The stock market, as measured by the S&P 500 index
SPX,
pulled back by a modest amount prior to Nvidia’s
NVDA,
earnings report Wednesday. The large-cap benchmark finally retreated enough to touch its rising 20-day moving average for the first time since mid-January. In other words, the pullback has been modest. Once Nvidia reported positive earnings, the S&P 500 gapped up. The index’s chart is in a positive mode, and that means that a “core” bullish position is still warranted.
The bears have been able to engineer a couple of severe down days in the last several weeks, but there has been no follow-through. In fact, those short-term pullbacks now represent support: at 4,950, 4,920, and 4,840. Below those is the major support area of 4,680-4,800. There is no formal resistance since the index is trading at all-time highs, but the +4σ “modified Bollinger Band” (mBB) is at 5,100 and rising.
The “classic” mBB sell signal is technically still in effect. We do not trade those, as we wait for the further confirmation of a McMillan Volatility Band (MVB) sell signal. That has not occurred and will not occur unless SPX drops to 4,903. It seems unlikely that will happen in the short term. That “classic” sell signal would be stopped out if SPX were to close above the +4σ Band.
Equity-only put-call ratios have plunged to the lower levels of their charts and are now turning upward. Both ratios are graded as being on sell signals by the computer programs that we use to analyze these charts (both are marked with a green “S” on the accompanying charts). The last sell signals (issued near the end of the year) were not successful, unless you happened to be trading small caps. Regardless, these ratios have a long and profitable history, so we are going to be watching this carefully. With SPX making new highs this morning, these budding sell signals might be canceled, but the larger picture is that both ratios are deeply in overbought territory.
On the New York Stock Exchange, new highs continue to dominate new lows, so this indicator remains in a bullish mode. It would only be stopped out if new lows were to outnumber new highs for two consecutive days. There has been the occasional day when new lows were greater than new highs on the NYSE, but not two days in a row.
Volatility
VIX
VX00,
spiked on Feb. 13, when there was heavy selling in the S&P 500. Since then, it has fallen sharply, creating a “spike peak” buy signal (for stocks) which is still in place (green “B” on the VIX chart). VIX has been on both sides of its 200-day moving average recently, so the trend of VIX buy signal is not in place at this time. The VIX chart is still generally bullish for stocks as long as VIX remains at these low levels. It would be a problem if VIX were to being to rise sharply. The “spike peak” buy signal would be stopped out if VIX were to close above 17.94 — the peak of Feb. 13.
The construct of volatility derivatives has remained steadfastly bullish for stocks for quite some time now. The occasional days of sharp selling have not changed that. Currently the March VIX futures are the front month, and so we are watching their price versus that of the April VIX futures. If March were to trade above April, that would be a major negative sign, but that has not even come close to happening.
We are maintaining a “core” bullish position largely due to the positive nature of the S&P 500 chart. There are some sell signals that have come and gone, and now it appears that the equity-only put-call ratios might be creating sell signals. We will continue to trade confirmed signals around that “core” position.
New recommendation: APA Corp. (APA)
There is a new weighted put-call ratio buy signal in APA Corp.
APA,
APA,
It has a modestly successful history of put-call ratio signals (see the accompanying chart). However, we want to make sure the stock is moving upward when we enter, so this is a conditional recommendation:
IF APA closes above 32.50, then buy 3 APA May (17th) 32.5 calls in line with the market.
If the calls are bought, we will hold as long as the weighted put-call ratio remains on a buy signal.
New recommendation: Potential MVB sell signal
This is a repeat recommendation and, frankly, SPX has not come close to triggering this sell signal. But it is still a possibility as long as the “classic” sell signal is in place. That “classic” signal would be stopped out by SPX closing above its +4σ Band, which is currently at 5,100 and rising. Otherwise, the following recommendation remains open:
IF SPX trades at 4,903 or lower, then buy 1 SPY Mar (28th) at-the-money put and Sell 1 SPY Mar (28th) put with a striking price 25 points lower.
If this trade is established, it would have a target of the lower -4σ Band, and it would be stopped out if SPX were to close above the +4σ Band.
New recommendation: Baker-Hughes Co. (BKR)
The weighted put-call ratio for Baker-Hughes Co.
BKR,
has generated a buy signal, and several other put-call ratio signals in BKR have been accurate in the past year. However, there is some overhead resistance in place, so we are going to make this a conditional recommendation. This recommendation was made last week, but remains open for this week since it was not filled:
IF BKR closes above 30, then buy 4 BKR Apr (19th) 30 calls in line with the market.
If these calls are bought, we will hold as long as the weighted put-call ratio remains on a buy signal.
Follow-up action:
All stops are mental closing stops unless otherwise noted.
We are using a “standard” rolling procedure for our SPDR S&P 500 ETF Trust
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 4 XLP
XLP
March (15th) 73 calls: The stop remains at 72.60.
Long 2 SPY March (8th) 501 calls: This position was initially a long straddle. It was rolled up, and the puts were sold. The calls were rolled up several more times. This is, in essence, our “core” bullish position. Roll the calls up every time they become at least eight points in-the-money.
Long 1 SPY Mar (8th) 500 call: This was originally a long straddle. The call was rolled up, and the put was sold. Roll up every time the call is eight points in-the-money. The closing remains at 486.
Long 3 TLT
TLT
May (19th) 95 puts: We will hold as long as the put-call ratio sell signal is in place for T-Bonds.
Long 1 SPY Mar (8th) 502 call: This call was bought in line with the new highs vs. new lows buy signal. Stop yourself out if NYSE new lows exceed new highs for two consecutive days. Roll up every time the call is eight points in-the-money.
Long 0 SPY Mar (1st) 498 put: This put was bought in line with several negative divergences. But the trade was stopped out when SPX closed above 5,027 on Feb. 15.
Long 0 SPY Mar (15th) 494 put and Short 0 SPY Mar (15th) 469 put: This spread was bought when VIX closed above 15.30 on February 13. That is, when VIX closed above its 200-day moving average. Stop yourself out if VIX closes below its 200-day moving average for two consecutive days. It has already closed below for one day, so if it closes below 15.10 today, that would stop out the trade.
Long 2 SPY Mar (15th) 500 calls: Bought in line with the most recent VIX “spike peak” buy signal. We will hold for 22 trading days (about one calendar month). The trade would be stopped out if VIX subsequently closed above 17.94.
Send questions to: lmcmillan@optionstrategist.com.
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.” www.optionstrategist.com
©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.
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