Trump Starts a Nuclear Trade War

Trump 2.0 trade war started late Jan with Trump throwing grenades as tariffs, but everyone expected him to step up his game last week by using a bazoka.  However, much to everyone's surprise Trump went full scale nuclear with his reciprocal tariffs with our largest trading partner, China, getting a combined 54% tariff.  Estimates for the cost of almost everyting increased with the price of a new car expected to jump from $8,000 to 16,000, but as explained in last weeks Tech/Other, if consumers can't afford to buy, prices wil rise less and cut into profit margins.  Stocks did not like it as the SPX started as planned with an initial drop to 5000 (target 5550-5650) then a rise to 5550 Tue.  Wed was crazy as promised with a rise to 5700 before the close, then in the A/H further gains were seen in the SPX futures for about 10 min, then the next 20 min saw a 200pt drop when the tariff increases were announced.  Selling continued throughout Thur & Fri for a second 10% drop in SPX to close at 5074.  Is Trump a madman or a genius?

Trump has stated all along that he "will do whatever it takes" to get the job done where several objectives include extending his tax cuts, reducing the federal debt, lowering int rates (TNX), and starting a sovereign wealth fund.  Tariffs are the main tool to fund his objectives.  His tax cuts seem to be well on the way with passage of the Senate reconciliation bill.  Int rates (TNX) have dropped from a high of 4.8% in Jan to below 4% with a 15% drop in the SPX, so another 15% (SPX 4250) could drop rates to near 3%, and a third 15% (3500) could be near 2%.  Now use the oppty created by the tariff chaos to refinance the debt at a 50% lower LT rates and tax cuts are paid for.  Although this may sound preposterous, this exact outcome is outlined for the ES by Trader Joe this weekend in his monthly expanding diagonal scenario.  Now use the tariff funds to start a sovereign wealth fund by investing in the S&P 500 thru cash/futures and when stocks recover Soc Security will be funded.

That may work for while, but if TJ is right, the next ATH will be W5 of SC3 or SC5, then the real fun begins.  Personally, I think TJ may be underestimating the current decline as there are several indications that a repeat of the early 2020 covid decline might be more relevant where a st line decline of 35%+ or about 3970 for SPX is similar to TJs 82% retrace for the SPX w3 of 3500 pts.  I prefer 3800.  A look at this weeks sentiment shows very little bearishness to support a large rally at this time.  There also seems to be an alternation on the LT sentiment charts where less extreme bullish sentiment (Sell) was seen before the covid crash compared to 2022 bear market.  The Tech/Other section has charts and more discussion of the 2020 analog and a look at the LT NAAIM exposure index.

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 has moved above neutral, but in 2022, even the corrective rallies saw a strong Buy so little support at this time.

INT volatility. Bearish sentiment for the volatility component looks like the action is just getting started.

Update Alt EMA. Bearish sentiment shows much higher levels compared to the 1st leg down in 2022.

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 is barely at the weak Buy.

Update EMA. Bearish sentiment is barely at the weak Buy.

The ST VIX calls and SPXADP indicator bearish sentiment moved above neutral from last weeks weak Sell, but well short of 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 rose above neutral but below a weak Buy.

Update FOMO calls. Bearish sentiment rose above neutral but below a weak Buy. 

Bonds (TNX).  Bearish sentiment remains at a low extreme.

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 toward neutral with the sharp drop Fri.

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 remains below neutral.

With the sister options Hedge Spread as a ST/INT indicator (outlook 1-3 mns), bearish sentiment VST hit the strong Buy level with ETF puts rising to 3x last two years avg,  but LT sentiment remains weak.

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 fell as BTFD hits the long ETFs.

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 rose as buying of short SQQQ has improved sentiment to neutral along with the ETF options.

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 with ETF option sentiment.

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 Apr 11. A text overlay is used for extreme OI to improve readability, P/C is not changed. Also, this week includes a look at GDX, TLT & IBIT for Mar exp.   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 5074, options OI for Mon is small (bottom cutoff, only puts with 1000pts) wher a move over 5100 could go to 5240, but little support until 4500.

Wed has small OI where SPX has little support until 4500.

For Fri SPX has strong put support at 4850 and 4900 and should keep prices above those levels by EOW.

IV. Technical / Other

The following two charts compare the SPX performance today to the 2020 Covid crash of 35%.  Both charts show an initial move from above the 50 SMA to below the 200 SMA as they were flattening and and an initial recovery of the 200 SMA before a large decline.  In EW, 2020 seemed to be 3 waves with w3 longer timewise.  So far in 2025 w3 is long in pts but short in time.  For both w3s the early declines have been large, so 2025 may see smaller declines drag prices lower for several weeks.  Previously, I had indicated that an event, probably a Fed dovish turn or maybe tax cuts, were likely necessary to turn things around.  A Ukraine peace seems unlikely. 

Many EWers think a tradeable low is near, but sentiment indicators shown above do not agree.  Avi is looking for a low around SPX 4950, then 5850 before lower lows.  TJ (see top) sees ES low about 4800 then 5600 before 4000.  One of the best ST outlooks has been Pretzel Logic thinks 5100 or 4700 are likely inflection pts.

I Haven't talked about the NAAIM active manager index because I wanted to look at a LT chart which took longer than expected.  Here is a chart since early 2019.  There are two apparent cycles as 60-100% seems to be the ST cycle in a bull phase, but in a bear phase the range drops to 20-70%.  So for the LT outlook a 60-100% range is bearish.  Currently we are a long way from the 20% level at 47%.

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) bearish remains neutral at -0.0 SD, NQ (NDX) bearish sentiment remains at a weak Sell at -1.5 SD, YM (DJIA) is neutral at 0.0 SD.

Click dropdown list to select from the following options:

Tech / Other History
2025
   03.22 A comparison to Trump 1.0 trade war results for the SPX.    03.15 Update of Technical Indicator Composite & SKEW plus VIX term structure.    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.  I am running short on time so I think every thing has been said above.  Bearish levels do not indicate a tradeable rally anytime soon, but the brunt of the decline may be over soon. I would not be surprised to see another 10% decline early next week to about SPX 4500 before a counter trend rally to 4800-900 by end of week.  Ultimate lows are expected by early to mid May near or below SPX 4000.

Weekly Trade Alert.  Mon_Wed may see a continued decline toward SPX 4500 before an EOW rally to SPX 4800-900.  CPI is Thur a low number may help.  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
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