Sentiment Signals for Market Investmentsby Arthur Knopf, Financial Economist and Contrarian

Saturday, April 8, 2023

Unemployment Continues to Surprise the Bears

Last week I was looking for a ST top around SPX 4130 based on ST sentiment and "simple TA" and the Tue high was 4133 before a drop to 4070 Thur AM then a bounce into the close to 4100. Fri jobs data came in as expected and futures indicated a move to SPX 4115, but bond futures seemed to open late after ES closed and by noon EST the TNX rose from below 3.3% to over 3.4%, and continued higher rates are likely to pressure stocks next week. EPS season begins next week with major banks reporting Fri. Apr opt exp OI continues to point to a low around SPX 4010, the 4th wave "simple TA" target from the SPX 3810 low. Fri continued strength in employment with low unemployment at 3.5% indicates a likely May 3rd Fed rate hike before a pause. Supporting my outlook for a continued rally into late June, a recent ZH article by Market Ear summarizes SPX performance after a final rate hike.

This week I want to look at some of the other views out there. Starting with Avi, his 27th triangle wasn't too bad on the upside, but the downside target of the low SPX 3900s early Apr was too pessimistic as expected. More importantly in what seems to be a first, Avi gave a "crash" warning (no J/S) for the Fall with a target of SPX 2700 (daily/grn c). This is apparently due to his research in the banking sector and the outlook for a 2008-09 outcome, but Jamie Dimon (JPM CEO) in his recent share holders report indicated only limited expected risk from recent banking problems. For those interested in AI, Phils StockWorld has been covering its usage for writing the past few weeks and Fri looks at use in art and cybersecurity. Speaking of cybersecurity, Der Spiegel (no J/S) takes an in depth look at Russian plans for cyber-warfare that can target corporations and infra structure should escalation continue with NATO.

Sometime in the next 2-3 weeks (after taxes), I plan to update the Investment Diary to include links for the past research comparing the current economy and markets to the late 1960-70s and late 1990s.

I. Sentiment Indicators

The INT/LT Composite indicator (outlook 3 to 6+ months) has three separate components. 1st is the SPX and ETF put-call indicators (40%), 2nd the SPX 2X ETF INT ratio (30%), and 3rd a volatility indicator (30%) which combines the options volatility ratio of the ST SPX (VIX) to the ST VIX (VVIX) with the UVXY $ volume. This week breaks SPX options into volume adj (1/B-A) and traditional spread (A-B).

Update Alt. In this case the wts for the SPX 2X ETF ratio (SDS/SSO) and SPX puts & calls spread are adj to equal as in the DM/SM section for SPX ETFs. Bearish sentiment was little changed for the week.

Update Alt EMA. Bearish sentiment was little changed for the week.

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. Weights are 80%/20%.

Update. Bearish sentiment bounced early in the week, then fell closer to the official Sell level.

Update EMA. Bearish sentiment is off the recent lows but lower than last weeks close.

The ST VIX Calls & SPXADP remains near the strong Sell level, so a 3-4% pullback is likely the next 1-3 weeks.

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. An increase in hedging (mainly NDX) has pushed sentiment back to neutral, but lower prices are likely before a Buy level is reached.

Bonds (TNX). Bearish sentiment in bonds is consolidating near the weak Sell level.

For the INT outlook with LT still negative, 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 was little changed for the week with ETF sentiment at neutral.

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 continued to fall below the weak Sell level.

With the sister options Hedge Spread as a ST/INT indicator (outlook 1-3 mns), bearish sentiment rose slightly.

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.

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 was little changed for the week.

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.

A moderate increase in the ETF option put-call spread increased sentiment to the weak Buy. The NDX may be setting up a large IHS if a move up to 13.7k is seen in June. This would imply a retest of 11k in the Fall (SPX 3700-800) before a move up to test the ATH in 2024.

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 14. 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.

With Fri close at SPX 4105, options OI for Mon is moderate with call resistance at 4100 and above with put support starting at 4050. Some downward bias is expected.

