Will Feds QT be Sell the Rumor, Buy the News for Bonds?

Last week interest rates (TNX) looked liked they would follow late 2017 with a consolidation between 2.5% and 2.3%, but this week started off with a bang with rates back to a new recovery high Tue at 2.6% and continued to 2.7% Fri.  In Jan 2018, 2.7% was enough to break the stock market.  A couple of weeks ago (Mar 26 Tech/Other), I indicated that I expected the important level this time would be 3.4%, matching the Sept-Oct 2018 level before a 20% SPX correction thru Dec 2018.  If rates continue to rise sharply, the downside risk for INT 2022 is 20-25% or SPX 3700-4000, on the other hand if rates stabilize below 3% into the FOMC May 4, a strong move to fight inflation by the Fed may reverse the upward trend in rates.

For the SPX, ST trends continue to follow the 2011 analog from last week.  Musk's $9B purchase of TWTR stock led to a 2% rise in the NDX on Mon with the SPX modestly exceeding my upside target of 4550-75 (act 4593) before giving it all back on hawkish Fed talk Tue with a double bottom in SPX at the lower target of 4450-75 (act 4450) on Tue & Wed.  Next week may see a consolidation in the middle for opt exp week before further downside with a lower target of SPX 4300-50 early May with FOMC on May 4.

In the Tech/Other section, I discuss a new feature added to the options OI chart showing the notational value ($ amount) with $ B/E.  I started following this for Mar 31 EOM exp and the last hour drop in SPX saved the dealers (call writers) over $1B in exposure, probably due to a flood of SPX futures selling.  The deviation from $ OI vs contract OI may explain why contract OI only is sometimes less reliable.

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 (30%), 2nd the SPX 2X ETF INT ratio (40%), 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.

Update.  Longer term sentiment continues to decline with higher risk as the LT (blue) EMA approaches neutral.

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 sentiment showed considerable improvement and may mean a ST bounce is likely.

Update ema.  I noticed that ST (1 yr) period EMAs have a high correlation (50%) with price moves and are also pointing toward a bounce.

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.  ST/INT sentiment has moved back to positive with the pullback of the last two weeks

Update ema.  A modest rally of perhaps half of the decline from the lows or SPX 4550+ seems likely.

Bonds (TNX).  Bearish sentiment in bonds has finally started to rise above neutral, but TNX 3%+ looks likely in the not to distant future.

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.  Combined sentiment is now the lowest in 4 yrs and ETF sentiment is not far behind, but prices continue to inch upwards on the inflation outlook.

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.  The sharp decline just below neutral has reversed somewhat, but is unlikely to support a sustained rally.

With the sister options Hedge Spread bearish sentiment as a ST/INT indicator (outlook 1-3 mns), the recent decline has reversed much of the previous weakness in sentiment.

Taking a look at the ETF ratio of the INT term SPX INT (2X) ETFs (outlook 2 to 4 mns), bearish sentiment remains near bullish levels and likely indicates a larger rally is yet to unfold.

The INT term NDX ST 3x ETFs (outlook 2 to 4 mns) bearish sentiment remains stubbornly high.

Similar to the TNX plus ETF sentiment shown for the HUI, I think I am going to start showing  the NDX sentiment with the interest rate effect.  The INT term NDX ST 3x ETFs + TNX (outlook 2 to 4 mns) bearish sentiment has a higher correlation of 50% vs 35% with ETFs only.  Here we see that much of the strength of the NDX since Mar 2020 may be int rate related and as rates return to normal levels so might 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 Apr 14, markets are closed for Good Fri. 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 and $ volume.

With Fri close at SPX 4488, options OI for Mon is small with strong support at 4490 (BE) with a move over 4525 likely intra-day (OI P/C & Vol) with a close 4500-25.

Wed has very small OI where SPX shows call resistance at 4500 and 4525, but BE $ at 4535 may push prices higher.

For Thur AM, normally I don't cover opt exp AM OIi because they are usually all hedged, but this is interesting due to weak support from the OI & OI $ P/C and BE.  Could be a weak open to 4500 but reverse for PM.

For Thur PM moderate OI with neutral P/C and strong put support at 4500 and call resistance at 4575 may rally to 4550-75 then fade into close due to low BE to 4525-50.

For Apr EOM strong OI with high P/Cs indicate strength but most of the puts are in the 4200s and time decay is likely to be vicious, so only a guess for now for close SPX at 4500.

