The stock market is becoming a picnic for the bears

The stock market is becoming a picnic for the bears

The stock market, as measured by the S&P 500 index staged a strong oversold rally, taking it from a low near 4,950 up to its declining 20-day moving average. Oversold rallies in bearish markets typically flame out at or just above that 20-day moving average. There is now a budding downtrend line (see the accompanying SPX chart) that runs near to the 20-day moving average. As long as that downtrend line is in place, the bears have the upper hand. Even a rally above that line would likely run into resistance near 5,150-5,180 and then at the all-time highs at 5,260.

On a more positive note, the McMillan Volatility Band buy signal remains in effect. Its target is the +4σ modified Bollinger Band (mBB), which is currently at 5,280 and declining. The MVB buy signal would be stopped out if SPX were to close below the -4σ Band, which is near 4,900 and also declining.

Equity-only put-call ratios remain solidly on sell signals for the stock market, as they continue to rise. They were not swayed by the recent oversold rally and have remained on sell signals throughout. These sell signals would only be reversed if the ratios topped out and began to trend lower.

Market breadth has been swinging back and forth somewhat wildly, but there were breadth oscillator buy signals generated over a week ago, and those are still in place.

New York Stock Exchange new highs and new lows have remained somewhat subdued (neither has reached 100 on any day), so this indicator remains in a neutral state.

The are two conflicting indicator signals emanating from the Cboe Volatility Index right now. The first is the “spike peak” buy signal, which occurred two weeks ago. That buy signal will remain in place for 22 trading days or until VIX returns to “spiking” mode, whichever comes first. But that rise in VIX also generated a trend of VIX sell signals, since VIX crossed above its 200-day moving average. That sell signal would be stopped out if VIX were to close below the 200-day moving average for two consecutive days. It did close below for one day, but not two, this past week.

The construct of volatility derivatives remains bullish for stocks, although there has been some cause for concern recently. The term structures continue to slope upwards, but the front-month May VIX futures have come within 20 cents of the June VIX futures. If May trades significantly above June, that would be bearish for stocks.

In summary, we continue to hold a core bearish position in line with the negative S&P 500 chart and the equity-only put-call ratios. However, we will trade other confirmed signals around that core position.

New recommendations: Recap

For the past few weeks, we have made some conditional recommendations that have not all been filled. The only remaining one is a longer-term potential buy signal from Walgreens Boots Alliance We are keeping this recommendation open but will not continue to reprint the reasoning behind the trade.

If WBA closes above $22.50, then buy 4 WBA June 21 22.5 calls in line with the market.

New recommendation: U.S. Oil Fund puts

There is a put-call ratio sell signal in the U.S. Oil Fund as well as one in crude oil futures options.

Buy 3 USO June 21 76 puts in line with the market.

We will hold these puts as long as the put-call ratio is on a sell signal.

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 3 TLT May 17 90 puts: We will hold as long as the put-call ratio sell signal is in place for Treasury bonds.

Long 4 CSX May 17 37.50 puts: Roll to the May 17 32.5 puts. Even though the put-call ratio seems to have peaked, we are going to roll down here because CSX remains in a downtrend.

Long 4 RSI May 17 5 calls: We will hold without a stop in order to let the takeover rumors play out.

Long 2 MCD May 17 275 puts: We will hold this position as long as the weighted put-call ratio remains on a sell signal.

Long 1 SPY May 3 502 put: Close the position now, since the breadth oscillators are no longer on sell signals.

Long 2 SPY May 31 516 and short 2 SPY May 31 486 puts: Hold this position as long as the equity-only put-call ratios remain on sell signals. This is our core bearish position for now.

Long 3 AEYE May 17 12.5 calls: Raise the stop to 12.20.

Long 1 SPY May 24 502 put and short 1 SPY May 24 482: Was bought in line with the trend of VIX sell signal. Stop out of this spread if VIX closes below its 200-day moving average for two consecutive days. Currently the 200-day moving average is just below 15.

Long 1 SPY May 24 500 call and short 1 SPY May 24 515 call: Was bought in line with the VIX spike-peak buy signal of April 22.

We are going to change the stop: Exit the position if VIX returns to spiking mode — that is, if it closes at least 3.0 points higher over any three-day or shorter time period. Today, that would be a close at or above 18.39. Otherwise, the position will be closed out after 22 trading days.

Long 1 SPY May 31 508 call and short 1 SPY May 31 524: This is the MVB buy signal. Its target is for the S&P 500 to trade at the +4σ Band. The buy signal would be stopped out if the S&P 500 were to close below the –4σ Band.

Long 10 POET June 21 2 calls: Raise the trailing closing stop to 1.63.

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 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 the author of “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 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.