Too Much of a Good Thing

Since the mid-Dec FOMC, I have been indicating that the Fed was likely to pause its rate-cutting cycle due to persistent strength in the economy and "sticky" inflation, so the continued panic over every bit of "good" news has surprised me.  The flip side of a strong economy is strong earnings, however, which why I did not expect much of a rally until EPS season begins mid-Jan.  Equity markets, however, seem to be focused on the Feds rate cycle currently, but if you look at the last tech boom into 2000, this coincided with a pause for 6 mns in the Feds hiking cycle after the LTM crisis, but when the economy continued its expansion, both stocks and rates rose into Mar 2000.  What appears likely this time is that stocks may stay range bound (5800-6100) until Trumps "new agenda" with cut backs in spending and tariffs slow the economy, resulting in lower rates and a stock blowoff right before a recession and a 20% decline in stock prices.

For the last week, the SPX was expected to bounce around 6000 and Mon got off to a strong start rising in the AM to about 6020 before a pullback, but on Tue AM the "good news is bad news" started with strength in both the JOLTS job opening data and ISM services survey which showed broad strength in the services sector and the SPX fell to below 5900 by Wed AM.  The "good" news selloff continued Fri when the unemployment data showed 256K new jobs created (about 100k over est) and the unempl rate dropped to 4.1%.  As a result the prob of any Fed rate cuts soon dropped essentially to zero, unless stocks crash.

Sentiment remains muddled with some improvement in the ST indicators (but below a weak Buy), while INT and LT indicators remain negative.  SPX options OI is showing strong put support below 5800, but a brief dip below would not surprise.   With monthly options exp on Fri fairly strong pu support indicates a good possibility of seeing SPX 5950 by Fri, and with the FOMC on 27-28, the EOM OI also shows 5950 as a likely target.

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 continues to improve with a move toward neutral.

Update Alt EMA. Bearish sentiment  improved with a move toward 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 below neutral early in the week, but reversed with the late week decline.

Update EMA. Bearish sentiment rose slightly, nearing a weak Buy.

Using a ST view, the ST VIX calls and SPXADP indicator bearish sentiment improved slightly to a weak Buy.

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 continued to rise from a strong Sell late Dec, matching the sentiment level of July 2024 before a 10% correction based on strong option FOMO (call buying).  If similarities continue, more downside is possible.

Bonds (TNX).  Bearish sentiment ticked up slightly as the TNX rose toward 4.8% (for equities 5% becomes major risk).

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 slightly as gold regained the $2700 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 continues its slow decline but remains well above the levels of late 2021 prior to the 2022 bear market phase.

With the sister options Hedge Spread as a ST/INT indicator (outlook 1-3 mns), bearish sentiment rose very slightly and remains below neutral.

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 just 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 remains near a weak 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 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 Jan 17 & EOM. 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. Note multiply OI$ by 100 for shares/contract.

With Fri close at SPX 5827, options OI for Mon is moderate with strong put support below 5800 and weak support up 5900.  ITM puts could give a positive bias to 5950+.

Wed has SPX only small OI where SPX has relatively strongly put support between 5800 and 5900 that should continue a positive bias.

For Fri AM SPX has stronger OI with strong put support up to 6000 (overlay not shown +30k p&c at 6k).  Price target 5950-6000.

For Fri PM SPX has moderate OI with a positive bias to 5950.

For Fri EOM, SPX has moderate OI with a positive bias to 5950.

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 neutral 0.0 SD, NQ (NDX) bearish sentiment remains  a strong Sell at -2.0 SD, YM (DJIA) remains near a weak Sell at -0.75 SD.

Click dropdown list to select from the following options:

Tech / Other History
2024
   12.15 Comparison of NYSE Adv/Dec volume lows to peaks in SKEW shows ST (1 month) warning of INT tops.    12.06 High peaks in SKEW since 2018 have been early warning of INT tops as sign of "max" options bearishness.    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.  Probably the biggest surprise so far this year has been the performance of Germany's DAX index with the EU economy and Germany in particular facing an economic downturn.  While the SPX is down over 5%, the DAX is only down 1.5% from ATH, but the EU is still expected to continue cutting rates which bolsters the outlook that int rates may be "trumping" economic strength.  The best analyst I've seen for this year so far is ExecSpec who is looking for an SPX 10% pullback thru Feb.

Weekly Trade Alert.  SPX options OI are indicating a somewhat limited range of 5800-5950 for next week and EOM.  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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