IV. Technical / Other

This week I want to look at the difference between options OI contracts and notational value ($ amounts).   After following the Mar EOM massive put contracts at 4510 & 20 for over a month as a basis for a move in SPX to 4500-600 while most were looking lower, I wanted to measure the sustainability of the move to 4640 by looking at the OI $ amounts.

Here you can see at Wed (Mar 30) high, the OI contracts showed a neutral position, but the $ amounts showed an extreme bias for calls.  Since the dealers/call writers are on the hook for $2.4B ($000), a reversal was likely.

By the close Thru with much of the drop in the last hour fueled by futures selling, the dealers/options writers had lobbed $1.1B off the call value and only gave up $100M in put value for a total savings of $1B.  Note put support at 4550 was broken

On a smaller scale, I decided to look at last Fri weekly exp also adding the call/put breakeven $ amount (BE).  Here is a look at the OI 1 hr after the open.  OI looks bullish with P/C of 138% and little resistance until 4550, but the OI $ is the opposite.

By noon EST at SPX 4511 (hi 4520) the OI $ was even more extreme.

By the close, the OI$ predicted weakness won out and the decline would have been sharper except for the high $ volume traded at a P/C of 429%.  In conclusion, the OI $ amounts do seem to add value to the OI interpretation with the BE lending some directional bias.

Conclusions.  The bond market has presented the biggest problem for the INT outlook for the SPX over the last few weeks.  An accelerated move to the upside for rates presents a problem for stocks especially techs.  A back and for rise as seen in late 2017 will encourage the flow of funds from bonds to stocks and may result in a blow off stage for the SPX.  The current rally in rates may last until the May 4 FOMC where a strong stand against inflation may temporarily appease bond investors.  As long as the TNX rate (now 2.7%) stays below 3%, the SPX may continue to rise after a likely correction into early Mar (target 4350 or lower), but a move over 3% raises the likelihood of a more serious decline to 4000 or lower.

Weekly Trade Alert.  Opt exp week is expected to br relatively mild with a potential range of SPX 4475-4575 and lows early in the week and highs Thur.  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

© 2022 SentimentSignals.blogspot.com

Was That Maximum Optimism?

Last week went mostly as expected, but in the somewhat familiar accelerated time frame.  Initially there was a lot of optimism regarding the peace talks between Russia and Ukraine.  This pushed the expected rally in the SPX to 4600+ (4637 act ) by Thur EOM forward by two days with a sharp drop in oil prices and int rates (TNX).  As mentioned several times over the past two weeks, higher rates are expected to be a positive and lower as negative, so this was a warning, and late Wed a reversal began toward the Fri target of 4550 or lower (act 4507).  With the drop in int rates, the 2017-18 SPX analog becomes more viable as does the 2011 analog of the SPX "death cross" where a two day recovery rally over the major MAs (50, 100, & 200 SMAs) led to an eventual retest of the prior lows in 4-6 weeks.  Comparing 2011 to todays market, this implies SPX at 4300-4350 around the May 4th FOMC when a 0.50% rate hike is looking more likely (more in Tech/Other).

It looks like last weeks VIX options OI was correct in predicting higher prices ST, while the VIX call indicator was vindicated for its Sell with the Wed-Thur pullback.  A closer look at the SPX analog for the 2011 analog looks like it may be the best option for todays market and is discussed in the Tech/Other Section.  A link has been added to the bottom Investment Diary section for previous Tech/Other sections in 2022.

Bearish sentiment continues to fall for the INT/LT indicators and last weeks declines satisfied to bearish out for ST indicators that have moved to neutral.  The outlook for the next week or so is a consolidation between 4450-75 and 4550-75 with a possible breakdown the last half of Apr.

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 (30%), 2nd the SPX 2X ETF INT ratio (40%), 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.

Update.  Bearish sentiment has fallen sharply, now nearing the neutral zone.

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 has bounced from the weak Sell area, now nearing the neutral zone.

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.  Bearish sentiment has fallen below neutral lead by SPX FOMO while the Hedgespread lags.

Update ema.   Bearish sentiment bounced back sharply with last weeks pullback to above neutral.

Bonds (TNX).  Bearish sentiment in bonds remains very subdued near neutral, increasing the risk of higher rates.

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.  Momentum seems to be the main driver of this market, surprisingly gold stocks were up 1% Fri even though gold was down 1%.

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 has fallen sharply, now at the neutral zone.

And the sister options Hedge Spread bearish sentiment as a ST/INT indicator (outlook 1-3 mns) with bearish sentiment now nearing the neutral zone. . 

Taking a look at the ETF ratio of the INT term SPX INT (2X) ETFs (outlook 2 to 4 mns) as bearish sentiment, sentiment continues to fall sharply, now below the Buy zone. .

