Rumbles of Thunder but No Storm Yet

Last week's finale was reminiscent of the "flash crash" of Aug 2015 where a sharp decline of several days took the SPX down more than 10% due to a sharp devaluation of the Chinese yuan.  If similarities continue, there may be a retest of the lows in Sept around the FOMC before a more sustained rally.  Although not totally unexpected as I had warned previously of the huge yuan/yen gap, there were no sentiment warnings this time of the Japanese rate hike.  In 2015, even the LT NYSE adv/dec volume was indicating a strong sell, while this time only a warning was showing.  Perhaps this is why the decline was less severe, falling short of a 10% correction by about 20 pts.  It is surprising how many misunderstand the pervasiveness of the yen carry trade, misrepresenting current weakness as a correction in the US megacap tech stocks while the shock was global in nature with Japan's Nikkei down 25%, Germany's DAX down more than 10% and even Bitcoin was down 30%.  A recent article by Avi even had the direction of the yen backwards, as a fall in the $USDJPY from 165 to 142 early July thru Mon resulted from a rise in the yen which increases the cost of the yen carry trade, while the fall in the $USDJPY late 2022 resulted from a fall in the US$ after the Fed "pivot" which did not affect the cost of the yen carry trade.  Overall, by the EOW the SPX was down a mere 3 pts as the yen did stabilize after a 3% decline on Mon back to the previous Fri level of 146.5 $USD/JPY.  A good way to track currencies and global indices is at IG.com.

Over sentiment has improved somewhat, but not likely enough for an ATH retest.  Following the May 2015 period a retest of the lows may be likely in Sept.

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 below neutral.

Update Alt EMA. Bearish sentiment VST (grn) continued to rise above 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 rose above a weak Buy early in the week then fell back to neutral.

Update EMA. Bearish sentiment VST fell below neutral.

The ST VIX calls and SPXADP indicator bearish sentiment is similar to the ST Composite, rising to near a weak Buy then fell back to 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 from a LT perspective appears to be in between the 2019 and 2021 topping periods and a weak Buy may be required for a sustained rally.

Bonds (TNX).  Bearish sentiment remains at low extremes.

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 rose sharply as the HUI corrected about 10% from the July 310 top and along with bonds is warning of a Nixon/Arthur Burns 1970s era potential for a Trump POTUS and Fed dovishness ahead.

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 is also in between the 2019 and 2021 topping periods.

With the sister options Hedge Spread as a ST/INT indicator (outlook 1-3 mns), bearish sentiment rose harply VST (grn) while LT (blu) is neutral and may lead to a strong rally, but probably not yet.

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 only slightly and remains below 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 had been giving a strong Sell after reaching the NDX 19.7k level, so almost 5% up before 12% down.  Up slightly from last week.

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 slightly from last week.

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 16. 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 5344, options OI for Mon is small, showing put support up to 5300 and call resistance at 5350 with positive bias from ITM puts.  Expt range 5325-50 for close.

Wed has similar SPX OI where SPX has ITM calls at 5300 and puts at at 5400 & 5450, likely close 5350-5400.

For Fri AM strong SPX OI is heavily put wtd up to 5400 and likely close is 5400+.

For Fri PM SPX OI shows stronger put support up to 5400 with call resistance at 5450.  Likely close 5400-50.

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 is neutral at -0.5 SD, NQ (NDX) is a weak Sell at -1.0 SD, YM (DJIA) is near a weak Sell -0.75 SD. Note updates are Tue, so may be out of date.

Click dropdown list to select from the following options:

Tech / Other History
2024
   05.25 A possible rounded top aka May 2015, Initial Claims lead Unempl Rate, LT NYADV/Dec warning.    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.   Warnings of a "flash crash" were timely at least.  I was having some home construction work done Wed the previous week so was AFK when the fun started.  If the 2015 analog the next few months, at least thru the election, are likely to be very frustrating for the bears.  By Jan if Trump is elected, a closer look at his proposed policy changes are likely to prove problematic.  His proposals may have worked fine 8 years ago but the world has changed dramatically.

Weekly Trade Alert.  A 50-60% retrace of the decline from SPX 5670 to 5120 is 5400-50 or the 50D SMA.  Next weeks SPX OI shows the potential to reach it next week, but what happens after is unclear.  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

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