The stock market has broken decisively upward, as measured by the S&P 500 index SPX. The rally began in late October, initially driven by oversold conditions and favorable seasonal patterns. This took SPX to levels around 4400, where it faced resistance from three different factors. But late last week, it managed to close above there, indicating a new bullish trend. This week, favorable CPI numbers and heavy short-covering have fueled the rally.
SPX has already risen to the first resistance level at 4510 (mid-September high). There is also another resistance level at 4540 before facing the 2023 high at 4600. If they are all surpassed, early 2022 levels – including the all-time high of 4800 – come into play.
Moving forward speed may be a bit of a problem. Yes, there is solid support at the 4400 level – the area that drove this latest move. But there are shortcomings all over the SPX chart. Actually, there are four of them. The most recent would be filled on a pullback to 4420, and it is likely that one will be filled. The others are below 4400, with the lowest (and oldest) down at 4100. It doesn’t look like these will be filled anytime soon, but most gaps are usually filled on the SPX, so this could be something that could happen next year.
The most recent Macmillan Volatility Band (MVB) buy signal, which occurred on October 31, has already successfully reached its target of the +4σ band. In fact, now that the SPX has risen above that band, a new “classic” sell signal will be coming soon. It remains to be seen whether that “classic” sell signal will become a full-blown MVB sell signal. We do not trade “classic” signals, only MVB signals. The “classic” sell signal would be when the SPX closes below the +3σ band – which today would mean the SPX closes below 4440.
Equity-only put-call ratios are finally on the same page: Both the standard and weighted ratios are on buy signals. They will stay there until they roll over and begin to get up. There was a slight upward “tilt” in the standard ratio, but our computer analysis programs are “saying” that this ratio is still at a buy signal (for the stock). There have been arbitrage-related distortions – particularly of the weighted ratio – but the signs are bullish right now.
The width is swinging wildly back and forth. At the present time, the Width Oscillators are both on buy signals (or more appropriately, were recently punctuated by sell signals), and they are in overbought territory. November 14 was a “90% up day”, which is a strongly overbought situation. When the SPX is making a new upside breakout, these breadth oscillators are generally a good thing to be overbought. Frankly, I would have thought they would have been overbought more than before, because at current levels, they could easily get back to selling signals again.
The number of new highs on the NYSE rose above 100 on one day this week and reached 92 new highs the next day. But this was not enough for a buy signal – it had to be 100 or higher for two consecutive days. Therefore, this indicator is currently in a neutral position.
The VIX VX00 has declined during this rally, but it seems reluctant to drop below the 13-14 area, which would be the low of the year. The VIX is largely driven by the price of SPX puts, and it appears that “big money” is still buying puts at these relatively cheap prices. Thus, the VIX cannot go down. It is interesting to note that despite the recent bullishness, these big traders still have some concerns about this market.
The “Spike Peak” buy signal (green “B” on the attached VIX chart) remains in place. Those signals last for 22 trading days (about a month), so there’s another week or more to run it. There is no trend on the VIX signal, but as you can see from the chart, the 20-day moving average of the VIX is about to move below the 200-day moving average. With VIX below the 200-day moving average, a VIX buy signal will trend. The last of them was November 2022, and it lasted for quite a long time. However, he came from the crossover level of 26, and will be at the crossover level of 17. That is, there was much more room for the VIX to fall to 26 than to 17.
The build-up of volatility derivatives has returned to a solid bullish outlook for stocks. Term structures are on an upward slope, and VIX futures are trading at large premiums to the VIX. December VIX futures are the new front month, so the warning signal will be if their price rises above January VIX futures. At present there is no remote possibility of this happening.
With the SPX breakout, we are now in a “core” bullish position and will trade other confirmed signals around it.
New Recommendation: Bio-Techn Corp. (TECH)
There is a new weighted put-call ratio buy signal in tech. It is in a sharp downward trend, but recent activity has seen the formation of lower lows – in the form of higher highs and higher lows – taking place.