Wed has somewhat larger OI where SPX OI is very small with downward bias toward 4050-4100..

For Fri stronger OI, but put/call overlap between 4075-4125 could point to some volatility in that range, but OI and OI$ favor the bears.

For Fri Apr 21 AM strong OI where large straddle at SPX 4000 may act as a magnet.

For Fri Apr 21 PM moderate OI shows a similar position to AM, where SPX call resistance extends down to 4010, while strong put support resides at 4000.

IV. Technical / Other - N/A

Conclusions. Last week went pretty much as expected with no "crash" and some late short covering ahead of the Fri employment data which came in as forecast. Low volatility may continue as this puts more pressure on the bears with a targeted pullback by the Apr 21 opt exp around 4000 as indicated by the SPX options OI. A prelim look at the EOM Apr 28 shows a move back to SPX 4050-4100 is possible before the May 2-3 FOMC. If markets do rally after a May Fed rate hike and pause, the strength of the rally is likely dependent on what happens to INT rates (TNX) as I think they will continue to rise.

Weekly Trade Alert. Expect a choppy market with a downward bias as no definitive signs are provided by this weeks OI. Wed CPI and Fri bank EPS will provide the best oppty for a sizeable decline. 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
Article Index 2016 by Topic

Long term forecasts

© 2023 SentimentSignals.blogspot.com

Saturday, April 1, 2023

Bulls Stampede as Bears Cower

Ouch. A time out worked for the bears who otherwise got trampled by the bulls hooves, but I try to play both sides when possible. The week started as expected with Mon & Tue up 7 then down 7, but with little news a rally of almost 150 SPX pts followed Wed-Fri. My preconception of a sideways move into mid-April and recent options OI success led me to ignore some simple TA. From the Mar lows at SPX 3810, the SPX rallied to 4030 (+120) then fell to 3910 (-120). If C=A then the next move up is to 4130. If an impulse, then possibly down to SPX 4010 then up to 4230, although 3 or 5 up may extend. This weeks options OI looks out thru the Apr 21 AM exp where a very large straddle (80k puts&calls) at SPX 4000 actually supports the expected pullback in mid-Apr to that level.

Next week is shortened by Good Fri so any reaction to Fri job report will have to wait to next week with CPI to follow on the Wed 12th. Jobs are expected to fall from 300k to 225k while CPI is expected to remain around 6%. Bond sentiment is showing strong investor bullishness as many seem to expect that rates (TNX) will fall if the Fed pauses or pivots, but the opposite happened in 1998-99 and will likely repeat if job strength and persistent inflation occur.

LT/INT bearish sentiment is little changed and is likely not reflecting the effects of last weeks late rally, but the ST indicators, both ST Composite and VIX Call & SPXADP indicate that a ST top is likely next week.

Update Alt. In this case the wts for the SPX 2X ETF ratio (SDS/SSO) and SPX puts & calls spread are adj to equal as in the DM/SM section for SPX ETFs. Bearish sentiment declined, but will probably take a few days to reflect last weeks gains.

Update Alt EMA. The faster moving EMAs show that a few more days of strength (EOW) are possible before a ST top.

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. Weights are 80%/20%.

Update. Bearish sentiment declined sharply to just shy of a weak Sell, so a ST top is likely this week.

Update EMA. ST EMAs (grn) have reached the weak Sell, indicating buying exhaustion, but LT (blu) remains near neutral, so an immediate reversal is unlikely

The ST VIX Calls & SPXADP has reached the strong Sell level, so a 3-5% pullback is likely the next 1-4 weeks.

Update EMA. With the ST (grn) at a weak Sell and LT (blu) neutral a few more days of topping are likely before a downturn.

Bonds (TNX). Bearish sentiment in bonds fell sharply last week as rates hovered around 3.5%, so higher rates are likely, it's only a question of when.

For the INT outlook with LT still negative, 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 declined to near the weak Sell with ETF sentiment dropping to neutral.

