Sell signs are all over the stock market now - but the bulls are holding out

MW Sell signs are all over the stock market now - but the bulls are holding out

By Lawrence G. McMillan

Key indicators are mixed and market swings are more volatile

The S&P 500 Index $(SPX.UK)$ SPX continues to break down, although the path has been volatile. Just over a week ago, the benchmark U.S. stock index broke down from a trading range that encompassed the 5,560-5,650 area. A swift slide to 5,400 ensued, but a rebound rally has brought the index back above 5,560.

Resistance is strong in the 5,560-5,650 area, with further resistance at the all-time highs of 5,670. On the downside, there is support at 5,400 and further support at 5,370. A breakdown below 5.370 would be extremely negative.

The McMillan Volatility Band $(MVB.AU)$ buy signal is still in place, with a target of the upper 4<SIGMA> "modified Bollinger Band" - currently above 5,750.

Equity-only put-call ratios remain on buy signals. This is a bit unusual, given that the market has been selling off. Still, put buying has not been particularly strong during this selloff and so the ratios continue to fall. As long as they are falling, that is theoretically bullish for stocks.

Market breadth has been fairly negative. The "stocks only" breadth oscillator briefly descended into a sell signal last week and is now trying to dig itself out of that hole. The NYSE-based breath oscillator also generated a sell signal, and it remains in that negative state for now.

New highs on the NYSE have continued to outnumber new lows, so this indicator remains in a positive state. But there has been something of a negative development in that new lows exceeded 100 issues on two of the past three days. If new lows should exceed new highs for two consecutive days, that would return this indicator to a neutral status (i.e., it would stop out the current buy signal). If new lows were to register more than 100 issues on those same two days, that would be an outright sell signal.

Realized volatility, as determined by the 20-day historical volatility of SPX (HV20) continues to remain just elevated enough that it is still a somewhat bearish sign for stocks. In a bullish market, realized volatility calms down, but if it remains relatively high as it is doing now, there could be negative surprises.

VIX VIX continues to be split in its signals. It popped up last week and then eventually generated a new "spike peak" buy signal for stocks at the close on Sept. 5. That signal will remain in place for 22 trading days, unless VIX closes above its most recent high-close of 23.31. Conversely, the trend of VIX sell signal remains in place as well. VIX would have to close below its 200-day moving average $(MA)$ in order to stop out that signal, and that moving average is quite some distance from here, as it remains below 15.

The construct of volatility derivatives remains mostly bullish, but there are some problems. The term structure of the CBOE volatility indices slopes upward, so that is bullish. However, the term structure of the VIX futures continues to be hampered by the "election bump" in the October futures. Moreover, many of the futures have recently been trading at a discount to VIX, and that can be a warning sign of danger as well. Even so, this is more bullish than not.

Indicators are mixed, and market swings are getting larger. We will continue to trade new signals as they emerge and will continue to roll deeply in-the-money options when they occur.

New recommendation: Wheat futures

Note that the conditional buy in XRAY $(XRAY)$ was not fulfilled last week, so we are canceling that recommendation.

A new put-call ratio buy signal has registered in wheat options. This put-call ratio is constructed using the wheat futures options that trade on the Chicago Board of Trade (CBOT). This recommendation could be implemented by buying wheat futures call options, but since most traders don't have access to a futures account, use the Teucrium Wheat Fund WEAT

Buy 10 WEAT (Oct. 18) 5 calls In line with the market.

New recommendation: PDD Holdings $(PDD)$

A new McMillan Volatility Band (MVB) buy signal is pending in PDD (PDD). The buy signal will be completed if PDD trades above $95.80.

If PDD trades above $95.80, then buy 2 PDD (Oct. 18) 95 calls in line with the market.

If the calls are bought, we will look to exit on a move to the +4<SIGMA> Band, and would stop out the position if PDD closes back below the -4<SIGMA> Band.

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 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.

We have adjusted our entry points once again: If WBA closes above 9.80, then buy 2 WBA (Oct. 11) 9.5 calls, in line with the market.

Follow-up action:

All stops are mental closing stops unless otherwise noted.

We are using a "standard" rolling procedure for our SPY SPY spreads: in any vertical bull or bear spread, if the underlying hits the short strike, then roll the entire spread. That would be to 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 puts: Hold without a stop for now.

Long 2 AKAM $(AKAM)$ (Sept. 20) 100 calls: 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 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 1 SPY (Oct. 18) 553 call and short 1 SPY (Oct. 18) 573 call: This spread was bought at the close of trading on August 15, when new highs numbered more than 100 for the second consecutive day. It would be stopped out if, on the NYSE, new lows outnumber new highs for two consecutive days.

Long 3 CMG $(CMG)$ (Sept. 20) 52 calls: 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) 549 put: This is a long straddle, intended to capture a large move in either direction. The puts were rolled down 10 points on Sept. 5, when SPY traded at 549. Continue to roll either side if it gets 10 points in-the-money; alter the strike, not the expiration date.

Long 2 AOS $(AOS)$ (Oct. 18) 80 calls: We will hold these calls as long as the weighted put-call ratio remains on a buy signal.

Long 1 SPY (Oct. 18) 550 call and short 1 SPY (Oct. 18) 570 call: This was bought in line with the latest VIX "spike peak" buy signal of Sept. 5. Stop out if VIX closes above 23.31. Otherwise, we will hold for 22 trading days.

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 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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September 14, 2024 08:20 ET (12:20 GMT)

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