The stock market is finally showing positive signs — unless it’s just another head-fake

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The stock market, as measured by the S&P 500 Index has been trying to break out over 4200 since last August. This past week, with the debt-ceiling negotiations taking on a positive tone, it appeared that SPX was finally going to accomplish the task. It traded up to 4231 on May 30th, but then reversed direction. The index closed at 4221 on June 1 and needs to close above 4210 for two consecutive days in order to confirm an upside breakout.

Even if that does occur, there is still the resistance at 4300, left over from the island gap (circled on the accompanying SPX chart). Above there, it should be easier sailing for the bulls if SPX can get to those levels. There have been several failed upside breakouts in the last 18 months, so there is reason for some caution. 

SPX is back in its old trading range, with support at 4100 and then just below that, at 4050. A more severe decline from there would bring into the play the months-long trading range that extends from roughly 3800 to 4200.

Equity-only put-call ratios have both rolled over to buy signals. The standard ratio’s buy came from a relatively high point on its chart, which is where the better signals usually originate. The weighted ratio, however, never got very elevated before this more recent buy signal took place. Hence, it is coming from a relatively low point on its chart — not often the best of buy signals. 

Breadth has been all over the place once again. After buy signals were generated by the breadth oscillators late last week, they are coming into question already. In fact, the “stocks only” breadth oscillator’s buy signal has been canceled out by the heavily negative breadth of the past two days. This latest stock market rally, which was led by NVDA and other high-tech stocks, was rather narrow, as breadth did not expand much.

New 52-week lows on the NYSE have continued to outnumber new highs for the past six consecutive days, and for most days over the past month. This has resulted in the indicator refusing to generate a buy signal, and so it remains in neutral territory for now.

VIX and the other implied volatility-based indicators have generally remained bullish. The VIX “spike peak” buy signal of May 5th is still in place. The trading system that we built around these peaks calls for exiting the trade after 22 trading days, and that date will be reached next week. Meanwhile, the trend of VIX buy signal (whose starting point is circled on the accompanying VIX chart), remains in place as well.  Note: there was an overlapping VIX “spike peak” buy signal about a week ago (orange “B” on the chart), but we do not trade the overlapping signals — only the original ones.

The construct of volatility derivatives is also a positive indicator for stocks, since the term structures continue to slope upwards, and there is a considerable premium on the VIX futures.

In summary, the indicators and mixed and SPX remains in a trading range. That makes for a market that is somewhat difficult to trade, and we are not holding a “core” position because of it. We will, however, trade individual indicator’s buy signals if they are confirmed.

New recommendation: Potential upside breakout

If SPX does break out to the upside, we want to take a new “core” position.

IF SPX closes above 4210 for two consecutive days, buy 2 SPY July (7th) at-the-money calls and sell 2 SPY July (7th) calls with a striking price 13 points higher.

If this position is taken, then stop out on a close below 4150.

New recommendation: Kopin Corp. (KOPN)

This is strictly a low-priced speculation. Kopin has been trapped below 1.75 since April 2022. It has finally broken to the upside, with extremely strong stock volume patterns. Option volume has increased as well, although I do not think a takeover rumor is in play here — merely a recognition of the upside breakout. Since we are going to use a relatively tight stop here, we are going to recommend buying the stock instead of its options.

Buy 800 KOPN common stock in line with the market.

If bought, stop out on a close below 1.70.

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 400 JFIN : Raise the stop to 5.00.

Long 1 SPY June (16th) 409 put and Short 1 SPY June (16th) 379: This position was based on the sell signals from the equity-only put-call ratios that occurred in late April. Those put-call ratios have now rolled over to buy signals, so this spread should be closed.

Long 1 SPY June (16th) 409 put and Short 1 SPY June (16th) 379: This position was based on the sell signal from realized volatility, since the 20-day Historical volatility (HV20) of SPX has risen back above 10%. This position will be stopped out if HV20 falls back to 9% or lower; it currently is at 15%.

Long 4 BWA June (16th) 42.5 puts:  Continue to hold.

Long 1 SPY June (16th) 411 call and Short 1 SPY June (16th) 425 call: This spread was bought in line with the VIX “spike peak” buy signal of May 5th. Stop out of this position if VIX closes above 21.33. Otherwise, we will exit after holding for 22 trading days, a “deadline” which is approaching: if not stopped out, close out this position at the close of trading on Wednesday, June 7th

Long 3 CHD July (21st) 95 puts: We will hold this CHD position as long as the put-call ratio remains on a sell signal.

Long 3 AMAM June (16th) 12.5 calls: Raise the trailing closing stop to 12.00.

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.

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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