The stock market started what looked like another head start last week, as the benchmark S&P 500 broke through resistance at 3900 points.
In fact, the index rose to 4020 but then ran into trouble. There is support at 3900, but if that level is breached, the recent jump would, in effect, be a fake to burst. So there is a struggle between bulls and bears for control, just at current levels.
The SPX is still in a downtrend, as indicated by the thick blue lines on the index chart below. The horizontal red lines indicate support: 3900, then the early November lows at 3700, and finally the yearly lows near 3500.
The recent rally hasn’t quite reached the 200-day moving average (currently at 4070 and falling) or the downtrend line of the bear market (near 4100). If support holds at 3900, there is still a chance that these bullish levels will be challenged, but frankly, it looks like the bulls had their opportunity and didn’t take it.
The McMillan Volatility Band (MVB) buy signal remains in effect and its target is the +4σ “modified Bollinger Band”, which is currently above 4100 and rising.
Many of our internal indicators have been positive since the October low and throughout this rally. They haven’t started turning around to sell signals yet, for the most part, but some are starting to weaken.
Equity-only put-call ratios remain on buy signals as they continue to decline. The CBOE equity-only put-call ratio also remains on a buy signal, although it saw a very large number yesterday (indicating extreme decline), which seems a bit out of step with other benchmarks. data for this indicator.
The width was not the greatest in this rally, and the width oscillators swung between buy and sell signals. They are about to be on sell signals, if the negative overnight action persists throughout the day. This is the first of our indicators to generate a new confirmed sell signal.
The number of new 52-week highs on the NYSE continues to remain subdued, so this indicator (new highs vs. new lows) has never did generate a buy signal. In fact, it has been on a sell signal since last April.
The CBOE VIX volatility index,
has rebounded slightly in recent days, but remains in a generally bullish state for stocks.
First of all, the “peak peak” buy signal that was generated about a month ago has “expired”. That is, the trading system we built around “spikes” calls for exiting the trade after 22 days of trading, and this has been achieved. There is therefore no “spike” buy signal in effect at the moment.
Second, there is a new trend of $VIX a buy signal, since the 20-day moving average of the VIX has fallen below the 200-day MA. This will remain in effect unless $VIX itself moves back above the 200-day MA, which is currently at 26.70 and begins to decline. Since VIX is near 25, the new buy signal is still in a somewhat tenuous state but is safe for now.
The construction volatility derivatives is a solidly bullish indicator (for equities) at the moment. In other words, the term structures of VIX futures contracts and CBOE volatility indices have an upward slope. Additionally, VIX futures are trading at a premium to VIX. November VIX futures expired yesterday, so December is now the first month.
We will now monitor the price of December VIX futures against January. If December were to overtake January, it would be a new bearish development. Currently, January is trading 1.85 points higher than December, so there is no imminent danger of a sell signal on this front.
In summary, we continue to hold a “basic” bearish position, due to the downtrend on the SPX chart. Until a rally can cross this upper blue line, it is still a bear market and the “middle” position is warranted. However, we have also traded other confirmed signals around this “leading” (mostly successful) position, and we will continue to do so.
New Commendation: Thanksgiving Seasonal Buy
Several seasonal factors come together at the end of the year. Briefly, these are 1. the post-Thanksgiving gathering, 2. the “January effect” and 3. the “Santa’s gathering”.
These encompass the entire period between the day before Thanksgiving and the second trading day of the New Year. Additionally, small cap stocks (as measured by the Russell 2000 RUT Index,
) outperform large-cap stocks over this period.
The Russell 2000 is followed by the iShares Russell 2000 ETF IWM,
We buy IWM calls at the close of trading the day before Thanksgiving and exit the position at the close of the second trading day of the New Year.
Since Thanksgiving is next week (before our next newsletter), we’re making the recommendation today.
At market close on Wednesday, November 23rd,
Buy 2 IWM Jan (20e) parity calls
And sell 2 IWM Jan (20e) call with a strike price 20 points higher.
We will adjust this position if IWM rallies during the holding period, but initially there is no stop for the position, so all throughput is at risk.
New recommendation: Phillips 66
A new put-call ratio sell signal was generated by the weighted ratio in Phillips 66 PSX,
Buy 2 PSX Jan (20e) 105 put options
At a price of 6.00 or less.
PSX: 106.79 Jan (20e) 105 put options: bid 5.60, bid 6.00 We will hold this as long as the weighted the put-call ratio remains on a sell signal. In other words, as long as the put-call ratio increases.
All stops are mental closing stops unless otherwise stated.
We use a “standard” rolling procedure for our SPY spreads: in any bullish or bearish vertical spread, if the underlying hits the short strike, then roll the entire spread. It would be rolling at the top in the case of a call bull spread, or roll down in the case of a bear put spread. Stay in the same exhale and keep the same distance between strikes unless instructed otherwise.
Long 1 SPY expiring November (18e) 352 puts and shorts 1 SPY Nov (18e) 325 set: this is our “basic” bearish position. As long as SPX stays in a downtrend, we want to hold a position here, so let those options expire and Buy 2 Dec. (16e) 375 put options and December 2 put (16e) 355 put options.
Long 1 SPY expiring November (18e) Call 396 and Court 1 SPY Nov (18e) call 416: this trade is based on the MVB buy signal, which was established on the morning of October 4e. Since SPY traded at 396 last week, the spread has been rolled up 20 points either side. Now sell the expiring November spread and replace it with the following: Buy 1 SPY Dec (23rd) call for parity and sale 1 SPY Dec (23rd) call with a 16 point higher striking price. The goal of this trade is for SPX to trade in the upper +4σ band. The stop for this position would be if SPX were to close below the -4σ band.
Long Expiration 1 SPY November (18e) Call 387 and Court 1 SPY Nov (18e) 407 call: this spread was bought in line with the last VIX buy signal “peak peak”, which was confirmed on Monday October 17the. The gap was rolled up when SPY traded at 387 last week. We’re going to break out of this gap now (not replace it), since the trading system we built around the “peak peak” calls for an exit after 22 days of trading, and that time frame has passed.
Long 300 KLXE: raise the stop at 13.80.
Long 2 WRK January (20e) Calls 32.5: we will hold on as long as weighted the put-call ratio remains on a buy signal.
Long 1 SPY Dec (2n/a) 371 puts and Short 1 SPY Dec (2n/a) 351 set: when the width was negative on the NYSE on November 3rd, we have established this position. The width is on sell signals right now. We will update this position weekly.
Long 1 SPY Dec (9e) Call 390 and short 1 SPY Dec (9e) call 410: the spread based on the rare buy signal of the CBOE Equity-only put-call ratio. As a stop, we will close it if SPX closes below 3700.
Long 1 SPY November (18e) Call 399: this trade was based on VIX9D closing below VIX on November 11e. Roll the call if it becomes 10 points in the money and close the entire position at the close on November 18e. Long 2 KMB Jan. (20e) 125 calls: we will hold these calls as long as the weighted KMB’s put-call ratio remains on its buy signal.
Send your questions to: [email protected]
Lawrence G. McMillan is President of McMillan Analysis, a registered commodity trading and investment adviser. 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 bestselling book, Options as a Strategic Investment. www.optionstrategist.com
©McMillan Analysis Corporation is registered with the SEC as an investment adviser and with the CFTC as a commodity trading adviser. The information in this newsletter has been carefully compiled from sources believed to be reliable, but its accuracy and completeness are not guaranteed. Officers or directors of McMillan Analysis Corporation, or accounts managed by such persons, may hold positions in the securities recommended in the advisory.