Options bets and volatility are sending buy signals, which sets up the stock market for a potential upside breakout
The S&P 500 is nearing an upside breakout, based on these positive signals in the options market.
The S&P 500 index is showing signs of coming out of its recent slumber, and most of the signals coming out of the options market are saying a big rally may be imminent.
After making new all-time highs in August, the S&P 500 SPX has been stuck in a narrow 7,640 to 7,700 range. On Thursday, however, it climbed 0.5% to close above the top of that range, as Nvidia's (NVDA) upbeat earnings appeared to be just what the S&P 500 needed to break out of that range.
If the index can reach a little higher, a close above 7,740 would be especially positive. The S&P 500 reached an intraday high of 7,741.27 on Thursday, before paring some gains to close at 7,730.99.
Conversely, a close below 7,600 would be a big problem.
Meanwhile, not all internal indicators are so positive. Breadth has recently been negative, meaning most stocks were actually declining as the index rose. As a result, breadth oscillators remain on sell signals.
But equity-only put-call ratios remain bullish, as they continue to fall - meaning activity in bullish call options is rising relative to volumes in bearish put options.
And the Cboe Volatility Index VIX remains in its own lackluster world, as it has been trading mostly in a narrow 15 to 16 range, well below the longer-term average of closer to 20. (The VIX is known as the market's "fear gauge," as it tends to rise when the stock market falls and decline when the market rises.)
So the trend of the VIX's buy signal for stocks remains in place. And the construct of derivative trades on volatility remains bullish, too.
The bottom line is that the S&P 500 chart remains positive, and we may have a chance to see an upside breakout after the positive Nvidia earnings.
And while the market still has to contend with Federal Reserve Chairman Kevin Warsh's Jackson Hole speech on Friday, it doesn't seem likely that the new Fed chair is going to stir the markets much with his rhetoric - but anything is possible.
New recommendation: Allegion
We recently had a successful call buy in Allegion's stock $(ALLE)$, based on a put-call-ratio buy signal. That buy signal occurred last July (see accompanying chart below), when there was heavy put buying and plenty of pessimism regarding the stock. The situation has now completely changed.
Currently, there is heavy call buying, and the put-call ratio is at the bottom of the chart. That reflects too much optimism currently. So a new put-call-ratio sell signal for Allegion's stock has been generated (green "S" on the chart).
Buy 1 ALLE (Oct. 16) $160 put, in line with the market.
As usual, we will hold these puts as long as the weighted put-call ratio for ALLE remains on a sell signal.
New recommendation: Compass Minerals
The long-term options on Compass Minerals' stock $(CMP)$ are somewhat underpriced, compared with the historic movements in the stock itself. This is conducive to a straddle buy recommendation. Straddle buys can profit if the stock moves far enough in either direction.
We typically buy our straddles four or five months out in time, to allow ample time for the stock to move.
Buy 2 CMP (Dec. 18) $25 calls and buy 2 CMP (Dec. 18) $25 puts, for a combined price of $6.50 for each straddle.
Once the position is established, we will roll the options if the stock moves far enough. If CMP trades at $32.50 or higher, roll the calls up to the $32.50 strike. Conversely, if CMP trades down to $17.50, roll the puts down to the $17.50 strike. Otherwise, we are holding without a stop for now.
Follow-up actions:
All stops are mental closing stops unless otherwise noted. Also, for outright long options, roll if they become 10 points in-the-money.
Long 2 RTX (Sept. 18) $220 calls: Sell these calls, since the weighted put-call ratio for RTX's stock (RTX) has rolled over to a sell signal.
Long 1 SPY SPY (Aug. 28) $772 call and short 1 SPY (Aug. 28) $797 call: This is the trend of VIX buy signal. Stop yourself out if VIX closes above 19 for two days in a row.
Long 1 JKHY (Sept. 18) $165 call: As usual, we will hold this call as long as the weighted put-call ratio for Jack Henry & Associates' stock $(JKHY)$ remains on a buy signal.
Long 6 KEY (Sept. 18) $23 puts: We will hold these as long as the weighted put-call ratio for KeyCorp shares (KEY) remains on a sell signal.
Long 5 VIX (Sept. 16) 24 calls: We are going to retain a small position in "long volatility," just because of the seasonal trade here.
Long 2 ESS (Sept. 18) $280 puts: As usual, we will hold these puts as long as the weighted put-call ratio for Essex Property Trust shares (ESS) remains on a sell signal.
Long 2 CVS (Sept. 18) $97.5 puts: We will hold as long as the weighted put-call ratio for CVS Health's stock (CVS) remains on a sell signal.
Long 3 SLV (Sept. 18) $59 calls: Raise the trailing closing stop to $58 for the calls for the iShares Silver ETF SLV.
Long 1 TSLA (Sept. 18) $335 call and short 1 TSLA (Sept. 18) $385 call: As usual, we will hold as long as the weighted put-call ratio for Tesla's stock (TSLA) remains on its original buy signal.
Long 5 VIX (Sept. 16) 24 calls: We will add to this position if VIX closes above its 200-day moving average for two consecutive days.
Long 4 EEM (Sept. 18) $66.5 calls: We will hold this position as long as the put-call ratio for iShares MSCI Emerging Markets ETF EEM remains on a buy signal.
Send questions to: lmcmillan@optionstrategist.com
Lawrence G. McMillan is president of McMillan Analysis, a registered investment and commodity trading adviser. 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 adviser and with the CFTC as a commodity trading adviser. 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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