The Bears May be Ready for a Siesta

Last week provided little relief for the bulls as apparent concerns over a gov't shutdown pushed the SPX down another 5% to around 5000 for a decline of 9% since the mid-Feb high at 6150.  Recently, I saw an interesting statistic where over the last 50 years the SPX has had 26 corrections of 10% or more, but only 6 bear markets, so a 10% correction is common every 2 years.  Essentially, all of the optimism since mid-2024 on a possible Trump victory and resultant market friendly posture (deregulation and tax cuts) has been reversed with the reality of global trade strife and DOGE gov't agency cuts.  By all appearances Project 2025 is the new Mein Kampf as the US attempts to create a new world order.

The initial optimism may be why bearish sentiment was so slow to react and only now is approaching levels normally seen with a 4-5% pullback before and after the 2023 bear market.  This week the ST Composite was joined by the VIX call indicator, FOMO call indicator and hedge spread with bearish sentiment at or near weak Buy level or higher.  The hedge spread is probably the most significant as it has remained between a weak and strong Sell for about 6 mns and will likely provide a cushion against steep drops.  Futures remain a concern as the NDX remains at a strong Sell and the SPX moved to a weak Sell.

Last weeks inflation may increase the odds of a dovish turn by the Fed with FOMC Tue-Wed but any rate cuts are unlikely until June which is now given 50% odds.  GDP forecast by the Fed (Atlanta) are also forecasting negative GDP for 2025 Q1 and economic weakness may lead US stocks to join Europe which has remained strong (DAX) with rate cuts even as US stocks faltered.  In addition to sentiment and the Fed, SPX options OI with monthly exp this week shows a strong likelihood of recovery to the 200D SMA by Fri at 5740 or better.  BTC is also supportive as it has regained its 200D SMA.

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 increased slightly closer to neutral.

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 remains near a strong Buy.

Update EMA. Bearish sentiment remains between a weak and strong Buy.

The ST VIX calls and SPXADP indicator bearish sentiment finally moved above a weak Buy, confirming the ST Composite.

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 with higher bearish sentiment from FOMO calls (weak Buy) and hedge spread (near a weak Buy).

FOMO Call component continued to rise to a weak Buy, matching the Nov 2021 level, but short of the Dec 2024 level.

Bonds (TNX).  Bearish sentiment remains at low extremes as TNX rates dropped to 4.2% then bounced.

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 fell sharply below neutral as gold rose above $3000/oz and the HUI made a ST high.

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 slightly below neutral.

With the sister options Hedge Spread as a ST/INT indicator (outlook 1-3 mns), bearish sentiment rose sharoly the last four days of the week to the highest levels the last 6 mns with ETF P/Cs of 1.25 vs the last several weeks around .95.

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 slightly positive 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 moved above a weak Sell for the first time this year, but remains below neutral.

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 pushed up to neutral matching the Dec 2024 levels.

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 Mar 21. 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 5639, options OI for Mon is small.  There is little put support until 5500, but deep ITM puts at 5900 may have a positive effect.  Little call resistance until 5700 should allow a move to 5680-5700

Wed FOMC day has small OI where SPX has put support at 5600 and call resistance 5680-5700.  Little directional bias, but Fri huge $OI put may give positive bias at EOD.

For Fri AM strong OI shows a $750B put spread in $OI that should give strong delta hedging to SPX 5740 (200D SMA) or higher.

For Fri PM strong put support up to 5700 and 5750 indicates a close likely at/over 5740 with BE at 5795.

IV. Technical / Other

This week I wanted to take a look at the Composite Technical Indicator designed to emulate the pre-data mining composite.  The index has moved from a weak Sell in Jan to a weak Buy.

The EMA format shows an even more dramatic move with the highest sentiment of the last year.

This SKEW and VIX term structure volatility indicator also shows a sharp move up from a strong Sell at the Dec high to a weak Buy.

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 fell to near a weak Sell at -1.0 SD, NQ (NDX) bearish sentiment remains near a strong Sell at -2.0 SD, YM (DJIA) is neutral at 0.0 SD.

Click dropdown list to select from the following options:

Tech / Other History
2025
   01.25 Update of NYSE Adv/Dec volume now at Sell level & SKEW shows warning of INT top (1-3mns).
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.  Last week I mentioned a resolution of the Russia/Ukraine warn as a possible reason for a strong market turnaround, but an article at the Wash Post  on Mon of a leaked FSB think tank report on Russia's goals in Ukraine gave me doubts as Putin is likely to take a hardline approach and sees 2026 as a more likely timeline.  With last weeks inflation data and potential weakness in GDP by 2025 Q1/Q2 a dovish Fed is looking like a more likely stimulus for a rally.

Weekly Trade Alert.  An uptick in bearish sentiment and SPX options OI support are likely to send the SPX back to the 200D SMA at 5740 or higher by Fri, but INT COT data indicates volatility is probably not over.  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
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