Update. The brief spike in ST sentiment played out as a warning for a rally, but has now turned back down.

With the sister options Hedge Spread as a ST/INT indicator (outlook 1-3 mns), bearish sentiment remains above neutral and any pullback should be a buying opportunity..

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 has turned down slightly, but remains above neutral.

The breakout over 13K means that the NDX will likely target 13.7k before an INT top as sentiment remains modestly positive.

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 6. A text overlay is used for extreme OI to improve readability, P/C is not changed. Also, this week includes a look at the GDX for Dec exp. A new addition is added for OI $ amounts with breakeven pts (BE) where call & put $ amounts cross.

With Fri close at SPX 4109, options OI for Mon is very small, but 4100 can be important as above is pos delta hedging, below neg. First support is 4050. Likely small range, neg bias.

Wed also has small OI where SPX is above put support, but possible negative bias.

For Thur (closed Good Friday) stronger OI, but most of puts are out of money, and similar outlook to Mon due to +/- delta hedging at 4100. Above 4100-50 possible, below 4050-4100.

For Fri Apr 21 AM opt exp strong OI with small P/C and $3B call value should be negative. Large straddle of 80k P&C at 4000 makes it a target for dealers.

IV. Technical / Other - N/A

Conclusions. Avi's leading diagonal outlook on Mon did a pretty good job so far, targeting SPX 4070-4100, but his pullback to the low 3900s early-mid Apr looks a little pessimistic. After testing SPX 4000-30 several times, the breakout above seems to have triggered a major short-covering rally. Such rallies can be somewhat relentless and both the steady advance throughout the day Wed-Fri and the relatively low volume indicate lack of selling which can drive such rallies. I hate to rely on TA, but it does seem to work best in short-covering rallies. So that being said a pullback to SPX 4000 or a little lower by mid-Apr could provide the next trigger point for another short covering rally.

Weekly Trade Alert. Next week could provide a ST top, possibly SPX 4120-40. Since payroll data comes out on Friday, the weekend delay will likely soften any immediate response and the CPI on Wed is likely to be the more important pivot point. 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
Article Index 2016 by Topic

Long term forecasts

© 2023 SentimentSignals.blogspot.com

Saturday, March 25, 2023

Time for a Time Out

Another successful week, but still full of surprises. The Sun update indicated that the UBS CSuisse buyout would create a more bullish start to the week, and the SPX climbed steadily thru Thur to reach the EOW target of 4000. Wed was expected to be down as the Fed held steady in the inflation fight and raised rates 25BP, even though many including Musk were calling for a "pivot". However, the SPX held steady over 4000 after the rate hike, but after a brief spike to 4040 fell hard the last 90 min to close below 3940. The choppy action between 3900 and 4000 continued thru Fri which rallied steadily from an opening low at 3910 to close at 3970, missing the 4000 target.

Next weeks outlook is for more of the choppy trading, but likely in a tighter range. If June -July 2022 patterns continues we may remain in a range from SPX 3900-4000 until mid-late Apr, while a Fed pause at the May 2-3 FOMC may provide fuel for a move to SPX 4200 or higher thru June. What happens to int rates (TNX) after the Fed pause is likely to be important. If rates continue to rise with the TNX moving to 4%+ then SPX 4200 is a likely maximum. If rates stay near 3.5% then 4300 is likely. A move to 4.5% by Fall due to continued inflation and strong growth probably means a retest of SPX 3800.

The Tech/Other section takes a "big picture" look at int rates (fed funds, TNX) and the PCE inflation gauge for two possible LT scenarios..

Update Alt. In this case the wts for the SPX 2X ETF ratio (SDS/SSO) and SPX puts & calls spread are adj to equal as in the DM/SM section for SPX ETFs. Bearish sentiment continued to climb, especially in options, with continued fears of a banking crisis, aka 2008-09, and now resides at neutral.

4Update Alt EMA. The brief spike to neutral has pulled back slightly.