The INT term NDX ST 3x ETFs (outlook 2 to 4 mns) bearish sentiment is falling more slowly and remains a Buy.

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 8. 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 fand TLT monthly.

Most advisors seem to be looking for a continued pullback next week to about SPX 4450-75 which shows up in higher put support (P/C).  With Fri close at SPX 4546, options OI for Mon is very small, but there is strong put support between 4350 and 4475.  SPX 4550 is the most likely close, but below 4530 the next strong support is 4475 and above 4450 the next resistance is 4600.

Wed has even smaller OI where SPX is likely to be between 4500 and 4550.

For Fri SPX OI is moderate where a similar outlook is a range of 4500-50.

For optn exp Apr 14 (Thur) stronger call resistance at 4575 and above with partial hedges down to 4425 indicating that surprising weakness may emerge mid-month, possibly due to Apr 12 CPI and Apr 13 PPI data.

For EOM Apr 29 stronger OI shows more call resistance extending down to 4400 & 4500 with put support at 4450 and 4475 and show potential for volatility between 4400-500 with most of the put support between 4275-4350.

Using the GDX as a gold miner proxy closing at 39.4, there has been surprising strength possibly due to inflation concerns, but there is little put support if inflation turns down.

Currently the TLT is 132.4 with the TNX at 2.38%, OI shows stronger call resistance to lower rates (higher TLT) at 134 and 137 with 135 hedged and less put support for higher rates.

Currently the TLT is 132.4 with the TNX at 2.38%, here an unusual pattern shows small hedged positions between 125 (TNX 2.75%) and 140 (TNX 1.75%) as likely means much uncertainty about the direction of rates..

IV. Technical / Other

This is a look at the SPX from 2011 that was used as an example several weeks ago as a bullish outcome resulting from the "death cross".  After a lower retest of the initial low, a sharp rally retraced about 62% of total decline before a second retest 4-6 weeks later that retraced a little more than 50% of the decline.  An equivalent second retest from the 2022 lows of 4115 to 4637 is about 4350.  The circled area shows a potential topping pattern before a breakdown.  The next low would likely be early May.

Comparing the above to the SPX today, you can see the lower low after about a 50% retracement, then a sharper rally to retrace 62% of the entire decline with a sharp reversal after a breakout over the major SMAs.  If a triangle occurs, the initial low should be 4450-75, then continue into mid- late-Apr before a breakdown.  One possibility for the next low is the May 4 FOMC where we might see a 0.50% rate hike.

Conclusions.  Last weeks SPX rally to over 4600 and subsequent pullback to 4500-50 were not unexpected although the timing was faster than expected.  The so-called "death cross" has proven to be less than deadly, at least for the ST/INT and more upside is expected LT, although a sizeable pullback is likely late-Apr and early May.  Using the 2011 analog has so far provided a valuable guide and now shows that a ST top is near with the potential for a pullback to the SPX mid-4300s by early May.  INT/LT bearish sentiment has retreated to near neutral, but is likely to reach the Sell level before the next major decline (10%+).

Weekly Trade Alert.  The next two weeks are likely to be a consolidation between 4450-75 and 4550-75 with weakness possible by optn exp Apr 14.  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

© 2022 SentimentSignals.blogspot.com

The Crash No One is Talking About

Last week started out as expected with a carry over of upside momentum into Mon/Tue carrying the SPX up to the 4522 level, but the mid-week pullback only lasted thru Wed to 4466 (-66pts vs expt -100+ pts).  The reason primarily was a sharper than expected selloff in bonds with money flowing into stocks for inflation protection.  This weeks Tech/Other section takes a closer look at the SPX/TNX trends from late 2017-18 and rates are running well ahead of that period.  If the current trend continues (which seems likely based on higher CPI comparisons), a continued rise in rates (TNX) toward 3.5% (current 2.5%) could cause a dislocation in stocks of 15-20% similar to Jan-Feb 2018, where 3.5% is twice the DJIA div yield and may cause reverse asset allocation.  Ultimately TNX rates are likely to reach 4-4.5% over the next 12-18 mns based on inflation comparisons.

Looking at the performance of INT bonds using the 20 yr TLT ETF, prices are down 10% in the month of Mar and 17% since Dec.  Currently at 128 vs Dec 155, a 12-18 mn target of 100 or par seems reasonable, especially considering the TBT/TLT ETF sentiment indicator which shows a drop in bearish sentiment as BTFD is strong in the retail bond sector.

