MW This market rally could carry stocks to new all-time highs
By Lawrence G. McMillan
Buy signals are appearing, but an oversold bounce can't be ruled out
The stock market, as measured by the S&P 500 index, has had a strong week, bolstered by some dovish (or at least, "nonhawkish") inflation and interest rate data. The rally has carried the S&P 500 well above its 20-day moving average $(MA)$ and through resistance at 5,180.
The only remaining resistance area is the all-time high near 5,260. On the downside, there are now two gaps on the S&P 500 SPX chart, and if they are both filled that would return things to a more bearish interpretation. Specifically, if the S&P 500 closes below 5,070, then the bears will have a chance to reassert themselves. As it stands now, though, this rally - which had a strong effect on market internals - has the potential to carry to new all-time highs. If it does, then the S&P 500 chart will once again be outright bullish. Otherwise there is still a chance that this rally was only a strong oversold bounce and not the first leg in a new bullish trend.
The McMillan Volatility Band $(MVB.AU)$ buy signal is still in place (green "B" on the accompanying S&P 500 chart). It has a target of the +4<SIGMA> "modified Bollinger Band," which is at about 5,275 and moving sideways - just into new high territory. The trade would be stopped out if the S&P 500 were to close below the -4<SIGMA> Band, which is currently at 4,900 and beginning to curl upward.
Equity-only put-call ratios remained on sell signals through the early part of the recent stock market rally but now are beginning to falter. Both ratios curled downward earlier this week. Now, the standard ratio is moving back to its recent relative highs. However, the computer analysis programs that we use to analyze these charts indicate that this standard ratio is now going to fall and that this is a buy signal.
The weighted ratio is sort of the opposite. It looks as if it has peaked and so is on a buy signal, but the computer analysis programs are not confirming that. In both cases, I've marked the potential peaks as questionable buy signals (for stocks), with a "B?" on the charts. The picture should be clearer in a day or two.
Market breadth has been very strong. The breadth oscillators have been on buy signals for a week and have moved into strongly overbought territory. It is not concerning for these oscillators to be overbought when the S&P 500 is rallying. Any signs of trouble would only come when breadth falters. Also, cumulative volume breadth $(CVB.AU)$ - the running daily sum of volume on advancing issues minus volume on declining issues - made a new all-time high on May 6. That is usually a sign that the S&P 500 itself will make a new high in short order as well.
New highs on the NYSE have taken control over new lows, so this indicator has moved to a buy signal. It was only in neutral status for a short time, as it has mostly been in a bullish mode since last November. This buy signal will remain in place until NYSE new lows exceed new highs for two consecutive days.
VIX VIX has fallen sharply and the entire rally that it experienced in April has been wiped out. That is, VIX is trading at prices last seen in late March. There was a "spike peak" buy signal (for stocks) in mid-April, and that buy signal remains intact. It will be in place for 22 trading days but would be stopped out if VIX returns to "spiking" mode (a close of at least 3.0 points higher over any three-day or shorter time frame, using closing prices). Meanwhile, the trend of VIX sell signal that had been in place has been stopped out since VIX fell back below its 200-day MA.
Finally, the construct of volatility derivatives remains bullish for stocks since the term structures of the VIX futures and of the CBOE volatility indices continue to slope upwards. There was a bit of doubt during the last selloff, but the bullish factors have taken control again in this space.
At this time, there are a number of bullish factors, but the S&P 500 chart will not turn completely bullish until it can register new highs (on two consecutive days). So, we are maintaining an out-of-the-money bearish position on that account but are trading these other signals around it.
New recommendation: New highs vs. new lows buy signal
New highs on the NYSE have started to dominate new lows once again. This is a new buy signal for this indicator. The buy signal was officially confirmed on May 6.
Buy 1 SPY SPY June 21 at-the-money call and sell 1 SPY June 21 call with a striking price 17 points higher.
This trade would be stopped out if NYSE new lows exceed NYSE new highs for two consecutive days.
New recommendation: CVB buy signal
Cumulative Volume Breadth (CVB) registered a new all-time high on May 6, and that is normally followed by the S&P 500 moving to a new all-time high as well.
Buy 1 SPY May 31 at-the-money call
The entire premium is at risk here if SPX does not rise to a new all-time high.
New recommendation: Lamb Weston Holdings
Lamb Weston Holdings $(LW)$ was crushed about a month ago on a bad earnings report. That engendered a huge amount of put buying, which in turn has now resulted in a weighted put-call ratio buy signal for LW. At its peak, there were $2,200 worth of puts being bought for every $100 being spent on calls. That is an extremely high and pessimistic ratio.
Buy 2 LW June 21 82.5 calls in line with the market.
We will hold this position as long as the weighted put-call ratio for LW remains on a buy signal.
New recommendation: Recap
For the past few weeks, we have made some conditional recommendations that have not all been filled. The only remaining one at this time is a longer-term potential buy signal from Walgreens Boots Alliance $(WBA)$. 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.
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 3 TLT TLT May 17 90 puts: We will hold as long as the put-call ratio sell signal is in place for U.S. Treasury bonds.
Long 4 CSX May 17 32.50 puts: Sell these puts now because the put-call ratio for CSX $(CSX)$ has rolled over to a buy signal.
Long 4 RSI $(RSI)$ 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: The put-call ratio may be rolling over here, but the stock is moving our way. So, set a trailing closing stop: sell the puts if MCD $(MCD)$ closes above $271.
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 $(AEYE)$ May 17 12.5 calls: Raise the stop to $16.20.
Long 0 SPY May 24 502 put and short 0 SPY May 24 482: Bought in line with the trend of VIX sell signal. The position was stopped out on May 3, when VIX closed below its 200-day MA for the second consecutive day.
Long 1 SPY May 24 500 call and short 1 SPY May 24 515 call: Bought in line with the VIX "spike peak" buy signal of April 22. 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 16.0 by VIX. 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 +4<SIGMA> Band, which is currently at 5,270 and moving sideways. The buy signal would be stopped out if the S&P 500 were to close below the -4<SIGMA> Band.
Long 10 POET $(POET)$ June 21 2 calls: Raise the trailing closing stop to $1.85.
Long 3 USO June 21 76 puts: We will hold these puts as long as the put-call ratio is on a sell signal.
All stops are mental closing stops unless otherwise noted.
Send questions to: lmcmillan@optionstrategist.com.
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
(c)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.
-Lawrence G. McMillan
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(END) Dow Jones Newswires
May 09, 2024 13:19 ET (17:19 GMT)
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