The stock market is showing cracks and the trading environment is murkier
The stock market is showing cracks and the trading environment is murkier
The S&P 500 Index chart remains extremely bullish, and we are maintaining a “core” bullish position because of it. However, there are some overbought conditions and, perhaps more worrisome, potential divergences. Divergences occur when SPX is making new highs, but other internal indicators are not.
There is support on the SPX chart at 5,325, from where the latest breakout occurred. Below that there should be support down to 5,260. Even though there are other support areas below that, a move back below 5,260 would be negative for the S&P 500 and the U.S. market as a whole.
This latest move higher has taken SPX back above the +4σ Band “modified Bollinger Band” (mBB). That stops out the previous McMillan Volatility Band (MVB) sell signal for a loss. It is possible, but not certain, that another MVB sell signal will occur soon. The first step toward that would be a sell signal if SPX closes below its +3σ Band. We do not trade this “classic” signal, for they have too many whipsaws. Instead we require further confirmation in order to generate a full-fledged MVB sell signal. That does not always happen, so currently we are in a “wait and see” mode with respect to this signal.
Equity-only put-call ratios are quite low on their charts. The standard ratio has curled upward slightly, and the computer analysis programs say that this is a sell signal for stocks. There is a green “S” on the accompanying chart as a result. However, the weighted ratio continues to fall. The computer analysis programs also say this is a sell signal, but I prefer to have visual proof. That is, I want to see the ratio roll over and begin to rise before declaring it a sell signal. Stated another way: This ratio is still on a buy signal for stocks. In any case, these ratios are in overbought territory, with the weighted ratio being at its lowest level since just before the last bull market ended, in late 2021.
Market breadth has not been strong over the past couple of weeks. The breadth oscillators remain (barely) on buy signals for stocks, and this is one of the divergences. Normally we would expect to see the breadth oscillators climb dramatically into severely overbought territory when SPX is making a series of new all-time highs such as this. The fact that they are not doing so is a warning.
Another divergence is coming from cumulative volume breadth (CVB), the running daily cumulative total of volume on advancing issues minus volume on declining issues. CVB last made a new all-time high on May 20. It is not far from an all-time high, but the fact that SPX is making new highs and CVB is not is another divergence. As noted last week, a divergence is not a sell signal, but is rather a warning sign to stay alert; don’t become complacent.
So, when a sell signal occurs (even if it doesn’t “feel right”), take it. A case in point might be the MVB sell signal. The last two were stopped out for losses, so one might be inclined to ignore the next one. That could be a big mistake if this divergence still exists at the time of the next MVB sell signal.
New lows on the NYSE finally eclipsed new highs for two consecutive days and thus stopped out this long-term buy signal for stocks. This indicator is now in a neutral status; it is not on a sell signal. The next signal will arise when either new highs or new lows number more than 100 for two consecutive days.
As long as VIX remains low, stocks can rally.
VIX has remained subdued, and so the trend of VIX buy signal for stocks remains in place (the latest such buy signal began in the circled area, in mid-May, on the accompanying VIX chart). That buy signal would be stopped out if VIX were to close above its 200-day moving average for two consecutive days. That moving average is currently at 14.50 and declining slowly. As long as VIX remains low, stocks can rally. It’s when VIX begins to rise (sharply) that trouble appears for the stock market.
The construct of volatility derivatives remains bullish for stocks, too. That is, the term structures of the VIX futures and of the CBOE Volatility Indices are sloping upwards. The June VIX futures have expired, so the July VIX futures are now the front month. We will now be watching the prices of July VIX futures versus the second-month August VIX futures. If July climbs above August in price, that would be bearish for stocks. That is not in imminent danger of happening, though, since August is trading at a comfortable spread over July.
In summary, we are maintaining a core bullish position. The only confirmed sell signal at this time is the standard equity-only put-call ratio (and that is only half of the equity-only story, since the weighted ratio remains on a buy signal). Regardless, we will trade any new confirmed signals around our “core” position as they occur.
New recommendation: Five Below puts
Both stock and option volume patterns for Five Below are negative. The stock broke down to new lows a couple of weeks ago and has not recovered.
Buy 2 FIVE (July 19) 115 puts In line with the market.
New recommendation: Nike puts
There is a new put-call ratio sell signal in Nike In general, put-call ratio signals in NKE have worked out fairly well (see the accompanying chart).
Buy 2 NKE (Oct 19) 95 puts in line with the market.
We will hold these puts until the NKE put-call ratio rolls over to a buy signal.
New recommendation: Walgreens Boots Alliance
This 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, other than to say that stocks that have been removed from the Dow Jones Industrial Average usually experience a strong rally within a matter of weeks after that removal. A McMillan Volatility Band (MVB) buy signal will occur if WBA trades at 16.71 or higher (the MVB system can be used on any chart), so we are going to take a small position if that happens and then move to a full position if WBA can continue to rally.
If WBA trades at $16.71 or higher, buy 2 WBA (July 12) 16.5 calls in line with the market.
If WBA closes above $19.50, buy 2 WBA (July 12) 20 calls in line with the market.
As with any MVB recommendation, the purchase of these 16.5 calls would be stopped out if WBA were to close back below its -4σ Band.
Follow-up actions:
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 4 expiring RSI (June 21) 7.5 calls: Roll to the (July 19) 10 calls; raise the stop to 9.10.
Long 0 AEYE (June 21) 25 calls: Were stopped out on June 13 when AEYE close below $20.50.
Long 3 expiring USO (June 21) 76 puts: Sell these puts and do not replace them, for the put-call ratio has rolled over to a buy signal.
Long 0 SPY (June 21) 543 calls: We originally bought a spread in line with the new highs vs. new lows buy signal. But the signal was stopped out on June 17 when NYSE new lows exceeded NYSE new highs for two consecutive days. Sell these calls.
Long 2 expiring LW (June 21) 82.5 calls: Sell these calls and do not replace them; the put-call ratio is directionless at this time.
Long 3 expiring BL (June 21) 47.5 puts: Roll to the (July 19) 45 puts; lower the trailing stop to 47.5.
Long 1 SPY (July 19) 522 puts and short 1 SPY (July 19) 497 puts: This put-bear spread was bought in line with the MVB sell signal. SPX has closed above the +4σ Band, stopping out the sell signal, so sell this spread.
Long 3 expiring INSG (June 21) 9 calls: Roll the (July 19) 9 calls; stop out of this position if INSG closes below $6.80.
Long 1 expiring SPY (June 21) 543 call: This is our “core” bullish position. Roll to the July 5 at-the-money call.
Long 5 CORZ (July 19) 7 calls: Raise the trailing stop to $7.20.
Long 4 INOD (July 19) 16 calls: Set a trailing, closing stop at $13.
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 “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.