MW These stock-trading moves can boost a portfolio if the 'Santa Claus rally' fails
By Lawrence G. McMillan
Despite year-end selling, market conditions look promising for 2025
The seasonally bullish period is coming to a close on Jan. 3. It has not been a particularly good trade so far. The S&P 500 Index SPX is seeing quite a bit of selling - the past three trading days posted considerable losses. The 5,870 level is our demarcation line regarding a bullish SPX chart. A clear close below that level would change the chart from bullish to neutral or even bearish. As a result, we are holding core bullish positions unless SPX closes below 5,870 for two consecutive days.
There is resistance at 6,010 and 6,100 (the all-time highs). Below current levels, there is support at 5,670 as well as potential support at the edge of the "island reversal" (circled on the accompanying SPX chart) at 5,780. However, if SPX declines that far, its chart would no longer be bullish.
The SPX chart is one of the few remaining bullish indicators at this time. That has happened in the past, and usually the SPX chart is the one indicator that is the most important. However, there has been a great deal of deterioration in the market internals.
Equity-only put-call ratios continue to edge higher. The weighted ratio is rising faster and is clearly on a sell signal. The standard ratio is rising at a slower pace, so that sell signal is still somewhat in question (hence the "?" on that chart). As long as these ratios are rising, that is negative for stocks.
Market breadth continues to be miserable, so both breadth oscillators remain on sell signals. They have descended into oversold status, but oversold does not mean "buy." It will take at least two consecutive days of positive breadth to reverse these breadth-oscillators sell signals to buys.
New lows on the NYSE continue to dominate new highs, so this indicator remains on a sell signal as well. It will take two consecutive days on which new highs outnumber new lows in order to reverse this sell signal.
VIX VIX has started to rise again. In fact, it has returned to "spiking" mode - meaning that it has risen at least 3.0 points over the past three trading days (using closing prices). The previous "spike peak" buy signal is still in place because VIX has not exceeded its previous peak of 28.32. So, it is possible that a second, overlapping "spike peak" buy signal could occur if VIX falls back to 14.0 once again. We do not trade overlapping signals, preferring to stay with the original only.
A week ago, VIX also had descended far enough that it generated a trend of VIX buy signal. That has quickly been stopped out, though, by VIX closing back above its 200-day moving average $(MA)$ for two consecutive days. That is marked by the box on the accompanying VIX chart.
The construct of volatility derivatives remains bullish for stocks. That is, the term structures continue to slope upwards, and the VIX futures are trading at a healthy premium to VIX.
In summary, we are still holding a core bullish position but are trading other confirmed signals around that. Also, continue to roll deeply in-the-money options to take partial profits and reduce reversal risk.
New recommendation: Deckers Outdoor puts
A new weighted put-call-ratio sell signal has developed in DECK $(DECK)$, and if the stock falls below support at $202, we want to act on it:
If DECK closes below $202, then buy 2 DECK (Jan. 17) 205.5 puts in line with the market.
If these puts are bought, hold the position as long as the weighted put-call ratio for DECK remains on a sell signal.
Market insight: Bah humbug!
The last of the seasonally bullish indicators is coming to a close, as of Friday, Jan. 3, the second trading of the new year. This last seasonal indicator is the "Santa Claus rally," as coined by the late market strategist Yale Hirsch.
The Santa Claus rally began with the close of trading on Dec. 23, with SPX at 5,974. SPX is below that level right now, but it is still possible that this seasonal period could produce a gain by tomorrow's close. If it does not produce a gain, though, that could be a bearish harbinger for stocks, as has often been the case in the past.
Let's use this recommendation in case the bearish situation arises:
If SPX closes below 5,920 on Friday, January 3, then buy 1 SPY SPY (Feb. 21) at-the-money put and sell 1 SPY (Feb. 21) put with a striking price 30 points lower.
If this position is taken, we will hold without a stop initially.
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.
Also, for outright long options, roll up if they become 8 points in-the-money.
Long 1 SPY (Jan. 24) 607 call: This is our core bullish position. Stop out of the position if SPX closes below 5,870 for two consecutive days.
Long 4 WBA (Jan. 17) 9 calls: This is the "alternative" Dogs of the Dow position. Hold without a stop at this time. A takeover rumor is in effect, following a Wall Street Journal report that WBA $(WBA)$ is in talks to sell itself to private-equity firm Sycamore Partners.
Long 2 IWM (Jan. 17) 241 calls and short 2 IWM (Jan. 17) 254 calls: This is the post-Thanksgiving seasonal trade. This seasonal IWM IWM trade has not performed well this year. Exit the entire trade at the close of trading on Friday, Jan. 3.
Long 10 POET (Jan. 17) 5 calls: Raise the stop: Sell the calls if POET $(POET)$ closes below 4.95.
Long 1 expiring SPY (Jan. 3) 589 put: We will hold this put as long as the breadth-oscillator sell signal is in effect, which is still the case currently. Roll this put out to the SPY (Jan. 24) 589 put.
Long 4 DKNG (Jan. 17) 42 puts: We will hold these puts as long as the weighted put-call ratio for DKNG $(DKNG)$ remains on a sell signal.
Long 1 SPY (Jan. 17) 590 put and Short 1 SPY (Jan. 17) 550 put: This position is based on the "new highs vs. new lows" sell signal. This position will be held until new highs exceed new lows on the NYSE for two consecutive days.
Long 1 SPY (Jan. 24) 586 call and Short 1 SPY (Jan. 24) 606 call: This position is based on the latest "spike peak" buy signal. This trade would be stopped out if VIX were to close at a higher price than the previous peak (28.32). Otherwise, the position will be held for 22 trading days.
Long 3 VRAR (Jan. 17) 4 calls: Stop out of this trade if VRAR $(VRAR)$ closes below $2.40.
Long 1 SPY (Jan. 10) 600 call: Was bought in line with the Santa Claus rally seasonal period. Roll the call up if it becomes 8 points in-the-money. Otherwise, plan to exit the trade at the end of the trading day on Friday, Jan. 3, the second trading day of 2025.
Long 1 SPY (Feb. 21) 601 call and short 1 SPY (Feb. 21) 621 call: This was bought in line with the trend of $VIX system buy signal. VIX rose last week and closed above its 200-day moving average for two consecutive days, so this spread should be sold.
Long 6 ABAT (Jan. 17) 2.5 calls: Set a stop to sell these calls if ABAT $(ABAT)$ closes below 1.95 on any day.
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.
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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January 02, 2025 14:44 ET (19:44 GMT)
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