The stock market, as measured by the S&P 500 Index SPX, +1.44%, continues to struggle to make headway. The downtrend that began at the beginning of February is still in place. It is a series of lower highs and lower lows on the SPX chart, and the S&P 500 has repeatedly run into resistance at or below 4080. In fact, the entire area between 4080 and 4200 is a roadblock.
On the downside, the S&P 500 has found support in the zone between 3760 and 3850. Overall, the SPX chart won’t turn bullish unless it can break out over at least 4200 and probably 4300 (the highs of August 2022).
Contrasting the price action of SPX is the fact that many of our firm’s internal indicators have given confirmed buy signals in the past few weeks. That is certainly positive, of course, but in the past there have been more than a few occasions where SPX doesn’t confirm what the internal indicators might be “saying.” In those cases, SPX wins out because price — by definition — is the final arbiter.
The McMillan Volatility Band (MVB) buy signal from March 16 is still in place. Its target is the +4σ Band, which is currently at about 4150 and beginning to curl upward.
Equity-only put-call ratios remain on the buy signals that were generated a little over a week ago. The standard ratio’s buy signal came from an extremely high (oversold) reading, while the weighted ratio’s buy signal came from a much lower point on its chart. Regardless, both are in a bullish mode for stocks as long as they continue to decline. In addition, the total put-call ratio (all stock and index options that trade) is making a peak as well, but the buy signal there has not yet been confirmed.
Market breadth has finally improved over the past few days, and both breadth oscillators are on buy signals as of March 28. These buy signals were subject to the two-day confirmation process we use to avoid whipsaws if possible.
New 52-week lows on the NYSE have continued to dominate New 52-week highs. On March 29, for the first time in a while, there were more New Highs than New Lows. If that is the case again on March 30, this indicator’s sell signal would be stopped out. It would not be a new buy signal, though, until new highs exceed 100 in number for two days in a row.
The indicators surrounding VIX VIX, -1.68% and volatility are generally bullish for stocks. There is a VIX “spike peak” buy signal in place (green “B” on the accompanying VIX chart). Moreover, the trend of VIX is now lower once again, and that is bullish for stocks as well. This trend of VIX buy signal was confirmed when VIX closed below its 200-day Moving Average (the last two such signals are marked with circles on the VIX chart). VIX has now returned to the 19 area, which has been a problem for stocks for well over a year now, so in that sense, VIX is now overbought.
The construct of volatility derivatives remains modestly bullish for stocks. The term structure of the VIX futures slopes upward for the first few months. In addition, the term structure of the CBOE Volatility Indices slopes upward, too.
Overall, we are maintaining a “core” bearish position because of the negativity of the SPX chart. We are trading other confirmed signals (most of which have been bullish in recently weeks) around that “core.”
New Recommendation: breadth buy signal
We are going to add one more call bull spread, in line with the new buy signals from our breadth oscillators.
Buy 1 SPY SPY, +1.41% May (5th) at-the-money call
And Sell 1 SPY May (5th) call with a striking price 13 points higher.
This spread will be stopped out if the breadth oscillators return to sell signals. That is something that we will update each week in this newsletter.
New Recommendation: Arconic Corp. (ARNC)
In late February, there were rumors that Apollo Global Management APO, +2.78% was looking at buying ARNC ARNC, -1.50%. Those rumors have intensified: it is now rumored that private equity firms Carlyle CG, +2.68% and Lone Star would join Apollo in its potential purchase of ARNC. Option volume exploded on this latest rumor, which is what has caught our attention more than the rumor itself.
Buy 3 ARNC May (19th) 27 calls
At a price of 2.50 or less.
ARNC: 27.06
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 2 GRMN April (21st) 95 puts: These were bought on February 21, when GRMN GRMN, +2.13% 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. Close out this position if SPX closes above 4080.
Long 10 LLAP Apr (21st) 2 calls: Stop out if LLAP LLAP, +12.20% closes below 1.90.
Long 2 OMC Apr (21st) 85 puts: We will hold these puts as long as the weighted put-call ratio for OMC OMC, +1.73% remains on a sell signal.
Long 1 SPY May (19th) 391 put and Short 1 SPY May (19th) 351 put: This spread was bought in line with the sell signals from the “New Highs vs. New Lows” indicator. This sell signal would be stopped out if New Highs on the NYSE outnumber New Lows for two consecutive days. That occurred yesterday (March 29), so if New Highs on the NYSE are greater than New Lows on March 30, then this spread should be sold.
Long 1 SPY Apr (21st) 391 call and Short 1 SPY Apr (21st) 411 call: This call bull spread was bought in line with the VIX “spike peak” buy signal. We are going to tighten the stop: stop yourself out if VIX returns to “spiking” mode — that is, if it rises by at least 3.00 points over any 1-, 2-, or 3-day period. Currently, that would make the closing stop at 22.12, based on the VIX close of 19.12 on March 28.
Long 1 SPY Apr (28th) 395 call and Short 1 SPY Apr (28th) 410 call: This position was bought in line with the MVB buy signal and would be stopped out if SPX were to close below the -4σ Band. We will keep you up to date on that information weekly.
Long 1 SPY May (19th) 395 call and Short 1 May (19th) 415 call: This spread was bought in line with the equity-only put-call ratio buy signals. It would be stopped out if the ratios moved above their recent peaks. Again, that is something that we will update weekly.
All stops are mental closing stops unless otherwise noted.
Send questions to: [email protected].
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.