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. Weights are 80%/20%.

Update. ST volume sentiment continued to rise sharply, now producing a strong Buy similar to the levels of the June and Sept SPX lows. I still expect continued chopy behavior similar to June-July which saw a range of 3800-900 for a month before a breakout rally.

Update EMA. Here, we also see a strong Buy just below the June levels.

Update EMA. Here, we see similar but somewhat weaker bearish sentiment than at the June and Sept lows.

Bonds (TNX). Bearish sentiment in bonds remains below neutral and will probably remain in the same trading range.

For the INT outlook with LT still negative, 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. ETF bearish sentiment fell sharply and may mean limited upside.

Update. After the "fix", bearish sentiment now appears similar to the Aug 2019 period, where a choppy advance ended in the Jan 2020 meltup.

With the sister options Hedge Spread as a ST/INT indicator (outlook 1-3 mns), bearish sentiment continued to fall to the weak Buy level following the June 2022 pattern.

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 rose above neutral with a sharp rise in options sentiment.

The 10% rise in the NDX the last two weeks from the 11,800 level resulted in a sharp drop in sentiment and will probably result in more normal market performance.

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 31. A text overlay is used for extreme OI to improve readability, P/C is not changed. Also, this week includes a look at the GDX & TLT for Apr exp. A new addition is added for OI $ amounts with breakeven pts (BE) where call & put $ amounts cross.

With Fri close at SPX 3971, options OI for Mon is moderate with strong put support at 3950 and call resistance at 4000, so a tight range 3950-4000 is likely with a close near 3970 .

Wed has very small options O, where SPX has put support a 3900 and call resistance at 4025 and 4065.

For Fri EOM strong OI with outside support/resistance at SPX 3900 and 4025 and mostly straddles in between. Likely range 3950-4000 with small downward bias toward 3950-70.

Using the GDX as a gold miner proxy closing at 31.5 made it over strong resistance at 31, but OI and OI$ indicate a drop to 30 is likely.

Currently the TLT is 106.8 with the TNX at 3.38%, similar to GDX the move over call resistance at 105 is likely to reverse pushing TNX back to 3.5%.

IV. Technical / Other

This week I want to look at the Fed's inflation target using the PCE with the TNX and fed funds rates. The last time the PCE was over 4% was 1990 at the beginning of a recession due to an oil shock from the Iraq invasion of Kuwait. As you can see, until 2015 there was a positive spread between the TNX and PCE which is called the real interest rate. The spread is based on expected inflation and is usually based on what happened the last few years. In the 1990s, people expected a return to high inflation of the 1980s and now we see the opposite where people expect the low inflation of the 2010s. The result was that rates were too high in the 1990s, but are probably too low today which is why I expect higher rates. Note the chart does not include last weeks rate hike.

Looking at 1990, it took 4 years for the PCE to drop to the Feds target rate of 2% even with a recession. Today with continued signs of a stronger economy, it could take much longer. So I want to take a look at what I see as two of the most likely outcomes and what it means for interest rates. The first (prob 40%) is the 2006-07 prelude to the 2008-09 financial crisis where fed funds rate rise over 5% and stays there for two years while TNX rises staying between 4.5-5% until a full-blown financial crisis occurs. The second is 1998-99 (prob 60%) where the Fed lowered rates (today replaced with QE & other bailouts), but persistent inflation and strong growth with tech boom leads to higher TNX and Fed had to raise rates 9 mns later, eventually up to 6.5%. This led to tech crash and an even bigger recession.

Conclusions. Its probably time for a time out. The last two weeks have been fairly wild but if options OI is any indication, next week will be calmer with most of the time spent in the SPX 3925-4000 area.

Weekly Trade Alert. Mon could see a small pullback but SPX OI support is strong at 3950. Fri EOM shows a potential range of 3900-4025, but neutral bias centers around 3950-75. 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
Article Index 2016 by Topic

Long term forecasts

© 2023 SentimentSignals.blogspot.com