MW The S&P 500 is on fire - but a retreat to this level would unleash the bears
By Lawrence G. McMillan
Stock investors should be cautious if the S&P 500 declines toward 6,700
Stock-market bears are waiting for their moment to strike.
The S&P 500 Index SPX is approaching 7,000 with increased volatility - but the outlook is still bullish.
Technically, there is still resistance at the all-time high, at 6,985, with the main downside support at 6,720. That level was the December low for SPX and is an important one - market history shows that if the prior December lows are broken during the first quarter of a new year, it frequently leads to a bear market.
That happened last year, as the December lows of 2024 were violated in early March 2025, and then the heavy selling really began. In a similar fashion, the December 2021 lows were broken in mid-January 2022, and a 10-month, full-fledged bear market set in. The pandemic-induced bear market of 2020 followed the same pattern, as the December 2019 lows were broken in late February 2020, after which extremely heavy selling followed.
There is no volatility band signal in place at this time, although we have been using the +4<SIGMA> "modified Bollinger band" as a potential target for the market. That band is at 7,100 now.
Equity-only put-call ratios have rolled back over to buy signals. This happened quickly in terms of the weighted ratio, and that new buy signal occurred after the trading of Jan. 21. The standard ratio had been moving sideways. In any case, heavy call buying on the rally off the Jan. 20 lows has abruptly forced both ratios lower, and they are now on buy signals for the stock market. The computer analysis programs that we use to aid in interpreting these put-call ratio charts agree that both are now on buy signals.
Market breadth had a couple of bad days, on Jan. 16 and Jan. 20, but then followed with a positive day on Jan. 21. The net effect is that the breadth oscillator buy signals that were confirmed in mid-January are still in effect. Cumulative volume breadth (CVB) has been strong, too, as it has made new all-time highs as recently as Jan. 16, and that is positive confirmation for SPX to move to all-time highs as well.
New highs on the NYSE have continued to dominate new lows - even on the one day of heavy stock-market selling. On many recent days, NYSE new highs have numbered more than 200, including 250 on Jan. 21. This indicator has remained solidly in the bullish camp all along.
Perhaps some of the greatest turmoil technically has been with VIX VIX. The Cboe volalitility index had been creeping higher since its lows of Jan. 9, but then the surprise tariff announcement over the weekend caused VIX to spike sharply on Jan. 20. That raised some alarms, and the fact that the term structure quickly flattened and threatened to invert was another sign of tension.
As it turned out, VIX fell back from that level, creating a new "spike peak" buy signal for the stock market (green "B" on the accompanying VIX chart). In addition, the trend of VIX buy signal for stocks is still intact, since VIX did not close above its 200-day moving average for two consecutive days (pink "B" on the chart, from the inception of the signal last December).
The construct of the volatility derivatives remains bullish for the stock market. The term structure of the VIX futures is sloping nicely upward again. That is also bullish for stocks. The February VIX futures are now the front month, and so we will be watching their price versus that of the March VIX futures. If February begins to trade at a higher price than March, that would be a warning sign for stocks. In addition, the VIX term structure has continued to slope upward as well. There was a brief moment during the heavy selling when VIX9D rose above VIX, but that didn't last long.
In summary, the most recent "tariff tantrum" brought out the heavy sellers, many of which were probably nervous longs, looking for a place to take profits on older holdings. It does demonstrate that selling could accelerate if something truly negative arose. However, as long as SPX remains above last December's lows at 6,720, the bulls are still in charge. We will take new signals as they appear and will continue to roll deeply in-the-money options.
Market insight: Earnings
Earning season is back. Next week, several large companies are reporting. As is often the case, we look at the options market for some guidance as to just how far these stocks are expected to gap after their earnings announcements. The at-the-money, near-term (expiring Jan. 23) straddles are the gauge for these particular stocks.
