's guess, but the biggest surprise may be a period of relative calm before a gap fill at the early Apr SPX 5200 level, then a larger decline.

Weekly Trade Alert.  SPX options OI are not showing much bias for next week, and without a major surprise from FOMC or NFP jobs a range of 5025-5125 is expected.  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
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