S&P 500 index SPX,
has finally broken major resistance at 4100. If the breakout holds today, then it will be valid. Moreover, the SPX is now clearly above its descending 200-day moving average, and is above the downtrend line that has defined the US bear market for more than a year.
This breakout has several implications, the biggest of which is that this could be a signal that the bear market is over. That’s no guarantee, of course, because most bear markets have one significant rally designed to fool both the bulls and the bears. Regardless, we’ll be following this uptrend as long as it lasts – and, more importantly, as long as our indicators remain bullish.
There should now be support at 4100 and at 4020 below that. The next big obstacle to the upside would be resistance at 4200 and closing the gap on the SPX chart at 4218 (from last August).
The SPKS is already approaching the +4σ “modified Bollinger band”. Yesterday it touched that band. If the SPX closes above that range, a McMillan Volatility Band (MVB) sell signal could be set, but this is not a guarantee. So, for now, there is no MVB sell signal setup in the works, but there could be in the coming days and possibly weeks.
Equity-only put-call ratios are still falling from their highs in early January, when buy signals emanated from extremely oversold levels. Those buy signals are still in place (and there was one from the overall put-call ratio). Ratios will continue to be bullish for stocks as long as they continue to decline.
Market breadth is one of our strongest internal metrics. It’s still pretty spectacular. As a result, both of our breadth oscillators are on buy signals and are deep in overbought territory.
When the SPX breaks out on a new up market leg, it is preferable that these oscillators are overbought, as this means that the uptrend is broad and spreading. These oscillators could sustain two and possibly three days of negative breadth and still remain on current buy signals. There was a “90% volume increase day” on NISE on January 31st, but otherwise there were no other 90% days.
The number of new 52-week highs on the NISE continues to rise (they reached 177 on February 1), so this indicator remains bullish. This buy signal will be in effect until the new lows cross the new highs for two consecutive days. That seems unlikely to happen anytime soon, as the number of new declines has been consistently in signal numbers for several weeks.
WIX WIX,
continues to be in a downtrend (which is bullish for stocks) and the various indicators we have that include volatility are all currently generating bullish signals for the stock market. That downtrend in the VIX would only be broken if the VIX closed above its 200-day moving average – which is unlikely to happen anytime soon, as that moving average is at 25.50 and going sideways. The volatility derivative construct is also positive, as the term structure of the VIX futures skews upward, as does the structure of the CBOE Volatility Index — for the most part.
There are a few small flies in the fat. One is that CBOE’s 9-Day Volatility Index (VIKS9D) is still trading above the VIKS as traders anticipate a possible volatile reaction to next week’s CPI report. Also, the VIX is at a very low level, close to 17. In the long history of the VIX, it’s not all that low, but in the last few years it has been. When the VIX goes “too low” it is an overbought condition, which is not a problem unless the VIX suddenly goes back into “spiking” mode.
January’s seasonal bull run is over, and although it started off poorly, it has recovered to profitability. This is the end of the seasonal trades for a while, as the ones we track mostly take place from October to January.
All in all, there is no reason to hold on to the “core” bearish position anymore, now that the SPKS has broken out to the upside. We may revise that position later, but for now we are trading the buy signals generated by our various indicators.
New recommendation: Breakthrough trade to the upside
If the SPX can sustain a break above 4100, we want to add a bullish position to our portfolio:
IF SPX closes above 4120 each day,
THEN Buy 1 SPY Mar (17th) call for money and sell 1 spy mar (17th) call with a strike price higher by 16 points.
Stop on a close below 4020 by the SPKS.
New recommendation: Qualtrics Int’l (KSM)
Options Volume in Qualtrics International KSM,
rose significantly on February 1 after 15% of Silver Lake shareholders revealed plans to bid for the company. According to analyst estimates, the takeover price is rumored to be around $20. Stock volume patterns are very strong. Support is at 15.50.
Buy 3 KSM Mar (17th) 15 calls at the price of 2.50 or less.
XM: 16.76 Mar (17th) 15 calls: 2,250 offers, offered at 2.50
Follow-up action:
All stops are mental closing stops unless otherwise noted.
We use the “standard” procedure for our SPI SPI,
spreads: In any vertical bull or bear spread, if the underlying strike hits the short strike, then reverse the entire spread. That would be a roll up in the case of a call bull spread, or a roll down in the case of a bear put spread. Stay on the same expiration and keep the distance between strokes the same unless otherwise indicated.
Long 0 SPI Feb (17th) 375 puts and Short 0 SPI Feb (17th) 355 puts: This was our “core” bearish position. |It was stopped on February 1st when the SPKS closed above 4100.
Long 2 PCAR Feb (17th) 97.20 puts: The put-car ratio changed following a strong earnings report from PCAR PCAR,
The options are essentially worthless, so we’ll hold onto them to see if the stock can pull anything up.
Dugi 1 CVKS February (17th) 180 call: The stock suffered a violent share price move after it announced a new share buyback program last week, drawing serious criticism from the government. Sell CVX CVX,
calls now, as the road-to-car ratio has become higher.
Long 2 OSH February (17) 30 calls: Continue to maintain OSH OSH,
non-stop as long as the takeover rumors are in place.
Long 1 SPI Feb (24th) Call 412 and short 1 SPI February (24th) 427 call: This spread was bought when SPX’s break above 3940 was confirmed, at the close of January 12th. It rolled on February 1, when the SPI was trading at 412.
Long 1 SPI Feb (17th) Call 404 and short 1 SPI February (17th) 419 call: This spread is bought according to “new highs vs new lows” buy signals. It rose on January 26 when the SPI traded at 404. Stop this position if the new lows on the NISE exceed the new highs on two consecutive days.
Long 4 NATI Feb (17th) 55 calls: Keep NATI NATI,
without stopping at first, let’s see if a bidding war develops.
Long 2 SPI February (10th) 406 calls and Short 2 SPI February (10th) 420 calls: This spread was bought in line with the bullish January seasonal trade. There was no 421 strike so we used 420 instead. The seasonal bull period expires today (Thursday, February 2), so exit your position at the close of trading today.
We did not buy USO calls, since USO USO,
it has never closed above 72. We are now reversing that recommendation.
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 the securities recommended in this report, both personally and in client accounts. He is an experienced trader and money manager and author of the best-selling book, Options as a strategic investment. www.optionstrategist.com
Disclaimer: ©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 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.