The following list shows the stock, earnings date and what the straddle price would have to be in order for it to be cheaper than six of the past 10 post-earnings moves. The column entitled "pm?" shows whether the earnings announcement will be before the market open (N) or after the close $(Y)$ on the date shown. The last column, "Needed," shows the price at which one would want to buy the straddle in order to have it be cheaper than six of the past 10 post-earnings moves.
Symbol Date pm? Needed SBUX 1/28/26 N 1.21% IBM 1/28/26 Y 6.16% META 1/28/26 Y 4.40% MSFT 1/28/26 Y 3.06% TSLA 1/28/26 Y 9.30% AAPL 1/29/26 Y 0.68% DIS 2/2/26 N 6.23%
Of the stocks on this list, only Tesla's Jan. 23 at-the-money straddle is currently cheaper than the "Needed" price. Apple, Disney and Starbucks have straddles far in excess of the "needed" price.
Keep an eye on these, as it is often the case that the straddle price gets cheaper just before the earnings announcement.
New recommendation: VIX 'spike peak' buy signal
A new VIX "spike peak" buy signal has occurred, since VIX rose to 21 briefly and has fallen back sharply.
Buy 1 SPY SPY (Feb. 27) at-the-money call and Sell 1 SPY (Feb. 27) call with a striking price 20 points higher.
We will hold this position for 22 trading days (about a month) but would be stopped out if VIX were to close above 21 (its most recent high).
Potential break of December lows
Just in case, we are going to have this recommendation in place. As noted in the market commentary, if the December lows are broken, that can lead to a bearish move in the stock market.
If SPX closes below 6,720, then Buy 1 SPY (Mar. 20) at-the-money put and Sell 1 SPY (Mar. 20) put with a striking price 50 points lower.
This is probably not an immediate concerns - but better to have this trade in place rather than scrambling after the market has already broken down.
New recommendation: Ramaco Resournces $(METC)$
Ramaco Resournces (METC) had been one of the strongest stocks of 2025 but has fallen back sharply since October. Now, it appears to have recovered and is making a series of higher highs and higher lows. That is a bullish reversal.
Buy 2 METC (Mar. 20) 24 calls in line with the market. Initially, set a trailing closing stop at $20.
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.
For outright long options, roll if they become 8 points in-the-money.
Long 1 TSEM (Feb. 20) 125 call and short 1 TSEM (Feb. 20) 140 call: Continue to hold TSEM $(TSEM)$ without a stop for now. Roll up at $140.
Long 1 expiring SPY (Jan. 23) 688 call and short 1 SPY (Jan. 23) 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 (it closed there for one day this past week). Roll to the SPY (Feb. 20) 686-706 call bull spread.
Long 1 BMO (Jun. 18) 130 call and long 1 BMO (Jun. 18) 130 put: Continue to hold this straddle. Roll the calls up if BMO $(BMO)$ trades at $150 and roll the puts down if it trades at $110.
Long 0 SPY (Jan. 30) 690 call and short 0 SPY (Jan. 30) 710 call: This spread was bought on the upside breakout, when SPX closed above 6,920 for two consecutive days. It was stopped out when SPX closed below 6,840 on Jan. 20.
Long 2 SPY (Feb. 206) 683 puts: Held in line with the equity-only put-call ratio sell signals.
Long 6 AAL (Feb. 20) 15 puts: We will continue to hold as long as the AAL $(AAL)$ put-call ratio is on this sell signal.
Long 1 SPYM (Feb. 20) 81 call and long 1 SPYM (Feb. 20) 81 put: Roll the calls up to the 84 strike if SPYM SPYM trades at 84 or higher. Roll the puts down to the 78 strike if SPYM trades at 78 or lower.
Long 300 shares of BWEN: Raise the stop to 3.15 .
Long 1 LH (Feb. 20) 260 call: We will hold the call as long as the put-call ratio for LH $(LH)$ remains on a buy signal.
Long 3 ERAS $(ERAS)$ (Feb. 20) 7.5 calls: Set a trailing, closing atop at $7.
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.
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