The S&P 500 Index
hit resistance this week when an oversold rally failed near the 4080 level. This continues to support the idea that the index’s rise above 4100 in early February was a false upside breakout, and the onus is on the bulls to prove otherwise.
There was some optimism among stock investors early this week — until Federal Reserve Chair Jerome Powell spoke on Tuesday, and once again the market did not like what he had to say. This is reminiscent of the 1973-74 bear market when then Fed Chair Arthur Burns was notorious for driving the stock market lower every time he spoke.
Back then, it was the specter of the “three I’s” hanging over the market — inflation, interest rates and impeachment (President Richard Nixon was in danger of being impeached over the events surrounding the Watergate scandal, although that never happened). Now it’s just “two I’s” — inflation and interest rates — but they are still in place, as Powell pointed out.
There is a strong overhead resistance area for the S&P 500 from 4080 up to 4200, and then more resistance at 4300 above that. On the downside, there is support at 3930-3940 (last week’s lows), with further support near 3900, and then major support between 3760 and 3850 (the December lows).
The McMillan Volatility Band (MVB) sell signal of early February is still in place, although we have rolled our positions down. The target for this trade is for SPX to trade at the -4σ “modified Bollinger Band.” It has touched the -3σ Band but has not reached its target.
Equity-only put-call ratios have remained on sell signals, as both ratios have risen sharply this week. They will continue to remain on sell signals until they roll over and begin to decline — something that does not seem likely in the near term. Also, the total ratio has risen sharply as well.
Breadth has been sloppy, and as a result our two breadth oscillators are pointing in opposite directions. Breadth on the NYSE has been weakening, but the last signal generated there — a buy signal on Feb. 23 — is still in place (barely). However, the “stocks only” breadth oscillator (which covers a wider spectrum of stocks) deteriorated badly over the past couple of weeks and is back on a sell signal, having canceled out a previous buy signal. We will wait until there is some agreement here before taking on a position based on the breadth oscillators.
New 52-week lows on the NYSE edged ahead of new 52-week highs yesterday (March 8) and a repeat today would stop out the current buy signal from this indicator. We have seen new lows outnumber new highs on the NYSE occasionally over the past month, but not yet over two consecutive days.
So, the above indicators are all weakening to a certain extent, but the volatility indicators are not. The CBOE Volatility Index — the VIX —
remains in its own world. The “spike peak” buy signal of March 1 remains in place, as does the intermediate-term trend of a VIX buy signal, which was originally generated last November (circle on the accompanying VIX chart). The only potential negative on the VIX chart is its level near 18 — from which it has repeatedly bounced during this bear market, as it did on Thursday. This “low” VIX is justified somewhat by the fact that the realized volatility of SPX is now down to 15%, which is the lowest it’s been since this bear market started in January of 2022.
The construct of volatility derivatives is generally favorable in its outlook for stocks, as well. That’s because the term structures are sloping upwards and the VIX futures are trading at a premium to VIX. There is one small problem in this area, and that is that the CBOE’s short-term Volatility Index (VIX9D) is trading above the price of VIX. Yet its rise is due to a couple of upcoming near-term events (unemployment report and monthly CPI report), which could produce some volatility in the market.
Overall, we are maintaining our “core” bearish position because of the negativity of the SPX chart and because of the sell signals from the equity-only put-call ratios. However, we will trade confirmed signals around that “core” positions if they are issued by other indicators.
New recommendation: Omnicom Group (OMC)
There is a new sell signal from the weighted put-call ratio in OMC
The stock has already fallen slightly below support, so we can act on the signal at this time.
Buy 3 OMC Apr (21st) 90 puts
At a price of 3.00 or less.
OMC: 89.36 Apr (21st) 90 puts: recently 1.95 bid, offered at 3.00
We will hold these puts as long as the put-call ratio for OMC remains on a sell signal. As one can see from the accompanying put-call ratio chart, signals from extreme levels on OMC have been successful over the past year.
We are using a “standard” rolling procedure for our 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.
Long 1 SPY March (17th) 410 call and Short 1 SPY March (17th) 425 call: This spread was bought in line with the “New Highs vs. New Lows” buy signals. It was rolled up on January 26th, when SPY
traded at 404, and then it was rolled up again at expiration. Stop out of this position if new lows on the NYSE exceed new highs for two consecutive days.
Long 3 XM Mar (17th) 15 calls: The stock
has started to move higher, so roll March (17th) 15 calls up and out to the April (21st) 17.5 calls.
Long 1 SPY March (17th) 394 put and Short 1 SPY March (17th) 369 put: This bear spread was bought in line with the McMillan Volatility Band (MVB) sell signal, and was then rolled down last week. This trade would be stopped out if SPX were to close back above the +4σ Band. Its target is the -4σ Band.
Long 2 CTLT March (17th) 70 calls: This takeover rumor is still “in play,” although the stock
has fallen back slightly. Continue to hold while these rumors play out.
Long 3 MANU March (17th) 25 calls: The potential takeover has hit a snag, in that the current owners think the Manchester United
is worth far more than analysts can justify. We are going to hold.
Long 2 GRMN April (21st) 95 puts: These were bought on February 21st, when GRMN
closed below 95. We will remain in this position as long as the GRMN weighted put-call ratio remains on a sell signal.
Long 2 SPY April (21st) 390 and short 2 SPY April (21st) 360 puts: This is our “core” bearish position. Initially, we will set a stop to close out this position if SPX closes above 4200.
Long 1 SPY Apr (6th) 395 call and Short 1 SPY Apr (6th) 410 call: This call bull-spread was bought in line with the VIX “spike peak” buy signal. It was confirmed at the close of trading on Wednesday, March 1. Stop out if VIX closes above 23.73. Otherwise, we will hold for 22 trading days.
Long 10 LLAP Apr (21st) 2 calls: Stop out if LLAP
closes below 1.90.
Long 1 SGEN
Apr (21st) 180 call and Short 1 SGEN Apr (21st) 200 call: We will hold without a stop initially, while this takeover rumor plays out.
All stops are mental closing stops unless otherwise noted.
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 best-selling book, Options as a Strategic Investment.
©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.