Last week's finale was reminiscent of the "flash crash" of Aug 2015 where a sharp decline of several days took the SPX down more than 10% due to a sharp devaluation of the Chinese yuan. If similarities continue, there may be a retest of the lows in Sept around the FOMC before a more sustained rally. Although not totally unexpected as I had warned previously of the huge yuan/yen gap, there were no sentiment warnings this time of the Japanese rate hike. In 2015, even the LT NYSE adv/dec volume was indicating a strong sell, while this time only a warning was showing. Perhaps this is why the decline was less severe, falling short of a 10% correction by about 20 pts. It is surprising how many misunderstand the pervasiveness of the yen carry trade, misrepresenting current weakness as a correction in the US megacap tech stocks while the shock was global in nature with Japan's Nikkei down 25%, Germany's DAX down more than 10% and even Bitcoin was down 30%. A recent article by Avi even had the direction of the yen backwards, as a fall in the $USDJPY from 165 to 142 early July thru Mon resulted from a rise in the yen which increases the cost of the yen carry trade, while the fall in the $USDJPY late 2022 resulted from a fall in the US$ after the Fed "pivot" which did not affect the cost of the yen carry trade. Overall, by the EOW the SPX was down a mere 3 pts as the yen did stabilize after a 3% decline on Mon back to the previous Fri level of 146.5 $USD/JPY. A good way to track currencies and global indices is at IG.com.
Over sentiment has improved somewhat, but not likely enough for an ATH retest. Following the May 2015 period a retest of the lows may be likely in Sept.
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 below neutral.
Update. Bearish sentiment rose above a weak Buy early in the week then fell back to neutral.
Update EMA. Bearish sentiment from a LT perspective appears to be in between the 2019 and 2021 topping periods and a weak Buy may be required for a sustained rally.
Update. Bearish sentiment rose sharply as the HUI corrected about 10% from the July 310 top and along with bonds is warning of a Nixon/Arthur Burns 1970s era potential for a Trump POTUS and Fed dovishness ahead.
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 is also in between the 2019 and 2021 topping periods.
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 only slightly
and remains below neutral.
Bearish sentiment had been giving a strong Sell after reaching the NDX 19.7k level, so almost 5% up before 12% down. Up slightly from last week.
Bearish sentiment for SPX rose slightly from last week.
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 Aug 16. 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 5344, options OI for Mon is small, showing put support up to 5300 and call resistance at 5350 with positive bias from ITM puts. Expt range 5325-50 for close.
Wed has similar SPX OI where SPX has ITM calls at 5300 and puts at
at 5400 & 5450, likely close 5350-5400.
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 is neutral at -0.5 SD, NQ (NDX) is a weak Sell at -1.0 SD, YM (DJIA) is near a weak Sell -0.75 SD. Note updates are Tue, so may be out of date.
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Conclusions. Warnings of a "flash crash" were timely at least.
I was having some home construction work done Wed the previous week so was AFK
when the fun started. If the 2015 analog the next few months, at least
thru the election, are likely to be very frustrating for the bears. By Jan
if Trump is elected, a closer look at his proposed policy changes are likely to
prove problematic. His proposals may have worked fine 8 years ago but the
world has changed dramatically.
Weekly Trade Alert. A 50-60% retrace of the decline from SPX 5670
to 5120 is 5400-50 or the 50D SMA. Next weeks SPX OI shows the potential
to reach it next week, but what happens after is unclear. 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
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