Opinion: S&P 500 Flashes Signs That Bear Market May Finally End
S&P 500 SPX Index,
It finally broke the key resistance at 4100. If the breakout holds today, it will be valid. Moreover, the SPX is now above the declining 200-day moving average, which is above the downtrend line that has defined the US bear market for more than a year.
This breakout has several ramifications, the biggest being that this could signal the end of the bear market. This is not a guarantee, of course, because most bear markets have one all-important rally, designed to fool both the bulls and the bears. Regardless, we will follow this uptrend for as long as it continues – and more importantly, as long as our indicators are bullish.
There should be support now at 4100 and 4020 below it. The next major hurdle on the upside will be the resistance at 4200 and gap closing on the SPX chart at 4218 (from last August).
SPX is already approaching +4σ “adjusted Bollinger Band”. I touched that band yesterday. If the SPX closes above this range, a McMillan Volatility Band (MVB) sell signal can be set up, but this is not a guarantee. So, at the moment, there is no MVB sell signal setup in action, but there might be one in the coming days and maybe weeks.
Stocks only continue to be bought from their highs in early January, when buy signals emerged from extremely oversold levels. Those buy signals are still in place (and there was also one overall buy-to-buy ratio). Ratios will continue to trend upward for stocks as long as they continue to decline.
Market breadth has been one of our strongest internal indicators. Still absolutely amazing. As a result, both of our bearish oscillators are on buy signals and are deeply in the overbought zone.
When the SPX indicator breaks out of a new market upwards, it is recommended that these oscillators be overbought, as they indicate that the rally is broad and expanding. These oscillators can hold up to two and maybe three days of negative supply and remain on the current buy signals. There was a “90% increase in volume day” on the New York Stock Exchange on January 31, but other than that there weren’t any other 90% days.
The number of new highs in 52 weeks on the NYSE continues to grow (it reached 177 on Feb 1), so this indicator remains bullish. This buy signal will be valid until new lows exceed new highs of two consecutive days. This seems unlikely to happen anytime soon, given that the number of new lows has been consistently in signal numbers for a few weeks now.
It is still in a downtrend (which is an uptrend for stocks), and the various indicators that we have that involve volatility are all generating bullish signals for the stock market at the moment. This downtrend in the VIX will only be broken if the VIX closes above its 200 day moving average – which is unlikely to happen soon, given that this moving average is at 25.50 and is moving sideways. The construct of volatility derivatives is also positive, as the structure term for VIX futures is sloping upwards, as is the structure term for CBOE Volatility Indices – for the most part.
There are a couple of tiny flies in the ointment. The first is that the Volatility Index (VIX9D) released by CBOE is still trading above the VIX, as traders anticipate a possible volatile reaction to next week’s CPI report. Also, the VIX is at very low levels, approaching 17. In the long history of the VIX, it’s never been that low, but it has been low in the last couple of years. When the VIX gets ‘too low’, this is an overbought condition, which is not a problem unless the VIX suddenly starts back into ‘spiking’ mode.
January’s seasonal bull run is over, and while it got off to a bad start, it has recovered to profitability. This is the end of seasonal trades for a while, as the trades we follow generally happen from October through January.
All in all, there is no reason to tolerate a “fundamental” bearish position anymore, now that the SPX has broken out to the upside. We may review this situation later, but for now, we are trading buy signals generated by our various indicators.
New recommendation: trade the bullish breakout
If SPX can sustain the breakout above 4100, we want to add a bullish position to our portfolio:
If SPX closes above 4120 on any day,
Then buy 1 Spy March (17y) at-the-money call and sell 1 SPY March (17y) Call an amazing 16 pips higher.
Stop yourself on a close below 4020 by SPX.
New Recommendation: Qualtrics Int’l (XM)
option volume at Qualtrics International XM,
It rose dramatically on February 1 after 15% shareholder Silver Lake revealed that it planned to bid for the company. According to analyst estimates, the acquisition price is rumored to be around $20. Stock volume patterns are very powerful. Support is found at 15.50.
Buy 3 XM March (17y) 15 calls At 2.50 or less.
XM: March 16.76 (17y) 15 calls: 2.250 bid at 2.50
Follow the movement:
All breakpoints are mental breakpoints unless otherwise noted.
We use the “standard” rolling procedure for our spy,
Spread: In any vertical bull or bear spread, if the basic hits the short strike, then roll over the entire spread. That would be rolled up in a bull putt spread, or rolled down in a bear putt spread. Stay at the same expiration, and keep the distance between strikes the same unless otherwise instructed.
Long 0 Spy Feb (17y) 375 puts and short 0 SPY Feb (17y) 355 places: This was our “basic” bearish position. | It was stopped out on February 1 when SPX closed above 4100.
Long 2 PCAR Feb (17y) 97.20 puts: Buy-to-Buy ratio carried forward after PCAR PCAR’s strong earnings report,
The options are essentially worthless, so we’ll hold onto them to see if the stock can pull some of them away.
Long 1 CVX Feb (17y) 180 calls: This stock experienced some violent moves in share prices after the announcement of a new share buyback program last week, and in doing so received some heavy criticism from the government. Sell CVX CVX,
Calls now, as the call put ratio has turned up.
Long calls 2 OSH Feb (17) 30: Continue to maintain occupational safety and health,
Nonstop as long as the takeover rumors are circulating.
Long 1 SPY Feb (24y412 Call and Short 1 SPY Feb (24y) 427 calls: This spread was bought when the break above 3940 was confirmed by SPX, at the close on January 12thy. It was brought up on February 1, when SPY was trading at 412.
Long 1 SPY Feb (17y) 404 call and Short 1 SPY Feb (17y) 419 calls: This spread is bought in line with the “new highs vs new lows” buy signals. It was brought up on January 26th when SPY was trading at 404. Stop this position if NYSE’s new lows exceed new highs for two consecutive days.
Long 4 NATI Feb (17y) 55 calls: Hold on NATI NATI,
Non-stop at first, to see if the bidding war will develop.
Long 2 SPY Feb (10y406 Calls and Short 2 SPY Feb (10y) 420 calls: This spread is bought in line with January’s bullish seasonal trading. There were no 421 strikes so we used the 420 instead. The seasonal bullish period ends today (Thursday 2nd February), so exit your position at the end of today’s trade.
We didn’t buy USO callsAnd Since USE USE,
It never closed above 72. We are in the process of rescinding this recommendation now.
Send questions to: firstname.lastname@example.org.
Lawrence G. McMillan is the President of McMillan Analysis, a registered investment and commodity trading advisor. McMillan may hold positions in securities recommended in this report, either personally or in client accounts. He is an experienced trader, money manager and bestselling author of the book, Options as a strategic investment. www.optionstrategist.com
Not giving an opinion: © McMillan Analysis Corporation is registered with the Securities and Exchange Commission as an investment advisor and 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. Officers or directors of McMillan Analysis Corporation or accounts managed by such persons may have positions in securities recommended in the advisory.