Buy 2 Tech Jan (19) 60 Calls According to the market.
Tech: 60.70 Jan (19) 60 Call: Bid 3.30, offered at 4.20
We will hold these calls as long as TECH’s weighted put-call ratio is at a buy signal.
New Recommendation: Kraft-Heinz (KHC)
Similarly, a new weighted put-call ratio buy signal has been confirmed in KHC. Here, the stock has also been in a downtrend for a long time and now a small bottom formation has formed in it.
Buy 4 KHC Jan (19) 32.5 Call According to the market.
KHC: 33.60 Jan (19) 32.5 Call: Bid 1.52, offered at 1.58
We will hold these calls as long as the weighted put-call ratio for KHC remains at a buy signal.
follow up action:
Unless otherwise noted, all stops are mental closing stops.
We are using a “standard” rolling procedure for our SPY spreads: In any vertical bullish or bearish spread, if the underlying hits the short strike, roll the entire spread. It will be rolled up in the case of a call bull spread or rolled down in the case of a bear put spread. Unless otherwise instructed, stick to the same finish and keep the same distance between strokes.
tall 1 spy
December (15th) 420 Put: Basically just bought in line with equity-put-call ratio sell signals. It had broken down several times before the recent market rally. This was our “core” bearish position, but it should be sold now as the SPX has broken out to the upside.
long 2 ending EQR
November (17th) 52.5 Put: Technically, the weighted put-call ratio here is still at a sell signal, but the ratio has reached extremely oversold territory, so we are not going to roll this put. Let it end, closing a profitable trade.
long 3 xle is coming to an end
November (17th) 86 Put: As long as XLE’s weighted put-call ratio remains at a sell signal, we will hold it. roll up December (15th) 85 put. If XLE trades at 80, roll down to December (8) 80 puts.
Long 1 SPY Dec (1st) 448 Call: This spread was purchased in line with the CBOE equity-only put-call ratio buy signal. Per our previous instructions, the original November (17) 434-452 call bull spread was rolled into these December (1) 448 calls when the SPX gapped up on November 14. Roll up the call if it gets at least 8 points in-the-money. We are stuck without stopping for now.
long 3 ending es
November (17) 60 Call: We will maintain this position as long as the weighted put-call ratio chart for ES remains on a buy signal. roll up December (15) 60 calls.
long 4 xlp
Dec (1) 68 Call: in After a couple of weeks of trying the calls were finally bought on November 2, when XLP closed above 68.04. Raise trailing closing stop to 68.80.
Long 1 SPY December (15th) 428 calls and short 1 SPY December (15th) 443 calls: This position was purchased in line with the recent MVB buy signal. Since SPX traded above the +4σ band, this spread should be sold (taking good profits).
Long 1 SPY Dec (8th) 436 Straddle (ie, long 436 call and long 436 put): This situation has improved significantly with the rise in the market. Sell the entire straddle now and change it to: Buy 1 SPY December (8th) at-the-money call. If it becomes 8 digit ITM then roll up the call. Since the position has rolled up, hold on without holding for now. In short, this is our “core” bullish position.
long 5 avpt
December (15) 7 calls: Increase trailing closing stop to 7.25.
Unless otherwise noted, all stops are mental closing stops.
Send questions to: [email protected].
Lawrence G. McMillan is Chairman of McMillan Analysis, a registered investment and commodity trading advisor. Macmillan may hold positions in the securities recommended in this report in both personal and client accounts. He is an experienced trader and money manager and author of the best-selling book, Options as strategic investments, www.optionstrategist.com
©Macmillan Analysis Corporation is registered with the SEC as an investment advisor and with the CFTC as a commodity trading advisor. The information contained in this newsletter has been carefully compiled from sources believed to be reliable, but accuracy and completeness are not guaranteed. Officers or directors of Macmillan Analysis Corporation or accounts managed by such persons may have positions in the securities recommended in the Advice.