Dow 45,000 is just the start as the stock market looks to December's seasonal gains

MW Dow 45,000 is just the start as the stock market looks to December's seasonal gains

By Lawrence G. McMillan

Major indices at all-time highs and indicators show no resistance in sight

The S&P 500 $(SPX.UK)$ SPX and the Dow Jones Industrial Average DJIA both closed out November at record highs, with the Dow topping 45,000 in trading on Friday before ending the session just shy of that milestone.

As always, with the market at new all-time highs, there is no formal overhead resistance. But we continue to view the +4<SIGMA> "modified Bollinger Band" as a target of sorts. That is currently at 6,130 and rising. There is support at 5,870, which has been in place for some time now. We view that as an important level, and if SPX were to close below it, we would abandon our "core" bullish viewpoint on the stock market.

Even so, below that there is further support, both in terms of the bullish island reversal that is still in place (circled on the accompanying SPX chart), as well as the multiple support at 5,670. There had been a negative island reversal on the chart, but that gap was filled and eliminated from concern by the rally over the last week.

Equity-only put-call ratios have descended to their yearly lows. That represents an overbought stock market, but it is not a sell signal.

The McMillan volatility band $(MVB.AU)$ buy signal from early August (green "B" on the SPX chart) continues in place. Its target is also the +4<SIGMA> Band.

Equity-only put-call ratios have descended to their yearly lows. That represents an overbought stock market, but it is not a sell signal. For these ratios to generate strong sell signals, they would have to begin to rise sharply and exceed their November highs. Meanwhile, one could make the case that they are back on buy signals because they are descending. But it seems that they are mostly drifting sideways at very low levels on their charts. So, there is not a clear directional signal at this time.

Market breadth has improved, and the breadth oscillators remain on buy signals. There have been a few unusual days lately, where SPX is moving in one direction but breadth is flowing in the other. That is not too important in the larger picture, so we continue to view breadth in a positive light.

Cumulative volume breadth $(CVB.AU)$ made a new all-time high on three consecutive days recently, and then SPX did the same. The new all-time highs in CVB are a confirming signal for the new all-time highs in SPX.

New highs are far exceeding new lows on the NYSE, so this indicator - which has been on a buy signal since last August - remains bullish. It will remain so unless new lows outnumber new highs on the NYSE for two consecutive days.

The Cboe Volatility Index VIX has drifted down to near its yearly lows. This is another overbought condition, but it is not a problem for stocks unless the VIX begins to rise sharply. The "spike peak" buy signal of Nov. 6 remains in place. Moreover, the 20-day moving average $(MA)$ of the VIX is now approaching the 200-day moving average (bracket on the accompanying VIX chart). If that 20-day crosses below the 200-day and the VIX is below the 200-day (almost certain to be true), then a trend of a VIX buy signal would be in place.

The construct of volatility derivatives remains mostly bullish for stocks, as the term structures are sloping upwards, and the VIX futures are trading at a premium to the VIX.

Overall, this remains a bullish market, and we are maintaining a core bullish position as long as SPX continues to close above 5,870. We will add new positions based on newly-confirmed signals, and we continue to roll deeply in-the-money calls up to lock in partial profits and reduce downside risk.

New recommendation: Poet Technologies (POET)

Option and stock volume have expanded greatly in POET Technologies Inc. (POET) in the past few days, as it appears that it is ready for another breakout to the upside, continuing a series of breakouts that began last April.

Buy 10 POET (Jan. 17) 5 calls in line with the market.

Once the calls are bought, set a closing trailing stop at 4.25 and sell the calls if POET closes below 4.25.

New recommendation: LKQ Corp. $(LKQ)$

There is a new weighted put-call ratio buy signal in LKQ (LKQ). We want to see the stock rise above resistance at $40, so we are making this a conditional recommendation.

If LKQ closes above 40, then buy 3 LKQ (Feb. 21) 40 calls in line with the market.

If the calls are bought, we will hold as long as the weighted put-call ratio remains on a buy signal.

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 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.

Also, for outright long calls, roll up if they become eight points in-the-money.

Long 1 SPY (Dec. 6) 595 call: This position is based on the new highs vs. new lows buy signal. It was entered via a bull spread bought at the close of trading on Aug.15. It was then rolled several times. It would be stopped out if, on the NYSE, new lows outnumber new highs for two consecutive days.

Long 1 SPY (Dec. 6) 595 call: This is our core bullish position. Stop out of the position if SPX closes below 5,870 for two consecutive days.

Long 2 PLD $(PLD)$ (Dec. 20) 115 puts: Sell these puts now, since the put-call ratio has rolled over to a buy signal.

Long 4 expiring WBA $(WBA)$ (Nov. 29) 9.5 calls: This is the "alternative" Dogs of the Dow position. Hold without a stop at this time. Roll to WBA (Dec. 27) 9 calls.

Long 2 APH $(APH)$ (Jan. 17) 62.5 calls: We will hold these calls as long as the weighted put-call ratio remains on a buy signal.

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. In Friday's trading, that stop would have been a VIX close at or above 17.10.

Long 3 MSTY MSTY (Dec. 20) 31 calls: Stop out on a close below $30 by MSTY.

Long 4 UNG UNG (Dec. 20) 13 calls: We will hold these calls as long as the weighted put-call ratio for natural gas futures remains on a buy signal.

Long 1 SPY (Dec. 6) 595 put: This was bought in line with the recent breadth oscillator sell signals. Sell the put now, since the breadth oscillators have rolled over to buy signals.

Long 2 IWM IWM (Jan. 17) 241 calls and short 2 IWM (Jan. 17) 254: This is the post-Thanksgiving seasonal trade. We will plan to hold this trade through the second trading day of 2025, so the entire amount of the money in this trade is at risk. If IWM trades at 254, then sell the spread and replace it by buying the IWM (Jan. 17) call at that higher strike, holding it as an outright long.

Long 4 IEF IEF (Jan. 17) 94 calls: We will hold as long as the weighted put-call ratio for Treasury notes is 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

Disclaimer:

(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 30, 2024 07:44 ET (12:44 GMT)

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