MW S&P 500 pushes to new highs. Here is the 'line in the sand' for this bull run.
By Lawrence G. McMillan
Why 7,000 is the 'make-or-break' level for the current rally
Most market indicators remain positive - for now.
It would be disappointing to see SPX fall below 7,000. If that happens, selling can be expected to accelerate.
The S&P 500 Index SPX continues to make all-time highs. The benchmark finds near-term support at about 7,120, with perhaps a bit stronger support at 7,050 (last week's lows) and finally at 7,000.
At this point, after having broken out to the upside a couple of weeks ago and added on to that breakout, it would be disappointing to see SPX fall below 7,000. If that happens, selling can be expected to accelerate.
The U.S. Federal Reserve left interest rates unchanged this week, and there haven't been any major earnings surprises in the tech stocks which reported this week. So those won't be a catalyst for a volatile move.
SPX has been consistently closing at or above its +4<SIGMA> "modified Bollinger band" (mBB), but not by much now. Eventually, it will close below the +3<SIGMA> band, and that will generate what we call a "classic" mBB sell signal. We don't trade those, for their track record has too many whipsaws. Rather, once that occurs, we watch to see if further downside action develops. If it does then a McMillan volatility vand (MVB) sell signal will take effect. Just because there is a "classic" mBB sell signal does not guarantee that there will be an MVB sell signal to follow.
Equity-only put-call ratios continue to drop and thus remain on buy signals for the stock market. The weighted ratio is now at its lowest point for the year so far - but not as low as it was last fall. The standard ratio is dropping rapidly too but is not as low on its chart, relatively, as the weighted ratio is.
Market breadth has been slipping recently. The NYSE-based breadth oscillator is now on a sell signal, and the "stocks only" breadth oscillator could follow suit. Moreover, the cumulative breadth statistics - whether it be issues or volume - did not move to new all-time highs along with SPX over the past week. One week does make for a divergence in the market, but this might something to watch carefully as we go forward.
New highs continue to be greater than new lows on a daily basis, so this indicator remains bullish. It will retain its buy signal until new lows exceed new highs on the NYSE for two consecutive days.
VIX VIX is the one indicator that has retained some semblance of caution. It is somewhat elevated - trading the 18 to 20 area. Normally with SPX making new all-time highs, VIX would be in the 14-15 area. But it is not because traders are buying SPX puts and other protective strategies that are causing a rise in the price of VIX. It has been trading around its 200-day moving average for several days now. We would get a clearer picture of the trend of VIX when it moves away from that MA. The trend of VIX is important, because the stock market and VIX ty trend in opposite directions, so a trend signal from VIX can apply directly to stocks.
The construct of volatility derivatives remains modestly bullish for stocks. The term structures are sloping upwards, particularly in the front end of the curve. Moreover, the VIX futures are trading with a healthy premium to the spot VIX itself. We will continue to watch the two front months for any sign of inversion. That is if May VIX futures begin to trade at a higher price than June VIX futures, that would be a bearish warning sign for stocks.
In general, VIX continues to reflect some worries, but they are diminishing slightly. So, the overall picture is still bullish. Some confirmed sell signals are possible in the near future. We will act on them if they occur, but not before. Continue to roll deeply in-the-money calls up to higher strikes.
Earnings to watch
Next week's earnings reports include several major stocks that traders will be watching closely. These include Advanced Micro Devices $(AMD)$, Walt Disney $(DIS)$, Palantir Technologies (PLTR), PayPal Holdings (PYPL) and Trade Desk (TTD).
Stocks with a particular pattern of implied volatility heading into the earnings could wind up surprising the market.
For instance, the accompanying TTD two-year chart shows two graphs - the stock price on the lower graph and implied volatility on the upper one. Notice that implied volatility increases into a spike and then plunges, creating a sawtooth pattern. These implied volatility increases occur as the earnings date approaches. Then implied volatility plunges after the earnings are announced.
