The bulls finally control the stock market and the signs point higher

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The stock market, as measured by the S&P 500 Index has finally succeeded in breaking out over both resistance areas — at 4200 and at 4300. Both of those levels now represent support, and it would be a big negative if SPX were to pull back below 4200.

Such a pullback seems unlikely, though, since the SPX chart is quite bullish, and other indicators are in bullish modes, too — although some are getting quite overbought already. There really isn’t a lot of overhead resistance at this point. The first resistance is near 4650 (the highs of April 2022) and the next is the all-time highs, just above 4800.

As one can see from the SPX chart above, the index is now trading above its +4σ “modified Bollinger Band” (mBB). That sets up a “classic” mBB sell signal. However, we need further confirmation in order to generate a McMillan Volatility Band (MVB) sell signal. The “classic” mBB sell signal would take place if SPX were to close below 4339 today. That number changes daily, as prices and volatility change.  

Equity-only put-call ratios have continued to decline, thus remaining on their respective buy signals. They will be bullish for stocks until they roll over and begin to rise. Having said that, it is fairly obvious from the accompanying put-call ratio charts that they are at or below the levels at which previous sell signals have taken place. That means they are overbought, but overbought does not mean sell.

Breadth has been something of a problem during this rally, but now both breadth oscillators are on buy signals — albeit in overbought territory. When a new upward leg is taking place in SPX, it is a positive sign for the breadth oscillators to be overbought, so that is not really a problem.

My own take on this is that breadth should be stronger than it is. The small-cap indices, for the most part, have been laggards. The Russell 2000 Index is nowhere near its high of this year and has considerable overhead resistance. So, this may prove to be something of a problem later on, but for now the large-caps are plowing ahead and leading the way.

On the NYSE, New 52-week Highs continue to dominate New 52-week Lows. This indicator remains bullish until New Lows exceed New Highs for at least two consecutive trading days.

VIX has fallen as SPX has rallied — as is usually the case. VIX is now down to levels last seen in January 2020 — before the pandemic crisis. So, the “worry factor” among large traders is lessening, but not completely abating.

That is, these big players are not buying SPX puts as aggressively as they have been since March 2020. The trend of VIX buy signal remains in effect (it began in the circled area on the accompanying VIX chart). There is no real worry here until VIX returns to what we call “spiking” mode (an increase in VIX closing prices of at least 3.00 points over any 1-, 2-, or 3-day period).

The construct of volatility derivatives remains bullish for stocks. That is, the term structures of the VIX futures and of the CBOE Volatility Indices continue to slope upwards. In addition, there is a relatively large premium on the VIX futures. June VIX futures expire next Wednesday, at which time the July futures will be the front month.

In summary, we are maintaining a “core” bullish position because of the strongly positive nature of the SPX chart. We will trade other signals around that position when they occur.

Read: VIX just keeps getting harder to find. Low market volatility is music to stock investors.

New Recommendation: Principal Financial Group (PFG)

There is a recent weighted put-call ratio buy signal in PFG   The stock has recently overcome resistance and appears to have started an uptrend.

Buy 2 PFG July (21st) 70 calls at 5.00 or less.

PFG: 72.94 July (21st) 70 call: 4.00 bid, 5.70 offered

If bought, we will hold these calls as long as the weighted put-call ratio remains on a buy signal.

New recommendation: Potential MVB sell signal

As noted in the Market Commentary, a “classic” mBB sell signal is setting up. If that occurs, then a MVB sell signal may follow.  Without getting overly complicated in trying to project volatility movements going forward, use the following approach.  We will update these figures next week if the signal does not occur this week.

  1. IF SPX closes below 4340, then a classic signal will have occurred; note the low for SPX on that day.
  2. Furthermore, if SPX closes below that low of the day on any succeeding day, an MVB sell signal will have occurred.

When that MVB sell signal takes place,

Then Buy 1 SPY Aug (18th) at-the-money put, and Sell 1 SPY Aug (18th) put with a striking price 30 points lower.

Follow-up action: 

All stops are mental closing stops unless otherwise noted.

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 JFIN : The stock was stopped out when it closed below 6.40 on June 8th. The stock gapped down when the company reported earnings, even though those earnings seemed to be quite positive.

Long 1 expiring SPY June (16th) 409 put and Short 1 SPY June (16th) 379: This position was based on the sell signal from realized volatility. Realized volatility has fallen somewhat as SPX has broken out to the upside. Allow this position to expire and do not replace it. 

Long 4 expiring BWA June (16th) 42.5 puts: While the put-call ratio has only just started to roll over, this position was never able to gain traction. Allow the puts to expire and do not replace them. 

Long 3 expiring AMAM June (16th) 12.5 calls: Roll to the July (21st) 12.5 calls. The trailing stop remains at 12.

Long 4 HAL July (21st) 30 calls: Hold this position as long as the weighted put-call ratio remains on a buy signal.

Long 2 MXL July (21st) 30 puts: Stop out on a close above 31 by MXL

Long 800 KOPN :  The stop remains at 1.70.

Long 2 SPY July (7th) 427 calls: These were bought on the upside breakout. This will be our “core” bullish position. Stop yourself out of this trade if SPX closes below 4200. Roll up to the SPY July (7th) at-the-money calls. And from there, roll up every time your long SPY option is at least 6 points in-the-money.

Long 1 SPY July (7th) 427 call: This was bought in line with the “New Highs vs. New Lows” buy signal. Stop out of this trade if, on the NYSE, New Lows outnumber New Highs for two consecutive days. Roll up to the SPY July (7th) at-the-money calls. And from there, roll up every time your long SPY option is at least 6 points in-the-money.

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.

©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. 

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