Table of Contents
The S&P 500 index is having trouble sustaining a rally, despite having seen massive oversold conditions in late January.
had the obligatory oversold rally which has carried it back to, and slightly above, its declining 20-day moving average – to the 4600 level. That is a typical rally in a bearish market.
But unless it can clearly overcome the downtrend line on its chart (drawn in blue on the accompanying chart), the overall interpretation of the SPX chart is bearish. On the downside, there is support at last week’s lows, near 4450. Then there is the major support in the 4200-4300 area. If that were to be broken, then the next leg of a bear market would be underway.
There is a McMillan Volatility Band (MVB) buy signal in place (marked as a green “B” on the accompanying chart). Its target is the upper Bands; the +3σ Band is just below 4700 and declining. On the downside, this signal would be stopped out by a close below the -4σ Band, which is far below current prices.
Market internals are more positive than the SPX chart. For example, the weighted equity-only put-call ratio has given a buy signal. The standard ratio appears to be rolling over to a buy signal as well, although the computer programs that we use to analyze these charts are still not rating the standard ratio as a “buy.” In any case, these ratios are at extremely high (i.e., oversold) levels, and buy signals from these levels are normally strong ones.
Market breadth has improved from its woeful state of January. Both breadth oscillators are on buy signals. In fact, the “stocks only” breadth oscillator has already moved into overbought territory, slightly. The only problem with that is that if the positive breadth cannot be sustained, a sell signal could be forthcoming in short order.
The same is not true of the NYSE breadth oscillator. In what is a definite reversal of form, “stocks only” breadth is now doing better than NYSE breadth.
New 52-week lows have generally continued to be dominant over new 52-week highs. There was some improvement in that area this week, but overall this indicator is still in a negative state.
The VIX “spike peak” buy signal of Jan. 24 remains in place, and it has been a strong signal. We are tightening stops on that particular trade as the market advances. The other VIX indicator – the trend of VIX – is not bullish, however, as both VIX
and its 20-day moving average continue to trade above the 200-day MA.
The trend of VIX is an intermediate-term indicator, and it won’t reverse from its bearish (for stocks) stance unless both close below the 200-day MA, which is currently just above 19 and rising.
The construct of volatility derivatives is bullish once again. The VIX futures are trading at a premium to VIX, and the term structures of both those futures and of the CBOE Volatility Indices slope upward. Those are generally bullish signs for stocks.
The seasonal patterns were terrific this year, but they are over now, so the market no longer has the tailwind of the January Seasonal indicator at its back. Note: I am talking about the January Seasonal indicator, which is bullish at the end of January – not the “traditional” January barometer, which is a year-long indicator (and thus not of much use to a trader) and which is negative for this year.
As long as the trends are negative – i.e., the downtrend in SPX and the uptrend in VIX – this is a potential bear market. Yes, oversold conditions have produced some buy signals, and we generally will trade those, but one should not assume that the market has reverted to its nearly 10-year-long bullish state just because of that.
There is an old adage that no one makes money in a bear market: the bulls hang on because it continuously looks oversold (and thus too late to sell), and the bears get destroyed by the massive oversold rallies that take place on the way down. We have not seen a bear market of any length since the 2007-2009 bear market, but there is a possibility that one is underway now. The bearish scenario would be proven false if the trends of SPX and VIX can reverse.
New recommendation: Radian Group
has had heavy option volume this week, as rumors persist that the company is exploring a potential sale. Stock volume patterns are positive and improving. There is support at 22.50.
Buy 6 RDN Mar (18th) 24 calls
At a price of 1.35 or less.
RDN: 24.00 Mar (18th) 24 call: offered at 1.35
If bought, we will hold without a stop while these rumors play out.
New recommendation: ‘Core’ bearish position
In light of the Market Comment above, we are going to begin to establish a “core” bearish position. We will continue to trade oversold buy signals around this position, but as long as the trends of SPX (down) and VIX (up) persist, we want to have this position in place.
Buy 1 SPY April (14th) 450 puts
And sell 1 SPY April (14th) 420 puts
For a debit of 7 points or less.
NOTE: “regular” April expiration this year is on Thursday, April 14, since April 15 is Good Friday and the stock market will be closed.
We will use the VIX trend for setting a stop for this trade: stop yourself out if both VIX and its 20-day moving average close below the VIX 200-day MA. On a weekly basis, we will also observe the trend of SPX, but it is easier for readers for follow these VIX indicators.
All stops are mental closing stops unless otherwise noted.
Long 2 EMN Feb (18th) 130 calls: Continue to hold without a stop while these takeover rumors play out.
Long 1,000 FTK: Set a closing stop at 0.60.
Long 2 ARNA Feb (18th) 90 calls: We bought these because the spread in the takeover deal of Arena Pharmaceuticals
was too wide, in our opinion. Continue to hold.
Long 2 JOBS April (14th) 50 calls: Hold without a stop while the takeover process works out.
Long 2 SPY Feb (25th) 450 calls and short 2 SPY Feb (25th) 465 calls: This spread was bought in line with the VIX “spike peak” buy signal of Jan. 24 and was then rolled up. Stop yourself out if VIX returns to “spiking mode” – that is if VIX closes at least 3.00 points higher over any one-, two- or three-day period. Currently, the stop would be a VIX close above 24.96, since VIX closed at 21.96 on Feb. 1.
Long 0 SPY Feb (4th) 450 call: This position was bought in line with the January Seasonal buy signal. We originally bought the 431 calls, then per instructions rolled up to the 439 calls, and then rolled up again to the 450 calls. The seasonal trade was a strong winner, although holding for the fifth day wasn’t profitable.
Long 1 SPY Mar (18th) 448 call and short 1 SPY Mar (18th) 463 call: This position was taken in line with the MVB buy signal. This signal will remain in effect, unless SPX closes below its -4σ “modified Bollinger Band” (mBB), but even that would only set up the next buy signal. The “target” for this trade is the upper Bands.
Long FUN Apr. (14th) 60 calls: We will hold without a stop as these takeover rumors play out.
Send questions to: [email protected].
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 the bestselling book “Options as a Strategic Investment.”
Disclaimer: ©McMillan Analysis Corp. 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.