Last week, the S&P 500 index plunged to new relative lows. It is now trading at prices last seen in March 2021. This latest move lower breached support at 4100-4200 and prompted a quick move down to potential support at 3900. The next support area below is 3700: the lows of February and March 2021.
The S&P SPX,
it’s pretty oversold, though as readers know, “oversold doesn’t mean buy.” Still, oversold rallies accompany bear markets. They typically break above about the level of the 20-day declining moving average or maybe a little above that.
The bulls have tried to engineer a couple of oversold rallies of late, but they turned out to be one-day affairs that, while looking spectacular for a day, had no staying power. Those that occurred on April 28 and May 4.
Currently, the 20-day moving average is at 4240 and it is falling rapidly. Above that, those two one-day rallies peaked near 4300, so the general 4240-4300 area represents resistance.
So far, SPX has not set up a new McMillan Volatility Band (MVB) buy signal, because it has not closed above 4308. I would set a new signal at lower levels if it could close below -4σ” Modified Bollinger Band . “He hasn’t been able to do that.
In fact, SPX has been “walking” the narrow alley between the -3σ and -4σ bands. Those bands are falling faster now because the observed volatility has increased substantially. The S&P’s 20-day historical (realized) volatility is 31%, a very high level.
Equity-only put-call ratios continue to rise sharply, and that means they are still on the sell side. They will only generate buy signals when they turn around and start to decline. This is the highest level they have been at since March 2020, and they are certainly in oversold territory, but not in buying signals yet.
Meanwhile, the total put-call ratio finally posted a reading above 1.00 on one day last week. A buy signal from that indicator does not normally occur until its 21-day moving average reaches 0.90 or higher. Right now, it’s 0.837, so it’s nowhere near a buy signal either.
The breadth of the market has been poor, as one might imagine. On May 5th there was another “90% drop day”. Both amplitude oscillators are on sell signals and are heavily oversold. These oscillators are almost at the same levels as they were in late January when an oversold rally occurred, but the market psyche was much more bullish in late January than it is now.
In any case, it will take at least two or three days of positive amplitude (ie more advances than declines) for them to become buying signals.
The new 52-week lows continue to erase the new 52-week highs. One day this week only 5 new highs were recorded on the New York Stock Exchange. This indicator remains bearish and deeply oversold. It would take two days where the new highs break the new lows on the NYSE to turn this bullish. That may happen sooner than one might think, but it doesn’t seem to be in the cards right now.
The most recent VIX “peak peak” buy signals have stopped, but that also means that VIX VIX,
is back in “spikes mode”. Therefore, a new “peak peak” buy signal will be established soon. This indicator is quite sensitive to oversold reversals and is therefore often one of the first bullish indicators in a declining market.
However, so far recent signals have been losing (the blue “B’s” on the attached VIX chart are losing “peak high” buy signal trades, but the system we use to trade this indicator). This is somewhat typical action during bear markets, and the last time it happened was between March and April 2020.
The VIX trend remains bearish for stocks as both the VIX and its 20-day moving average are above the 200-day moving average. That would only be interrupted by the VIX closing below 200 days, which won’t happen anytime soon as 200 days is around 22 (and slowly climbing).
The volatility derivative construct has turned moderately negative in its outlook for the stock market, and is struggling to avoid turning seriously negative. May VIX futures from the previous month are trading slightly higher than June futures. If May rises more than 1.00 points above June, that would generate a more serious sell signal.
Meanwhile, the VIX futures term structure is skewed modestly lower, which is another mild negative for equities. If that term structure is reversed abruptly, it would generate a medium-term sell signal for the stock.
In general, the VIX and its derivatives have not responded in the way one would normally expect to see in a bear market. VIX hasn’t even broken above 40 yet, and the term structure is still relatively flat. Sometimes this happens, most notably in February and March 2009, when the VIX was flat (albeit at the 55 level) while the stock market plunged to bear market lows. A less serious but similar case also occurred in December 2018.
In short, we continue to hold a “core” bearish stance and will do so as long as the SPX (down) and VIX (up) trends hold. We will trade oversold buy signals around that “core” position, but only if they are confirmed signals.
New Recommendation: Possible VIX ‘Peak Peak’ Buy Signal
The highest price the VIX has reached since it stopped the previous buy signal was 35.48 on May 9. A new VIX “peak high” buy signal will occur when the VIX closes at least 3.00 points below the highest price it has reached, using the price from May 9 onwards.
IF VIX closes at least 3.00 points below the highest price it reached as of May 9,
THEN buy 1 June SPY (17the) at-the-money call
And sells 1 June SPY (17the) call with an attractive price 20 points higher.
New recommendation: Black Knight (BKI)
A takeover bid for The Intercontinental Exchange ICE,
was accepted by Black Knight BKI,
that was supposedly “worth” $85. Actually, it’s less than that, because part of the settlement is for actions by ICE, which has plummeted since the settlement was announced.
Examining the press release, it appears that the deal is 80% cash at $63.20, plus 20% ICE stock. So the deal is 63.20 + 0.2 * ICE, which is worth $82.11 with ICE trading at 94.55. BKI is trading at 69.34, which is a very wide spread. So we are going to buy BKI calls, looking for the spread to narrow.
Buy 3 BKI June (17the) 70 calls
At a price of 2.50 or less.
BKI: 69.44 June (17the) 70 call: offered at 3.00
We will hold without stopping initially.
follow up action
All stops are mental shutdown stops unless otherwise noted.
We are going to implement a “standard” rolling procedure for our SPY spreads: in any vertical up or down spread, if the underlying hits the short strike price, then roll the entire spread. that would be roll up in the case of a bull spread call, or roll below in the case of a bear put spread. Stay on the same expiration and keep the same distance between hits unless otherwise noted.
Long 2 ZEN May (20the) 125 calls and Short May 2 (20the) 140 calls: Stocks soared higher as Zendesk ZEN,
began to evaluate strategic alternatives. Hold on nonstop while activist activity is in progress.
Long 3 SAVE May (20the) 25 calls: Hold on tight for now as there are still competing offers for Spirit Airlines SAVE,
Long 2 ENV May (20the) 80 calls: Continue to hold on nonstop as takeover rumors unfold.
Long 2 SPY May (20the) 401 puts and Short 2 SPY May (20the) 376 puts: We originally bought this spread in line with the VIX trend sell signal. It dropped when SPY traded at 401 on May 9. We will maintain this spread as long as the VIX remains above its 200-day moving average, which is currently sitting around 22.
Long 0 SPY May (27the) 428 call and short 0 SPY May (27the) 443 call: This spread was bought on April 28, the day the VIX’s “peak peak” last buy signal occurred. It was stopped on Monday, when the VIX closed above 33.81.
Long May 4 MAT (20the) 25 calls: We bought these due to takeover rumors that have been spreading. The closing trailing stop remains at 24.
Long 0 CHK May (20the) 95 calls: These calls were purchased last week and then discontinued on Monday, when Chesapeake Energy CHK,
closed below 86.
Send your questions to: firstname.lastname@example.org.
Lawrence G. McMillan is president of McMillan Analysis, a registered commodity trading and investment 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”.
Disclaimer: ©McMillan Analysis Corp. 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 its accuracy or completeness is not guaranteed. Officers or directors of McMillan Analysis Corp., or accounts managed by such persons, may hold positions in the securities recommended in the notice.