The Earthquake May Be Over, but Is There a Tsunami Coming

Last weeks winner appeared to be Trader Joe whose ES/SPX target near 4800 was close enough at 4838 and the 5600-700 upside looks possible.  Trump apparently decided to dial back the rhetoric and Wed mid-day announced a 90 day stay on reciprocal tariffs for everybody but China and stocks exploded higher with a 10% rally from SPX 4950 to 5481.  This weekend he has also announced an exemption on reciprocal tariffs on a number of electronic items, which include China, and appear to specifically target big tech such as APPL and NVDA.  Weekend indications (ig.com) are a 3%+ gain for NDX and 2% for SPX, so SPX 5600-700 is looking more likely.  Possibly the most interesting was that Trump posted "Now is a Great Time to Buy" on Truth  Social 3 hrs before the Wed announcement, perhaps to increase his following and the value of his interest in TS.

Last week did, however, give a hint as to what could be the reason for a second leg down when bonds (TNX) showed a sharp reversal from its downtrend from a Jan high of 4.8% to an Apr 4 low at 3.9%.  Mon saw a sharp jump from about 3.97% to 4.25% on the announcement of a $1T defense budget and again on Wed to 4.4% when the Senate passed Trumps tax cut bill and increased the Federal debt limit by $5T from $35T to 41T.  If DOGE and other tax cuts are supposed to be saving so much money, why does the Trump admin need to spend $5T more than Biden?  One possible reason for the increase rates is a seondary effect of tariffs as discussed in Tech/Other.

Bearish sentiment has increased to the point where a sustained rally could occur and could even extend to nominal new highs into the Fall as happened after the 2018 tariff episode, but I think the next leg down is more likely to be from rising int rates as the "tariff shock" has mostly passed.  With the TNX the breakout over the "bull flag" has left a gap at 4.3%, which is about a 38% retrace from the 4.6% high, and is likely to be filled.  A decline in rates will help stocks rally and the SPX OI for next weeks monthly exp on Thur shows SPX 5500+ as a likely target.  If the rally in rates continues as an ABC and A=C, then next target is 5%, and any higher than that is likely to see a new low for the SPX.

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 spiked to a strong Buy Mon/Tue at the SPX 4800 lows, but retreated to just inside the weak Buy by EOW.

Update Alt EMA. Bearish sentiment declined to the week to about .5SD after an early spike over a weak Buy.

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 on a short timeframe gave a strong Buy at the lows an an in-between weak/strong Buy at EOW.

Update EMA. Bearish sentiment (LT view) reached a strong Buy at the lows but retreated to a weak Buy by EOW.  Comparing sentiment at the SPX lows to other selloffs, the Covid lows were much stronger while current sentiment is comparable to Oct-Nov 2018 and mid-2022, where each was only the first leg down with a lower low yet to come.

The ST VIX calls and SPXADP indicator bearish sentiment rose to just shy of a strong Buy, then retreated 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 spiked above a strong Buy but retreated to below a weak Buy by EOW and seems incomplete.

FOMO calls rose to a strong Buy, but compared to 2022 may indicate only a ST bounce.

Bonds (TNX).  Bearish sentiment remains at low extremes.  Rates had been declining in an down channel (bull flag) from mid-Jan at 4.8% thur early Apr, but reversed on the 4th from a 3.9% low.  Over the next six days rates rose to 4.6% on Fri. 

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 overall is slightly below neutral, while ETF sentiment is slightly positive.

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 rose sharply to a weak Buy, but below levels seen at prior INT lows.

With the sister options Hedge Spread as a ST/INT indicator (outlook 1-3 mns), bearish sentiment briefly spiked to a strong Buy VST before falling back to below a weak Buy.

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 reversed from below to 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 improved significantly, rising from a weak Sell to in-between neutral and a weak Buy.

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 also rose sharply based on strong ETF P/Cs to in-between a weak and strong Buys.

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 17. 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 5363, options OI for Mon is small.  Premarket looks to open over SPX 5400 resistance so next target is 5450 or higher.

Wed has somewhat larger OI where SPX OI is also strong and could see some pullback with call resistance at 5425 and 5475, but Thur strong put support is likely to support a move toward 5500.

For Thur AM (Good Fri is Holiday) strong SPX OI shows a strong bias toward SPX 5500.

For Thur PM strong SPX OI shows a bias to 5500+.

IV. Technical / Other

This week I want to look at the foreign investors holdings of US debt as a percent of GDP and why it may be driven by trade globalism.  First, a primer of intl trade by J.Maudlin looks as trade having three components goods (G), services (S), and financial assets, mainly bonds (B).  Here, with Trumps policies, he only considers G.  For example if the US buys $100B (80B in G, 20B in S) from country X and X buys $100B from US ($40B in G, 40B in S and $20B in B) then Trump/Navarro call this a $40B deficit looking only at the purchase of G and demands that country X buy more of G from US.  However, since they only receive $100B from US (US $), country X must buy less or sell some of S or B.

The following chart shows the effects as foreign holdings of US debt as % GDP increased from 5% in 1980 to 35% when Trump was first elected.  The trend was down until Biden was elected, but when he kept the Trump tariffs the selling continued and now stands around 25% or $8T.  In 2016 China was the largest holder with over $1T in US debt and had dropped down to $750B early this year.  Likely they have been selling more and that may be why rates rose last week.  Japan is now the largest holder with $1T US debt and recent USD weakness may have also caused them to sell.

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
   04.05 A comparison to SPX 2020 covid crash and a look at LT NAAIM Index.    03.29 Corporate profits to GDP since 1980 show strong growth from globalism.    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.  The primary result of Trumps economic policies, "tariff shock", may have passed, but secondary effects, an "int rate shock" or "inflation shock" may still remain and may catch everyone offguard as the worst seems to be over.

Weekly Trade Alert.  Next week will likely be positive with Trumps announcement of popular tech items for exclusion from tariffs, at least until he changes his mind.  SPX options OI are indicating a likely run to 5500 or higher before the Easter Holiday.  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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