Bonds Catch a Bid as AI Falters

Last weeks target of SPX 7750 was met on Wed but a combination of bad news (Meta's 2 for 1 stock split for AI financing and higher oil prices) led to a drop back to the 7620 area by Fri.  One EW analyst (no J/S) believes that a seasonal bottom is near that could take the SPX to ATHs, but I prefer to focus on the DJIA with the recent pullback in int rates (TNX) that will likely benefit banks.  For the ST/INT the DJIA shows the potential for an IHS back to about 54.7k thru about mid-Dec, while the LT DJIA shows double tops in 2020, 2022 and 2025.The top is likely in for the NDX which will limit the SPX gains that could be a minimal move over 7800.

Overall sentiment has improved slightly with the biggest change in sentiment a move in the SPX options and ETF indicator dropping toward a strong Sell due to a sharp increase in options volume as ST traders chase moves in either direction.

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 remains at a weak Sell. 

Update Alt EMA. Bearish sentiment fell slightly below 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 remains between neutral and a weak Buy.

Update EMA. Bearish sentiment dropped sharply midweek then bounced above neutral Fri.

The ST VIX calls and SPXADP indicator bearish sentiment remains near a weak Sell.

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 increased to a weak Sell.

Update FOMO-calls. Bearish sentiment increased to a weak Sell.

Bonds (TNX).  Bearish sentiment remains at low extremes as rates dropped back to 5% on a safety bid.

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 near a weak Sell as prices dropped below 700.

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 from near a strong Sell to a weak Sell.

With the sister options Hedge Spread as a ST/INT indicator (outlook 1-3 mns), bearish sentiment rose further above 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 fell sharply toward a strong Sell as the SPX P&C volume soared.

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 slightly above 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 near 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 Oct 30. 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 7624, options OI for Mon is small with a BE at 7730 that may add upward momentum, but weak put support may lead to volatility.

Wed has similar SPX OI with a BE also at 7730 and stronger put support up to 7650, but some call resistance at 7675.

For Fri EOM strong SPX shows a BE at 7746 with strong put support up to 7700 and call resistance at 7800.

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 near a weak Buy at +1.0 SD, NQ (NDX) remains close to a strong Sell at -1.75 SD, YM (DJIA) is between neutral and a weak Sell at -0.5 SD.   A quick look at gold (GC), bearish sentiment is in-between a weak and strong Sell at -1.6 SD.

Conclusions.  There seems to be little impetus for chasing the AI sector given the increasing negative outlook for AI data centers.  You have to wonder if AI is "super intelligent" why can't it solve its own power problem by finding a solution to creating cheap "fusion power".  Stocks continue to follow the 2000-2001 topping pattern which was noted by a sharp drop in the DJIA as rates and techs rose into Mar 2000, followed by a recovery in the DJIA as techs faltered and rates fell.

Weekly Trade Alert.  Likely to be rangebound for SPX 7625-7725.  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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