The stock market, as measured by the S&P 500 Index rallied on Thursday and has confirmed 4080 as a strong resistance level, with further resistance up to 4200. On the downside, there is support in the 3760-3850 trading range from last December. SPX has probed down into that range, and a break below 3760 would be extremely negative — not only from the viewpoint of violating support, but it is also considered a bear market condition if the December 2022 lows are taken out.
This week, SPX traded down sharply enough that it touched its -4σ “modified Bollinger Band” (mBB). That profitably completed the previous McMillan Volatility Band (MVB) sell signal that was issued in early February. Now, there is a potential for a new MVB buy signal, but certain conditions have to be fulfilled first. The bottom line is that SPX has to trade at 3959 or higher in order for a MVB buy signal to be confirmed.
Equity-only put-call ratios continue to move higher, and thus they remain on sell signals. The total put-call ratio has also moved higher, and its 21-day moving average is above 0.90. That is an oversold condition that will eventually lead to a buy signal. However, the total ratio’s moving average must form a peak before that buy signal can take place and that can sometimes take a while. The stock market can decline substantially while it is in an oversold state.
Market breadth has been poor, and so both breadth oscillators remain on sell signals. They, too, are in deeply oversold conditions, but confirmed buy signals are still some ways off. At present levels, these breadth oscillators can withstand a couple of days of positive market action and yet still remain on those sell signals.
New 52-week lows on the NYSE have become dominant over New 52-week highs. That not only stopped out the previous buy signal, but also created a new sell signal from this indicator. This new sell signal will remain in effect until new highs outnumber new lows on the NYSE for two consecutive days. The data is much more negative in NASDAQ and “stocks only” terms.
VIX has finally taken notice of a market decline and has exploded over the past week. It has closed above its 200-day moving average, thus stopping out the previous trend of VIX buy signal. At the current time, there is no trend of VIX signal in either direction. A sell signal would be created if the 20-day MA crosses above the 200-day MA. From the accompanying chart, one can see that they are at roughly 21.50 and 24.00 respectively. Conversely a buy signal would be created if VIX were to fall back below the 200-day MA (at 24.00).
During the latest spike upward, VIX rose to 30.81 before backing off. That has created a new “spike peak” buy signal on the VIX chart. It also stopped out the previous “spike peak” buy signal from late February.
The bearishness of the current environment has also affected the construct of volatility derivatives to some extent, in that the term structures have flattened out. If they invert, that would be very bearish for stocks. So far, that hasn’t happened. In terms of the CBOE Volatility Indices, the 9-day Index (VIX9D) has risen above all of the others, which is an oversold condition. A buy signal will take place when it closes below one of the other four CBOE Vol Indices.
In summary, we are retaining a “core” bearish position. We will be trading confirmed signals around that “core.” It appears that the oversold conditions will produce buy signals, but one can’t count on that. Last September, a similar set of circumstances was in play, and the signal that emerged was a trend of VIX sell signal. So, don’t anticipate buy signals; wait for confirmation.
New recommendation: Omnicom Group (OMC)
We were not able to buy the OMC Apr (21st) 90 puts at our limit of 3.00 last week. So, since the weighted put-call ratio sell signal is still in effect, we will alter the recommendation as follows:
Buy 2 OMC Apr (21st) 85 puts in line with the market. We will hold these puts as long as the put-call ratio for OMC remains on a sell signal.
New recommendation: New highs vs. new lows
As noted above, this indicator has generated a new sell signal. These are often long-term affairs. For example, there was a sell signal issued in April 2022 that lasted seven months, until November.
Buy 1 SPY May (19th) at-the-money put and Sell 1 SPY May (19th) put with a striking price 40 points lower. This sell signal would be stopped out if new highs on the NYSE outnumber new lows for two consecutive days.
New recommendation: VIX ‘spike peak’ buy signal
In line with the latest “spike peak” buy signal, we will add the following position:
Buy 1 SPY Apr (21st) at-the-money call and Sell 1 SPY Apr (21st) call with a striking price 20 points higher. Initially, this position will be stopped out if VIX closes above 30.81. We will likely tighten that stop as time goes by.
We are using a “standard” rolling procedure for our SPY spreads: in any vertical bull or bear spread, if the underlying hits the short strike, then roll the entire spread. That would be roll up in the case of a call bull spread, or roll down in the case of a bear put spread. Stay in the same expiration, and keep the distance between the strikes the same unless otherwise instructed.
Long 0 SPY Mar (17th) 410 call and Short 0 SPY Mar (17th) 425 call: this spread was bought in line with the “New Highs vs. New Lows” buy signals. It was rolled up on January 26th, when SPY traded at 404, and then it was rolled up again at expiration. Then it was finally stopped out on March 9th, when new lows exceeded new highs on the NYSE for two consecutive days.
Long 3 XM Apr (17th) 17.5 calls: XM received and accepted a takeover bid at $18.15. Sell these calls now to close the position.
Long 1 expiring SPY Mar (17th) 394 put and Short 1 SPY Mar (17th) 369 put: This bear-spread was bought in line with the McMillan Volatility Band (MVB) sell signal, and was then rolled down last week. SPX traded down to the -4σ Band, so this position should be closed.
Long 2 expiring CTLT Mar (17th) 70 calls: This takeover rumor is still “in play,” but the April CTLT options are expensive. We are going to sell these calls and exit this position.
Long 3 expiring MANU Mar (17th) 25 calls: Sell MANU calls if you can and do not replace them.
Long 2 GRMN April (21st) 95 puts: These were bought on February 21st, when GRMN closed below 95. We will remain in this position as long as the GRMN weighted put-call ratio remains on a sell signal.
Long 2 SPY April (21st) 390 and short 2 SPY April (21st) 360 puts: This is our “core” bearish position. Lower the stop: close out this position if SPX closes above 4080.
Long 0 SPY Apr (6th) 395 call and Short 0 SPY Apr (6th) 410 call: This call bull-spread was bought in line with the VIX “spike peak” buy signal. It was stopped out on March 9th, when VIX closed above 23.73.
Long 10 LLAP Apr (21st) 2 calls: Stop out if LLAP closes below 1.90.
Long 1 SGEN Apr (21st) 180 call and Short 1 SGEN Apr (21st) 200 call: SGEN received a takeover bid, so exit this position now at a price of 17 or greater.
All stops are mental closing stops unless otherwise noted.
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Lawrence G. McMillan is president of McMillan Analysis, a registered investment and commodity trading advisor. McMillan may hold positions in securities recommended in this report, both personally and in client accounts. He is an experienced trader and money manager and is the author of the best-selling book, Options as a Strategic Investment. www.optionstrategist.com
©McMillan Analysis Corporation is registered with the SEC as an investment advisor and with the CFTC as a commodity trading advisor. The information in this newsletter has been carefully compiled from sources believed to be reliable, but accuracy and completeness are not guaranteed. The officers or directors of McMillan Analysis Corporation, or accounts managed by such persons may have positions in the securities recommended in the advisory.