It's an optical illusion really, for the TTD options are not getting more expensive in terms of price as the earnings date approaches, but are remaining the same. That is, the option trading "universe" prices the straddle prior to the earnings and more or less keeps it at that price until the earnings are announced. An option that doesn't lose value to time decay (which these don't over the couple of weeks heading into the earnings) thus has the appearance of increasing implied volatility.
The table below shows several companies reporting earnings next week that trades should note. This list normally is comprised of stocks whose options have increased implied volatility. That is, the option market is expecting a potentially volatile move after the earnings news.
Our approach is to attempt to buy the shortest-term straddle possible (generally the one expiring on the Friday after the earnings reporting date) and to exit at the close of the first full day of trading after the earnings have been reported. For the stock listed in this table, that would mean buying the straddles expiring on May 8.
Specifically, the columns below (from left to right) are:
Date: the earnings reporting date,
Pm?: whether the earnings are to be reported before the market opens ("N") or after the market closes ("Y")
Symbol: the stock symbol
Needed: the most that we would pay for that near-term straddle, with the price of the straddle expressed as a percentage of the underlying stock price. In reality, this is the percentage move that is smaller than six of the past ten post-earnings moves in this stock.
Optvol: the 20-day average of total option volume on this stock. Low numbers here indicate a potentially illiquid situation.
Date pm? Symbol Needed OptVol 5/5/26 PM AMD 6.26% 557,496 5/6/26 AM DIS 6.91% 26,936 5/4/26 PM PLTR 12.04% 543,331 5/5/26 AM PYPL 6.58% 70,126 5/7/26 PM TTD 12.49% 42,255
Palantir may of special interest. The PLTR (May 8) at-the-money straddle has a $138 strike price, and that straddle is currently selling for less that 11% of the stock price. That is the "count" shown in the table above, which is 12.04%. Thus this straddle would be a buy prior to earnings.
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 options, roll if they become 8 points in-the-money.
Long 1 TSEM (May 15) 220 call and short 1 TSEM (May 15) 235 call: The position was rolled up again this week, on April 17, when TSEM $(TSEM)$ traded above $220. Roll up and out both sides, 15 points each, if TSEM trades at $235.
Long 1 BKR $(BKR)$ (July 17) 65 call and long 1 BKR (July 17) 60 put: Roll the call up at $75 and roll the put down at $50.
Long 2 ARKK (May 15) 78 calls: We will hold the calls as long as the weighted put-call ratio for ARKK ARKK remains on a buy signal.
Long 1 SFL (Aug. 21) 10 straddle: Roll the calls up if SFL $(SFL)$ trades at $13, and roll the puts down if SFL trades at $7.
Long 1 SPY (May 15) 705 call and short 1 SPY (May 15) 720 call: This is based on the "new highs vs. new lows" buy signal. The spread was rolled up when SPY traded at $705 on April 17. This will remain in force until new lows outnumber new highs on the NYSE for two consecutive days.
Long 1 SPY (May 15) 705 call and short 1 SPY (May 15) 720 call: This position is based on the equity-only put-call ratio buy signals. They will remain in place until the ratios bottom out and begin to trend higher. The spread was rolled up when SPY traded at $705 on April 17.
Long 2 MHK (May 15) 105 calls: We will hold these calls as long as the weighted put-call ratio of MHK $(MHK)$ remains on a buy signal.
Long 3 CCL (Jun. 18) 27 calls: We will hold these calls as long as the weighted put-call ratio for CCL $(CCL)$ remains on a buy signal.
Long 3 BWA $(BWA)$ (May 15) 55 calls: We will continue to hold as long as the put-call ratio is on a buy signal.
Long 1 BNS (Sep. 18) 75 straddle: Roll the calls up to the $85 strike if BNS $(BNS)$ trades at $85. Similarly, roll the puts down to the $65 strike if BNS trades at $65.
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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