MW The S&P 500 has come to a major postelection crossroads
By Lawrence G. McMillan
All-time highs were made, but not with the broad market participation you want to see
The S&P 500 index SPX has remained strong since the U.S. presidential election. The target for this upside move continues to be the +4<SIGMA> "modified Bollinger Band," which is now near 6,050 and rising.
SPX has support at 5,870. A close below 5,870 would cause us to relinquish our core bullish stance, even though there is further support down to 5,670. A close below 5,670 would be very bearish, but that doesn't seem to be in the cards at this time - especially with the upcoming positive seasonality that arrives with Thanksgiving.
There is still a gap (circled on the above SPX chart), and as long as that is in place, it's another bullish sign for this index. The McMillan Volatility Band $(MVB.AU)$ buy signal (green "B" on the chart) is still in place from last August. It, too, has a target of the +4<SIGMA> band.
Equity-only put-call ratios had appeared to generate sell signals in late October, but they didn't rise much and have now turned downward again. At the moment, they are between their October lows and their recent November highs. As such, they are not giving much of a directional signal for the stock market at all. We are awaiting a breakout from the current range in order to use these indicators for a meaningful signal.
Market breadth, on the other hand, has deteriorated badly and the breadth oscillators are now on sell signals once again. The most recent, postelection move to new highs by SPX was never accompanied by very strong breadth. These breadth oscillators are very short-term signals and are sometimes subject to whipsaws.
In a related manner, cumulative volume breadth $(CVB.AU)$ did make a new all-time high along with SPX a couple of times this week. So, that is a strong confirmation of the new highs by SPX, and it means that there is no negative divergence in place at this time.
New highs on the NYSE have continued to dominate new lows, so this particular indicator remains bullish as well. It generated its most recent buy signal last August and has remained bullish ever since. It would take two consecutive days on which NYSE new lows exceed new highs to stop out this bullish signal.
VIX VIX has continued to decline after the election. That means that the recent "spike peak" buy signal is still in place. We are tightening the stop on this position: If VIX returns to "spiking" mode, the buy signal would be stopped out. That is, if VIX rises by at least 3.0 points over any one-, two- or three-day period (using closing prices), the buy signal would be terminated.
Meanwhile, there is no longer a trend of VIX signal in place at this time. Once VIX closed below its 200-day moving average (box on the accompanying VIX chart), that terminated the previous sell signal, and this indicator is in a neutral status for now.
The construct of volatility derivatives has taken on a more bullish outlook for stocks. This has been occurring since the election and seems to have reached a stabilization point now. The term structures of the VIX futures and of the Cboe Volatility Index are sloping upwards, and the VIX futures are trading at a premium to VIX. In particular, the December VIX futures are trading a full point higher than the November VIX futures, and that is a return to a fully bullish status for stocks.
In summary, we are maintaining a "core" bullish position as long as SPX closes above 5,870. We will trade other confirmed signals around that, and we are rolling deeply in-the-money calls up to higher strikes.
New recommendation: Natural gas
A weighted put-call ratio buy signal has been generated in the natural-gas futures options. This signal can be traded with the UNG UNG ETF, which tracks the price of natural gas.
Buy 4 UNG (Dec. 20) 13 calls in line with the market.
We will hold these calls as long as the weighted put-call ratio for natural gas futures remains on a buy signal.
New recommendation: Breadth-oscillator sell signal
As noted above, the breadth oscillators have rolled over to sell signals. We are going to take a small position because this is a confirmed signal.
Buy 1 SPY SPY (Dec. 6) 595 put in line with the market.
We will hold this position until the breadth oscillators roll over to buy signals.
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 bull call 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 0 SPY (Nov. 22) 560 put: This position was based on the trend of VIX sell signal and was stopped out on Nov. 8, when VIX closed below its 200-day moving average $(MA)$ for the second consecutive day.
Long 1 expiring SPY (Nov. 15) 584 call and short 1 SPY (Nov. 15) 605 call: This position is based on the new highs versus new lows buy signal. It was entered via a bull spread bought at the close of trading on Aug. 15. It was then rolled up twice. Sell this expiring spread and replace it with a straight long call: Buy 1 SPY (Dec. 6) at-the-money call. This would be stopped out if, on the NYSE, new lows outnumber new highs for two consecutive days.
Long 0 ABNB (Nov. 15) 142 call: The stock gapped down after earnings, and this call was stopped out on Nov. 12, when ABNB $(ABNB)$ closed below $34.
Long 1 expiring SPY (Nov. 15) 584 call and short 1 SPY (Nov. 15) 605 call: This is our core bullish position. Sell this expiring spread and replace it with a straight long call: Buy 1 SPY (Dec. 6) at-the-money call. Stop out of the position if SPX closes below 5,870 for two consecutive days.
Long 2 expiring PLD $(PLD)$ (Nov. 15) 115 puts: Roll to the PLD (Dec. 20) 115 puts. We will continue to hold these puts as long as the put-call ratio remains on a sell signal.
Long 0 expiring LX (Nov. 15) 2.5 calls: These calls were stopped out on Nov. 13, when LX $(LX)$ closed below the stop of 3.15.
Long 2 expiring CLX (Nov. 15) 160 puts: Sell these puts if you can, and do not replace them. The weighted put-call ratio of CLX $(CLX)$ is no longer on a sell signal.
Long 4 WBA (Nov. 29) 9.5 calls: This is the "alternative" Dogs of the Dow position. Hold WBA $(WBA)$ without a stop at this time.
Long 2 APH (Jan. 17) 62.5 calls: We will hold these APH $(APH)$ calls as long as the weighted put-call ratio remains on a buy signal.
Long 1 expiring BLDR $(BLDR)$ (Nov. 15) 170 put: We have rolled down twice. Allow these to expire and do not replace them.
Long 1 SPY (Dec. 20) 595 call and short 1 SPY (Dec. 20) 615 call: This position is based on the most recent VIX "spike peak" buy signal. This position will be held for 22 trading days, or until early December. It would be stopped out if VIX were to return to "spiking" mode. That is, if VIX were to rise at least 3.0 points over any one-, two- or three-day period. Currently that stop would be a VIX close at or above 17.02.
Long 3 MSTY (Dec. 20) 31 calls: Stop out on a close below $30 by MSTY MSTY.
Long 3 TAN (Dec. 20) 37 calls: When we recommended this trade last week, we set a stop to sell the calls if TAN TAN closed below 35.50. It has done that, so we are stopped out. Even so, it seems like this sector is overdone on the downside, and we will look for another entry point later.
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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November 15, 2024 16:38 ET (21:38 GMT)
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