Stocks need to find their footing fast if investors hope to keep the bears away

MW Stocks need to find their footing fast if investors hope to keep the bears away

By Lawrence G. McMillan

Bullish technical indicators are breaking down

We are the midst of the "Santa Claus rally" period, which encompasses the last five trading days of one year and the first two of the next. If this seven-day period produces a loss for the U.S. stock market, that could have bearish implications.

So far, the S&P 500 index SPX has support on the SPX chart at 6,840 and stronger support at 6,720 (the December lows). Bearish trading systems kick in if SPX closes below its December low at any time in the first three months of the new year, so that will be something to watch. Resistance currently is at the 6,945 high point.

Two of our internal indicators - breadth and the equity-only put-call ratios - are weaker. Equity-only put-call ratios started to edge higher about a week ago. Almost immediately when that happened, the computer analysis programs called for sell signals from this indicator, and now both put-call ratios are on sell signals - that is, the ratios are rising. As long as that is the case, it is bearish for the stock market.

Market breadth has been negative over these past few days as well. As a result, both of our breadth oscillators are on sell signals. These are short-term indicators and can reverse quickly - but for now, they are in the bearish camp.

Cumulative volume breadth (CVB) - the running total of daily volume on advancing issues minus the volume on declining issues - has fared somewhat better. The NYSE-based CVB made an all-time high along with SPX last Tuesday. "Stocks only" CVB has not made a new high, though.

Even the new highs on the NYSE have begun to falter. If that is the case again today, this indicator will be in a neutral state (but not a sell signal).

So far, VIX VIX has been fairly complacent, and that is generally bullish for stocks. VIX is low, and that is an overbought condition, but there isn't anything to worry about until VIX starts to rise. The trend of VIX buy signal (for stocks) remains intact and will continue unless VIX closes above its 200-day moving average for two days in a row. That moving average now is just above 19.0. The other VIX-based buy signal - "spike peak" - was closed out last week after it had reached its maximum holding period of 22 trading days.

The construct of volatility derivatives continues to paint a bullish picture for the stock market. Both term structures are sloping steeply upwards, and the VIX futures are all trading with a relatively large premium to VIX. Those are bullish factors for stocks. We will continue to watch January VIX futures versus February VIX futures for signs of inversion; that is not in the cards right now, as February continues to trade higher than January.

In summary, the SPX chart is positive, but the failure to rise after new highs were made is disappointing. The year-end selling shows just how many people are holding stocks at losses (which they are electing to take for 2025).

So, even though the major indices were higher for the year, this was achieved with a relatively small number of stocks. We will continue to take new positions based on confirmed signals, and recommend rolling deeply in-the-money options if they occur.

New bearish signals

We noted above that both breadth and the equity-only put-call ratios have generated recent sell signals. Therefore, we are going to buy some SPDR S&P 500 ETF Trust SPY puts in line with these new bearish signals.

Buy 2 SPY (Jan. 16) at-the-money puts in line with the market.

We will exit the position if these indicators roll back over to buy signals, and we will inform you of that in these weekly updates.

New recommendation: American Airlines Group $(AAL)$ puts

A new put-call ratio sell signal has been issued here. There was a similar low-level sell signal back in January 2025, and shares of AAL (AAL) declined after that.

Buy 6 AAL (Feb. 20) 15 puts in line with the market.

We will continue to hold as long as the put-call ratio is on this sell signal.

Follow-up actions

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 if they become 8 points in-the-money.

Long 1 TSEM $(TSEM)$ (Jan. 16) 115 call and short 1 TSEM (Jan. 16) 130 call: Continue to hold without a stop for now. Roll up at 130.

Long 2 IWM IWM (Jan. 9) 256 calls: This is our post-Thanksgiving seasonal trade. Roll up the IWM calls at 262. Exit the trade at the close of trading on the second trading day of 2026 - Jan. 5.

Long 3 SLV SLV (Jan. 16) 48 calls: Roll to the SLV (Jan. 16) at the money calls: We will hold these SLV calls as long as the weighted put-call ratio buy signal remains intact.

Long 1 GLD GLD (Jan. 16) 390 call and short 1 GLD (Jan. 16) 415 call: We will continue to hold as long as the put-call ratio for GLD remains on a buy signal.

Long 1 SPY (Jan. 9) 685 call and short 1 SPY (Jan. 9) 700 call: This position is the trend of VIX buy signal. It would be stopped out if VIX were to close above its 200-day moving average for two consecutive days.

Long 1 BMO $(BMO)$ (June 18) 130 call and long 1 BMO (June 18) 130 put: Continue to hold this straddle. Roll the calls up if BMO trades at 150 and roll the puts down if it trades at 110.

Long 1 SPY (Jan. 30) 690 call and short 1 SPY (Jan. 30) 710 call: This spread was bought on the upside breakout, when SPX closed above 6,920 for two consecutive days. Stop out if SPX closes below 6,840.

Long 2 SPY (Jan. 9) 688 calls and short 2 SPY (Jan. 9) 703 calls: This spread was bought in line with the Santa Claus rally seasonal period. If the long option becomes at least 10 points in-the-money, roll up the entire spread. Exit at the close of trading on Monday, Jan. 5 (the second trading day of 2026).

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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January 02, 2026 16:33 ET (21:33 GMT)

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