Last week started as expected with a rally back over SPX 5500 to
the top of the 5500-50 target, but what followed was unexpected.
Previously, I had discussed the potential for a "gray swan" due to the widening
diffference between the Chinese yuan and Japanese yen valuation relative to the
US$ as the yen has been in a freefall since early 2023 with the USD rising from
127 to 165 yen ($USD/JPY). The importance to
financial markets has been the "yen carry trade" where large institutions (hedge
funds) borrow money in a depreciating currency (yen) and invest in appreciating
assets (US & EU stocks). The BOJ implemented ZIRP (zero int rates) in 2000
and NIRP (negative int rates) in 2007. In Apr the BOJ exited NIRP but
maintained ZIRP, and the result was an SPX 5% decline over a few weeks as a
temporary drop in USD/Yen forced hedge funds to close positions. Last week
on Wed the BOJ made a surprise move to abandon ZIRP, raising rates to 0.25% and
the result was a massive exit from the yen carry trade as global markets saw the
start of a "flash crash" as assets were sold to exit the carry trade. The
$USD/JPY is now down 15% since early July and it is difficult to estimate the
effect on markets, but could be 10-15% for the SPX depending on how long the
$USD/JPY continues to fall.
Bearish sentiment has improved somewhat, but due to the rapid nature of the
current decline is not strong enough to expect a lasting turnaround.
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 has risen from a weak Sell, but
remains below neutral.
Update Alt EMA. Bearish sentiment VST (grn) is at 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, SMA only]. Weights
are 80%/20%.
Update. Bearish sentiment has now risen to a weak Buy.
Update EMA. Bearish sentiment VST (grn) has reached a strong Buy. Next
week could see a bounce.
The ST VIX calls and SPXADP indicator bearish sentiment shows little change,
remaining near 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 rose sharply to just below a weak Buy from a
weak Sell.
Bonds (TNX). Bearish sentiment remains extremely low even as
rates fell sharply below 4%.
For the INT outlook, 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 at the strong Buy level as the HUI tends
to be effected by stock selloffs.
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 to above neutral.
With the sister options Hedge Spread as a ST/INT indicator
(outlook 1-3 mns), bearish sentiment rose from below neutral and is nearing a
weak Buy.
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 to neutral.
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 rose from a strong Sell to 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 rose sharply but 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 Aug 9. A new addition is added for OI $ amounts with breakeven pts (BE) where
call & put $ amounts cross.
With Fri close at SPX 5347, options OI for Mon is moderate (most calls are over
5600) . Strong put support is at SPX 5200 with moderate support up to
5300. Beow 5350 could see 5300
Wed has somewhat larger OI where SPX has strong support at 5150 with OI too
small tp evaluate above.
For Fri strong SPX OI put support rises to 5300, but litle support above.
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 is
neutral at -0.25 SD, NQ (NDX) is below neutral at -0.75 SD, YM (DJIA) is
near a weak Sell -1.0 SD. Note updates are Tue, so may be out of date.
Click dropdown list to select from the following options:
Tech / Other History
2024
2023
2022
Other Indicators
Conclusions. Sentiment may not be of much use for the next several
days. It is almost impossible to predict where the USD/JPY may eventually
land, but as long as weakness persists, stocks are likely to see downward
pressure. SPX options OI show some support by Fri, but the "flash crash"
is unlikely over
Weekly Trade Alert. SPX 5300 could provide some support if the
$USDJPY stabilizes.. Updates @mrktsignals.
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