Some strength was expected early in the week due to the VST ST Composite
sentiment, and it was delivered in spades with a surprise announcement of a
large economic stimulus package by China on Tue and reinforced with additional
measures Thur. China buys more from Europe, esp Germany, than from the US
and the DAX was up 6% while the SPX could only manage a 1% gain before giving
back about half by the close. The NDX continues to lag while the DJIA is
making new highs following 2000 analog outlined a couple of weeks ago. The
NDX did fill a gap at 20250 from mid-July before retreating back toward the 20k
level.
Trader Joe this weekend shows an expanding wedge
formation which targets the DJIA 43K+ before a 10%+ drop to about 38k.
This looks a lot like the setup starting to appear in the hedgespread and ST/INT
Composite (hedgespread + call FOMO) which we saw before the surprise BOJ rate
hike that triggered the yen carry trade selloff early Aug. With the ST
Composite and VIX call indicator still positive the timing may be a few weeks
away and seems to line up with the election. Perhaps a surprise loss by
Trump disappoints those looking for lower taxes. However, it appears
unlikely that it would be the final hurrah with overall sentiment where it is
today.
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 continued to drop below the weak
Sell.
Update Alt EMA. Bearish sentiment remains near a weak Sell.
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 EMA. Bearish sentiment remains above neutral.
The ST VIX calls and SPXADP indicator bearish sentiment increased to above
the weak Sell as VIX call buying increased on down days.
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 moved toward a strong Sell with lower hedging
and stronger FOMO.
Bonds (TNX). Bearish sentiment remains near 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 remains near a strong Buy.
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 declined further below neutral.
With the sister options Hedge Spread as a ST/INT indicator
(outlook 1-3 mns), bearish sentiment fell sharply below a weak Sell and may
be heading to the Nov 2021 levels with an increasing risk of a pickup in
volatility.
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 above
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 for NDX - a sharp drop in ETF P/Cs has sent this indicator
back to a strong 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 also declined sharply beyond 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 Oct 4. 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 5738 (+35), options OI for Mon is large with strong call
resistance at 5750 and moderate resistance lower toward the 5700 level.
Wed has small OI where SPX has put support at 5675 and 5700 and call resistance
above 5720.
For Fri jobs report SPX has moderate OI with overlapping put/call positions
between 5650 and 5750. Likely range 5700 +/- 25.
For Oct EOM there seems to be a lot of optimism for SPX 5800+.
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 SD, NQ (NDX) is a weak Sell at -1.5 SD, YM (DJIA) is
at 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. For most of the last two years I have been expecting
an important top in the SPX in late 2024, possibly near the election, but some
indicators , namely the SPX ETFs and P/Cs are still showing considerably more
bearishness than what was seen prior to the early 2022 top. What it will
take for the SPX bears to give up is still unknown. The overall ST outlook
for a choppy market into the election remains in place, but the increasingly low
hedging and high call FOMO are warning of the possibility of another "gray swan"
event like the yen carry trade selloff early Aug.
Weekly Trade Alert. SPX options OI is showing resistance at 5750
and support just below 5700, so some weakness is expected, likely in the
5675-5725 area. Updates @mrktsignals.
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