Opinion: How to trade this undecided stock market
The S&P 500 continued to hover just below its still rising 200-day moving average.
When the S&P SPX,
first falling below 4420, it briefly accelerated, providing fuel for the bears. But then it quickly found support and rebounded in a range just above 100 points for over a week.
A 100 point range is nothing these days, so it’s basically a very undecided market with a few big ups and downs days, but little change overall.
The SPX chart remains in a downtrend, as indicated by the sloping blue lines on the attached chart. Minor support and resistance are at 4370 and 4630 (the thinner red horizontal lines on the chart), while major support and resistance are at 4100-4200 and 4700-4800, respectively.
“Modified Bollinger Bands” (mBB) are now moving sideways and have contracted somewhat since realized volatility continues to decline. There is no McMillan Volatility Band (MVB) signal at this time.
Equity put-call ratios only are on sell signals. The weighted ratio unexpectedly increased a few days ago, and our computer analysis programs now classify it as a “sell” signal. The standard ratio has now risen, and it too is turning into a sell signal.
If they reach new relative lows, that would negate those recent sell signals, but it’s an interesting development. It should also be noted that the buying and selling ratios of individual stocks also generate many sell signals.
The breadth of the market went back and forth, failing to maintain a trend. It’s nothing new, because he’s been doing it all year. More recently there have been width oscillator sell signals on April 5th, buy signals on April 13th, then a descent to a sell signal and finally, over the past two days, signals of width oscillators. ‘purchase. That’s too much stock swinging to trade in a weekly publication such as this newsletter, but it’s an example of the market’s indecisiveness as a whole.
New 52-week lows continue to dominate new 52-week highs in all three of our datasets (NYSE, NASDAQ, and “equities only”). It wasn’t until Wednesday that new highs broke new lows, with new highs above 100. If this persists for another day, this indicator will move into a buy signal.
The volatility complex was more supportive for equities, but not completely. There was the VIX “spike spike” buy signal on April 7th, and then there was another “spike spike” buy signal on April 13th. We don’t trade the second signal, or the straddle, but we took positions in line with the first buy signal.
The trend of VIX VIX,
is still negative, but barely. The trend would turn positive if the VIX and its 20-day moving average were to cross below the 200-day MA. The square in the lower right of the attached chart shows how close the 20-day is to such a cross below the 200-day MA.
However, a similar situation in mid-January (another box on the chart) never ended and the market fell sharply from there.
In fact, the 20-day MA of VIX has not been lower than the 200-day MA since late last November (the circle on the attached chart). A near VIX below 20 would probably be enough to generate a buy signal here.
The construction of volatility derivatives remains bullish for equities. The first month VIX futures contract is now the May contract because April expired on April 20. We now observe the relationship between May and June. As long as May is trading lower than June, this is positive for stocks. Additionally, the term structures of VIX futures and CBOE volatility indices continue to rise – another positive sign for stocks.
In summary, the indicators remain mixed as SPX is hovering in a relatively tight range. The situation will not be definitively resolved until SPX rises above 4638 or falls below 4100.
Right now we have new sell signals from the put-call ratios (usually a reliable indicator) and new buy signals from the width oscillators (normally a short-term signal). The deciding factor could be a trend change in the VIX, i.e. the 20-day MA closing below the 200-day MA.
However, expecting this could be a mistake, especially in a weekly release. We are therefore going to put in place a conditional recommendation.
New Recommendation: Conditional SPY Spread
Today, SPX is up sharply in pre-market trading – in part on Tesla’s strong TSLA earnings report,
– and that could be enough to change the trend of the VIX. But if the market cannot hold onto those gains, then sell signals in equity put-call ratios only should be considered. Basically, if the VIX trend changes today or Friday, then we will take a bullish position. But if not, we will take a bearish stance.
IF VIX closes below 7:00 p.m. on April 21 or April 22,
Buy 2 SPY Mai (20and) parity calls
And sell 2 SPY May (20and) call with a strike price 13 points higher.
However, if VIX fails to close below 19 on any of these dates, then we want to adopt a new bearish gap:
IF VIX does not close below 7:00 p.m. on the following two days,
Buy 2 SPY Mai (20and) at-the-money put options
And sell 2 SPY May (20and) puts with a striking price 25 points higher.
New Recommendation: Abbott Labs
A new put-call ratio buy signal has been generated in Abbott Labs ABT,
ABT over a month ago. However, the stock got stuck in a range and was unable to realize the outlook of this buy signal. The put-to-call ratio remained elevated (i.e. in oversold territory) as ABT traded sideways during this period. If it can break out on the upside, we want to own it.
IF ABT closes above 124.50,
THEN buy 2 ABT June (17and) 125 calls
All stops are mental closing stops unless otherwise stated.
We will implement a “standard” rolling procedure for our SPY spreads: in any bullish or bearish vertical spread, if the underlying hits the short strike, then roll the entire spread. It would be rolling at the top in the case of a call bull spread, or roll down in the case of a bear put spread. Stay in the same exhale and keep the same distance between strikes unless instructed otherwise.
Long 2 ZEN May (20and) 125 calls and courts May 2 (20and) 140 calls: The stock widened higher when Zendesk ZEN,
began to evaluate strategic alternatives. Hold continuously while militant activity is in progress.
Long 2 ORCL May (20and) Calls 82.5: We bought call options around the close of trading on March 15, when Oracle ORCL,
closed above 78, then rolled up later. The put-call ratio buy signal is starting to fade, so set a closing stop at 78.50, common ORCL basis.
Long 0 KSS April (14and) 62.5: These calls expired worthless last week, and we are not going to replace them, as options volume has started to fade in Kohl’s KSS,
Long 2 FRT May (20and) 125 calls: Hold as long as the put-call ratio stays on a buy signal, as it continues to do.
Long 2 SPY May (6and) 449 calls and short 2 SPY May (6and) 464 calls: This gap was bought in line with the last “peak” VIX buy signal from April 7th. Stop if VIX closes above 24.78.
Long 3 SAVE May (20and) 25 calls: Hold on tight for now, as competing offers are still in place for Spirit Airlines SAVE,
Long 2 ENV May (20and) 80 calls: The volume of options remained active. Keep holding on non-stop as the takeover rumors unfold.
NOTE: LIDR conditional call purchase did not occur, from AEye LIDR,
did not close above 6. Takeover rumors have died down, so rescind that recommendation.
Send your questions to: firstname.lastname@example.org.
Lawrence G. McMillan is President of McMillan Analysis, a registered commodity trading and investment 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 the bestselling book “Options as a strategic investment“.
Warning: ©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 its accuracy and completeness are not guaranteed. Officers or directors of McMillan Analysis Corporation, or accounts managed by such persons, may hold positions in the securities recommended in the advisory.