Middle East War Widens as Trump Offers Voter Payouts
Last week was somewhat weaker than expected as oil prices (WTIC/bbl) rocketed
higher from the low $90s to over $104 Thur as Houdi/Iran contingent expanded the
blockade of middle east oil into the Red Sea, cutting off access to the Suez
Canal. The US/Saidi alliance was completely caught off guard and now opens
a second front for Trump to contend with. For the SPX this meant new lows
thru Thur to the 7580 level before a sharp Fri recovery to 7660 with the CPI release
showing a continued decline of the core rate to 2.4%. This somewhat
muddles the Wed FOMC outlook after Waller last week said he would be content
with keeping rates constant with a lower core CPI, but the surge in oil prices
increases the probability of higher future inflation. A discussion of the
PCE, CPI and Fed rate changes is included in this weeks Tech/Other section.
The probability of a 0.25% FOMC hike is listed as 87% by
CME Watch.
ST SPX sentiment moved to a weak Buy with the ST Composite and VIX call
indicator moving from neutral to a weak Buy, while INT/LI indicators remain in
the weak to Strong Sell area.
Discuss.
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 improved but remains a weak Sell.
Update Alt EMA. Bearish sentiment improved but remains a weak Sell.
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 rose above a weak Buy, but pulled back Fri.
Update EMA. Bearish sentiment rose above neutral about halfway to a weak Buy.
The ST VIX calls and SPXADP indicator bearish sentiment moved above a weak Buy
from neutral with negative SPXADP and strong VIX call buying on down days.
The ST/INT Composite indicator (outlook 1 to 3 months) is based on the Hedge Spread (52%)
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 improved moving up to near a weak Sell.
Update FOMO calls. Bearish sentiment improved moving from a weak Sell to
near neutral.
Bonds (TNX). Bearish sentiment remains at low extremes as rates
closed just below 5% as Bessents bond purchases did little to offset inflation and
deficit jitters after oil (WTI) rose above $100/bbl and Trump promised a $1T+
voter payout if the GOP wins the midterms.
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 remains at a weak Sell.
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 to just above a strong Sell.
With the sister options Hedge Spread as a ST/INT indicator
(outlook 1-3 mns), bearish sentiment remains between neutral and a weak 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 at a weak
Sell.
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 rose 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 Sept 18. 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 7657, options OI for Mon is small/moderate with put
support at 7600 & 7700 and call resistance at 7650 and a BE at 7685.
Upside likely but limited 7675-7700.
Wed FOMC day, SPX OI is small with put support at 7650 and call
resist at 7675 although over 7675 could see positive delta hedging. Should
remain near BE at 7675.
For Fri AM very strong SPX OI shows BE improved to 7675.
For Fri PM strong SPX OI shows BE at 7655 with put support at 7600 & 7625 and
call resist at 7675 & 7700. Could see some weakness into PM.
IV. Technical / Other
This week I wanted to take a brief look at the core inflation measures for PCE
and CPI and the Fed funds rate for the last 10 years. The Fed claims to
base rates on the core PCE but since 2020 they seem to be following the CPI
instead, while the CPI seems to be lagging the PCE by about a year. As a
result instead of raising rates in 2021 when the PCE hit 4%, they waited a year
until the CPI hit 4%, allowing the CPI to move higher and then did not cut rates
until a year after the CPI topped. With the Aug core CPI on Fri declining
to 2.4%, The same policy could mean no change, but the new chair Warsh is an
unknown and the CME futures are
showing an 87% prob of a hike to 3.75-4.0% range. Data is annual change
quarterly (DPCCRV1Q225SBEA, CORESTICKM159SFRBATL, BOGZ1FL072052006Q).
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 above neutral at +0.15 SD, NQ (NDX)
remains
a weak Sell at -1.20 SD, YM (DJIA) remains a weak Sell at -1.35 SD.
A quick look at gold (GC), bearish sentiment is in-between a weak and strong Sell at -1.75 SD.
Click dropdown list to select from the following options:
Tech / Other History
2026
2025
2024
2023
2022
Other Indicators
Conclusions. Iran seems intent on stepping up the pressure on Trump
prior to the election with Trump admitting that a solution is unlikely until
after the election. The bond market apparently does not like Trumps lack
of concern over inflation as the 10 year bond rate (TNX) is now just below 5%.
In an interesting aside, in 1987, the TNX (Fred,DGS10) rose from 5% to 10%
before the stock market crash and at the time the DJIA div yield was 2.5% and
many felt much of the crash was due to an asset allocation switch from stocks to
bonds at a 4x yield differential. Today the DJIA yields about 1.5%, so a
4x yield differential is around TNX 6%. ST sentiment is showing some
upside bias next week, but Iran news and oil prices will remain important.
Weekly Trade Alert. Some upside is likely with a tight range unless surprise from FOMC, Iran with range 7625-7700
. Updates @mrktsignals.
No comments:
Post a Comment