MW Presidential election year and fall seasonal trading patterns favor the bulls
By Lawrence G. McMillan
Now that earnings season is over, the stock market is aiming at new all-time highs
The S&P 500 index SPX is consolidating after its strong move upward in just three weeks. Over the past several days, SPX has been trading in a range between around 5,560 to 5,650. A breakout from that range is expected soon and will probably generate some sustainable momentum when it does.
Overhead, there is resistance at the all-time highs (5,670), while on the downside, there is support around 5,370. A close below 5,370 would be quite negative, while a two-day close above 5,670 would be extremely positive.
The McMillan Volatility Band $(MVB.AU)$ buy signal remains in place (green "B" on the above SPX chart). Its target is the +4<SIGMA> Band, which is currently at 5,750 and moving sideways. The bands are contracting somewhat as realized volatility is calming down.
Equity-only put-call ratios have rolled over to buy signals. This was slow in coming, partly due to the fact that these are 21-day moving averages, but probably more because put buying remained quite heavy for the first week of the rebound rally off of the Aug. 5 lows. They will remain bullish for stocks until they roll over and begin to rise.
Market breadth had been very strong, pushing the breadth oscillators onto buy signals and keeping them there deeply into overbought territory. Breadth has now begun to slip, though, and one more day of negative breadth will probably be enough to roll these oscillators over to sell signals. Such signals need some refinement. First, we require a two-day confirmation of any change in the breadth oscillator signals. In addition, NYSE breadth remains much stronger than stocks-only breadth.
New highs on the NYSE have exploded and they continue to register large numbers daily. They are swamping the number of new lows. So, this indicator remains strongly bullish on the stock market.
Realized volatility has begun to retreat. The 20-day historical volatility of SPX (HV20) reached as high as 23%. It is still 20%, which is much higher than normal. An elevated HV20 is generally bearish for stocks, although there is a lag time for it to turn around. We are using a rather arbitrary reading of 15% as the "all clear" signal. That is, if HV20 continues to fall and reaches 15% or lower, that would eliminate HV20 as a negative indicator.
VIX VIX continues to display a mixed signal. The "spike peak" buy signal that was registered at the close of trading on Aug. 5 remains in place. The trading system that we designed around these signals requires holding the position for 22 trading days - or through Sept. 6 in this case. So that has another week to run. Countering that is the fact that VIX remains above its 200-day moving average $(MA)$, and so the trend of VIX sell-signal is still in place. The original signal took place in late July (circled area on the accompanying VIX chart). It would be stopped out if VIX were to close back below its 200-day MA, which is currently at 14.40 and moving sideways.
The construct of volatility derivatives has retained its recently-bullish outlook for the stock market. The term structures are mostly sloping upwards and the VIX futures are trading at a premium to VIX. I say "mostly" because of the election bump that has elevated the October VIX futures (which are based on SPX options that expire just after the election). Elections don't usually cause stock-market volatility, but options traders now are saying this one will.
So the stock-market indicators are mostly bullish, although there are still a couple of nagging negative ones - namely HV20 and the trend of VIX. Regardless, we will trade all confirmed signals that occur and continue to roll deeply in-the-money positions to take partial profits and reduce risk while maintaining a directional position.
New recommendation: Dentsply Sirona $(XRAY)$
A new weighted put-call ratio buy signal has set up in Dentsply Sirona (XRAY). We are going to make this a conditional recommendation, though, since we want to see the stock climb over resistance at $26 before taking a position.
If XRAY closes above $26, then buy 4 XRAY (Oct. 18) 25 calls in line with the market. If bought, we will hold as long as the weighted put-call ratio is on a buy signal.
New recommendation: Walgreens Boots Alliance $(WBA)$
This a longer-term potential buy signal from Walgreens Boots Alliance $(WBA.AU)$. 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 DJIA usually experience a strong rally within a matter of weeks after that removal.
WBA was obliterated after its most recent earnings report. The potential MVB buy signal was canceled. So we adjusted our entry points: If WBA closes above $10.60, then buy 2 WBA (Sept. 20) 10.5 calls in line with the market. (Note the change in strike price and expiration date.)
Market insight: Seasonal patterns
Fall brings a number of seasonal patterns that we have found to be profitable over the years. The first is coming up in a couple of weeks: The stock market typically declines during the week after September options expirations. That means the week after the third Friday of the month, which was the traditional options-expiration date before weekly options became so popular. So, you would short the market at the close of trading on Friday, Sept. 20 and cover the short at the close on Sept. 27. We buy puts rather than shorting the market.
Following that, we will look forward to the October seasonal trade at the end of October. Then a three-part seasonal pattern begins after Thanksgiving - the post-Thanksgiving rally, the "January Effect" (which occurs in December nowadays), and then the "Santa Claus Rally" around Christmas.
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 FIVE $(FIVE)$ (Sept. 20) 65 put: We are holding without a stop for now.
Long 2 AKAM $(AKAM)$ (Sept. 20) 100 call: This position will be held as long as the AKAM weighted put-call ratio remains on a buy signal. These calls were rolled up when AKAM traded at $100.
Long 2 RHI $(RHI)$ (Sept. 20) 65 call: Raise the stop for these calls to $61.80, basis RHI.
Long 1 SPY SPY (Sept. 20) 542 put and short 1 SPY (Sept. 20) 502 put: This spread was bought in line with the equity-only put-call ratio sell signals. They have finally rolled over to buy signals, but this spread is only worth a few cents. So, we are going to hold onto it in case something extreme happens on the downside in the broad market.
Long 1 SPY (Sept. 20) 512 put and Short 1 SPY (Sept. 20) 470 put: This put spread is based on the trend of VIX sell signal and would be stopped out if VIX closes below its 200-day MA for two consecutive days.
Long 2 COO $(COO)$ (Sept. 20) 90 call: The weighted put-call ratio for COO has rolled over to a sell signal, so sell these calls.
Long 1 SPY (Sept. 20) 546 call and Short 1 SPY(Sept. 20) 566 call: This spread was taken in line with the VIX "spike peak" buy signal and then rolled up. It will be held for 22 trading days, which means it will expire at the close of trading on Sept. 6.
Long 1 SPY (Oct. 18) 553 call and Short 1 SPY (Oct. 18) 573 call: This spread was bought at the close of trading on Aug. 15, when new highs numbered more than 100 for the second consecutive day. It would be stopped out if, on the NYSE, new lows outnumbered new highs for two consecutive days.
Long 3 CMG $(CMG)$ (Sept. 20) 52 call: We will hold as long as the weighted put-call ratio of CMG remains on a buy signal.
Long 1 SPY (Oct. 18) 559 call and Long 1 SPY (Oct. 18) 559 put: This is a long straddle, intended to capture a large move in either direction. Roll either side if it gets 10 points in-the-money; just alter the strike, not the expiration date.
Long 2 AOS $(AOS)$ (Oct. 18) 80 call: We will hold these calls as long as the weighted put-call ratio remains on a buy 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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August 31, 2024 09:23 ET (13:23 GMT)
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