Current sentiment outlook is for several more weeks of higher prices with ST trends likely influenced by int rates (TNX).  One EW analyst with a good ST record expects SPX 4700+ by mid Apr.

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 (30%), 2nd the SPX 2X ETF INT ratio (40%), 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.

Update.  Bearish sentiment continues to drop, but remains well above neutral.

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 has dropped below neutral which may result in some consolidation similar to June 2020 before a 200 pt run up and a more serious correction.

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.  Bearish sentiment remains slightly above neutral, similar to early June 2020.

Update EMA.  Bearish sentiment is coming off a similar high as seen in June 2020.

Bonds (TNX).  Bearish sentiment in bonds surprisingly has dropped as rates rose as BTFD is strong.  It's hard to tell if the threat of sanctions has caused China to dump US bonds, or if FED hiking rhetoric has scared fund managers, but the retail sector seems oblivious.

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 overall is unchanged as ETF sentiment is offset by higher int rates with prices consolidating near the recent highs.

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 has fallen sharply but remains well above neutral.

And the sister options Hedge Spread bearish sentiment as a ST/INT indicator (outlook 1-3 mns) remains very strong, indicating that pullbacks will be limited and likely short-lived. 

Taking a look at the ETF ratio of the INT term SPX INT (2X) ETFs (outlook 2 to 4 mns), bearish sentiment has declined from extremely high to the Buy level.

The INT term NDX ST 3x ETFs (outlook 2 to 4 mns) bearish sentiment remains well above neutral and the tech sector may continue to be held back by higher rates until the FED decides to pause, resulting in the last vertical phase for markets.

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 1. A text overlay is used for extreme OI to improve readability, P/C is not changed.

With Fri close at SPX 4543, options OI for Mon is very small and the verall high P/C and huge Thur put positions at 4510 and 20 may provide enough support to keep prices near current levels.

Wed has smaller OI where SPX price levels are likely to be influenced by EOM positions.

For Thur Mar EOM strong OI has now been about 50% hedged (straddles) where ther is not a lot of call resistance over 4500 to 4600, but not much put support over 4510-20.  SPX 4600 is possible.

For Fri (Mar jobs/payroll data) moderate OI shows strong call resistance at 4550 and over and if 4500 is broken to the downside, there is little put support until 4450.

IV. Technical / Other

Looking for some way to estimate the outllook for Apr, I decided to look at VIX options. First, the VIX call indicator continues to look more bearish, but notice for Mar & Oct 2021 there was a 4-6 week lead before a market downturn.

So next, I looked at the VIX options OI for Apr 20 which looks bearish based on # of contracts, but then I noticed that ATM call prices were 3x ATM puts which shows strong call resistance at 25 and a very low P/C $.  Therefore the bias is likely for a lower VIX thru mid-Apr which means higher stock prices.  (Note at 100 units/contract, $ amnts are x 100)

Turning to the SPX vs TNX rate outlook, I noticed that from late 2020 thru mid 2021 SPX rose with int rates, but from mid 2021 thru early 2022 they moved in opposite directions after rates hit the DJIA div yield at 1.7%.  Now, in Mar, they are again moving together.

Looking only at the SPX during the melt up phase from Sept 2017 thru Jan 2018, all of the declines were 1-2% and were immediately BTFD which may explain the smaller than expt decline last week.

Looking at the SPX vs TNX rate performance for 2017-18, rates started at a lower level in Mar 2022 at 1.7% vs 2% in Sept 2020, but last week rose to the same 2.5% in the first month.  There may be a consolidation at 2.5% as in 2017, but I expect rates to continue to rise over the next few weeks.  If rates continue to rise toward 3.4% (2x DJIA div yld), we could see a dislocation (crash) similar to the Jan-Feb 2021 decline (at 2.7%) to test the SPX lows at 4100 or lower.

Conclusions.  The early comparison of SPX ETF sentiment to the pre-melt up period of late 2017 has been proven correct so far, and if anything the rise in both int rates and stock prices have been stronger than expected.  As noted in the Tech/Other section, the rapid rise in rates may create a more serious problem if we see a more immediate rise to TNX 3%+.

Weekly Trade Alert.  Prices seem likely to rise with the SPX possibly approaching 4700 or higher by mid-Apr.  Pullbacks may be limited to the 1-2% variety and are likely to reverse quickly.  I have noticed a strong correlation each day between the direction of int rates and stock prices with rates usually leading.  Updates @mrktsignals.

Investment Diary,  Indicator Primer,
 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

© 2022 SentimentSignals.blogspot.com