Wall Street is as Bullish as Late 2021, Is It Enough?
Last week was more positive than expected, although the outlook for a choppy
market held thru Wed, the weaker US dollar and falling rates (TNX) helped the
techs (NDX). Trumpforia continued albeit at a slower pace gaining about 1%
for the week vs 2% the previous week. The appointment of Scott Bessent as
Treasury Sec under Trump has helped calm inflation fears and lower LT rates.
Frothiness is starting to appear, however, as the
NAAIM Index of active investment managers jumped to 98.9% from 90% the last
two weeks, and readings of 100%+ have matched swing highs over the last two years.
Much of Wall Street has bought into the new era of Trumponomics as evidenced
by the recent outlook by
UBS for SPX 6600 in 2025, while one of WS biggest bears, BofAs M. Harnett
(remember "Sell the 1st rate cut"), is even looking for SPX 6666. WS
outlook is much like late 2021 with the unanimous bullishness, but bearish
sentiment remains "sticky" as measured here, so an immediate downturn is likely
to be delayed. Currently, the sentiment measure with the most bearish
outlook ST is the VIX call indicator at a weak Sell after a strong Buy
pre-election.
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 near the weak Sell due to
weak hedging.
Update Alt EMA. Bearish sentiment VST (grn) fell to a strong Sell,
indicating lower prices/higher volatility for the coming week.
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 remains near neutral.
Update EMA. Bearish sentiment reversed sharply from a weqk Sell to above
neutral by the EOW. Any downside likely limited.
The ST VIX calls and SPXADP indicator bearish sentiment fell sharply from
neutral to a weak Sell. High put volume gave a strong pre-election Buy but
has now reversed to cause a weak Sell. A pickup in volatility is likely by
EOW.
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 remains near a strong Sell.
Bonds (TNX). Bearish sentiment remains near low extremes as
rates fell when inflation fears over Trump policies fell after Bessett was announced
as newTreasury Sec.
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 Sell on weak DUST volume.
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 fell sharply to near a strong Sell (VST) but as in
late 2021 can be several months early.
With the sister options Hedge Spread as a ST/INT indicator
(outlook 1-3 mns), bearish sentiment also fell to a strong Sell (VST) while
the INT/LT (blu) still has a way to go to match late 2021.
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 pulled back 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 remains near 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 remains below 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 Dec 6. 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 6032, options OI for Mon is moderate with resistance from
ITM calls, and stronger resistance at 6090-6100. No strong bias.
Wed has smaller OI where SPX has stronger call resistance at 6000 and 6075.
If 6075 holds, expect a move toward 6000.
For Fri SPX has moderate OI and strong ITM call resistance and OTM above 6050.
Should see a move toward 6000.
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
at a weak Sell at -0.75 SD, NQ (NDX) is near a strong Sell at -1.75 SD, YM (DJIA) remains a weak Sell -1.0 SD.
Click dropdown list to select from the following options:
Tech / Other History
2024
2023
2022
Other Indicators
Conclusions. Many had been calling to an end to the current bull market for much of the year based on valuations,
parabolic moves in AI related tech stocks, and even a 2008-09 financial crisis
brought on by CRE-related banking problems, but as a result bearish sentiment
remains resilient enough to support higher prices. At some point things
will change, but it is hard to tell when, at this point an 8-10% correction may
occur in 2025 Q1, but the result would ikely be higher prices later.
Weekly Trade Alert. Given the ST indicators, a pullback to SPX 6000
could occur by EOW, or more highs would likely lead to a bigger decline mid-Dec,
possibly due to FOMC disappointment. Updates @mrktsignals.
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