Early Warning Signs of an Important Top Appearing

Last week I was noncommittal and the SPX continued its crawl higher bolstered by techs as several Trump appointees were tech and crypto friendly which helped the NDX and BTC advance to new highs and the cyclicals languished.  As a result the SPX advanced about 1% hitting 6100.  The largest changes in sentiment were the COT where SPX/ES moved from a weak Sell to neutral and NDX/NQ moved to a strong Sell, and the Skew and VIX term structure which reached record levels.  Since Trumps first term the Skew saw record levels (for Stockcharts since 1990) in July 2018, 3 mns before the Oct top and in 2021 6 mns before the Jan 2022 top.  Peaks in the Skew seem to correspond with peak bearishness which tends to be followed by a blowoff rally then a collapse.  More in Tech/Other section.

ST sentiment seems rather boring as the ST Composite remains slightly positive and the VIX call indicator has returned to neutral.  A look at the SPX options for this coming week and opt exp (FOMC) week shows a similar setup to Nov with strong put support next week and huge call positions for opt exp week, so an up/flat then down for the next two weeks would not surprise.

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 a weak Sell.

Update Alt EMA. Bearish sentiment improved slightly.

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 moved above neutral.

Update EMA. Bearish sentiment remains modestly positive.

The ST VIX calls and SPXADP indicator bearish sentiment moved up from a weak Sell toward neutral.

The VST VIX calls and SPXADP indicator is included to show more detail.

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 from a strong Sell to weak Sell.

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 move up to a weal Sell as NUGT volume increased.

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 improved modestly to a weak Sell.

With the sister options Hedge Spread as a ST/INT indicator (outlook 1-3 mns), bearish sentiment remains close to a strong Sell.

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 modestly 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 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 improved slightly to 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 July 16. 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 crossand $ volume.

With Fri close at SPX 6090, options OI for Mon is moderate showing a large increase in OTM puts (Skew) showing a positive  bias for P/C while ITM options show a stronger negative bias for $OI.  A small range of 6050 to 6075 is most likely, while delta hedging can exaggerate a breakout either way.

Wed has somewhat smaller OI where SPX has a similar bias.

For Fri stronger SPX OI call resistance over 6050 may cause a retrace to that level.

For opt exp Fri Dec 20 strong SPX OI shows a huge net bullish position of $11B that could see s reversal down to 6000 or lower much like the Nov opt exp.

IV. Technical / Other

This week I wanted to take a LT look at the $SKEW which has reached record highs for the EMAs since 1990s.  Typically the SKEW has been an early, but dependable predictor of INT/LT tops for the SPX.  The SKEW is a measure of OTM option premiums, esp puts.  Looking at the INT tops since Trump one, and excluding 2019-20 as event driven (Covid), this leaves 2018 and 2021.  Following the peaks in SKEW, in 2018 the SPX advanced for 3 mns and 3% higher, while in 2021 the SPX advanced for 6 mns and 12% higher.  The SKEW may not have peaked yet, but when it does, it's reasonable to expect a top 3 to 6 mns later with an advance of 3 to 12% or 6250 to 6800 from current levels.

For the "in-house", I use a combo of Skew and VIX term structure (VIX/VV) which shows the same sentiment.  In both charts, an increasingly high Skew was followed by a larger decline (sentiment shows same) so eventual decline should be larger than 2022.

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 saw a huge reversal to a positive +0.1 SD, NQ (NDX) bearish sentiment increased to a strong Sell at -2.0 SD, YM (DJIA) remains a weak Sell -1.0 SD.

Click dropdown list to select from the following options:

Tech / Other History
2024
   09.07 A look at DJIA/SPX analog from the 2000 market top shows possible strength into year-end.    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.   The recent increase in put buying, as evidenced by the Skew and SPX P/C which Fri jumped to 1.58, the highest since a 1.59 on Nov 1 before the election, should serve as a warning for the bears and could result in a final blowoff rally over the next few months.  Next week is CPI/PPI on Wed/Thur that cause some volatility as prices remain "sticky" although oil prices remain low and may help dampen price pressure.  Next is FOMC Dec 18.

Weekly Trade Alert.  Next week is likely to see limited movement and could be a setup for a move to SPX 6000 or lower for opt exp week Dec 20.  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

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