Will Stocks Continue to Rally with Lower Rates?

The stocks market has been rallying since the Oct 2022 "Fed pivot" based on the expectations of lower int rates from the Fed.  At first, 6 int rate cuts were expected by EOY 2023 based on the inverted yield curve as a "perfect" recession indicator, but as 2024 started there were still no int rate cuts and no recession.  Now as a second Fed recession indicator has triggered, the "Sahm rule" with a 0.5% increase in the unemployment rate, J. Powell has finally decided to take action with his forecast of future rate cuts starting in Sept at his Jackson Hole speech.  However, you have to wonder how much buying ammunition in support of rate cuts is remaining.  The outlook remains generally positive into the election, but major policy changes are likely to muddy the outlook for 2025 and beyond.

Last weeks SPX OI outlook was for possible positive delta hedging Mon (over 5550) with some pullback later in the week, and Mon saw the bulk of the rally for the week over 5600 to about 5620 before a pullback to 5560 Thur.  Powell's Jackson Hole speech provided a rally to new weekly highs, but stalled at the 5640 level, about 0.5% below the ATH.  Next week's NVDA EPS on Wed will likely be the key for a run to SPX 5700.  So far the NDX remains about 5% below its ATH of 20.7k, only retracing about 2/3rds of the decline since the July high.

ST sentiment turned more bearish, at least before the Thur pullback, with the ST Composite reaching a strong Sell and the VIX call indicator joining at a weak Sell.  However, the strong reversal at the EOW could mean a mid-week pop before another pullback to the SPX mid-5500s or lower.

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 retreated slightly from the neutral level seen last week.

Update Alt EMA. Bearish sentiment remains near 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 fell to a strong Sell and closed the week still at a weak Sell.

Update EMA. Bearish sentiment reversed sharply with the pause around SPX 5640 and the pullback Thur.  NVDA EPS on Wed could be pivotal.

The ST VIX calls and SPXADP indicator bearish sentiment reached a similar Sell level as before the early Aug selloff.

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 only increased modestly at the early Aug SPX lows and remains very similar to the late 2021 topping period.

Bonds (TNX).  Bearish sentiment remains at extreme lows.

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 has retreated but remains at the strong 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 remains less than neutral.

With the sister options Hedge Spread as a ST/INT indicator (outlook 1-3 mns), bearish sentiment correctly reached the near strong Sell at the July highs and reversed to a VST (grn) near strong Buy at the Aug lows, but is now slightly below neutral after reaching a weak Sell Wed.

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 is moderately positive.

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 remains at the weak Sell level.

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 near 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 30. 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 for Dec exp.   A new addition is added for OI $ amounts with breakeven pts (BE) where call & put $ amounts cross.

With Fri close at SPX 5635, options OI for Mon is moderate with little put support until 5450 while momentum may support prices with call resistance at 5650 .

Wed has smaller SPX OI where SPX has less call resistance and put support up to 5600 via straddles, so not particularly bearish.

For Fri EOM strong SPX OI with strong call resistance at 5650 and some put support via straddle at 5600 and below that mid 5500s is possible.

Using the GDX as a gold miner proxy closing at 39.3, prices are well over put support, contrary to what is showing with the 3x ETFs DUST & NUGT, with major ST resistance at 40.

Currently the TLT is 98.4 with the TNX at 3.81%, O/H major ST call resistance is at 100.

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 -0.0 SD, NQ (NDX) is a weak Sell at -1.0 SD, YM (DJIA) is neutral -0.1 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.  My luck at trying to forecast big tech EPS has been pretty poor, so I am not going to try with NVDA.  There has been a lot of discussion about the Zweig breath thrust that may or not have been triggered with the recent rally due to differences in rounding.  The difference being that a valid ZBT means another 12 months of higher prices.  I will defer to the LT NYSE adv/dec volume chart, which is positive but so far not that impressive and similar to July-Aug 2019 vs Dec 2018.

Weekly Trade Alert.  A mid-week pop to SPX ATHs near 5700 is possible with positive results from NVDA Wed, then followed by a partial retrace of the recent rally into mid-Sept .  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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