The S&P 500 index
SPX,
-0.14%
continues to plow ahead, trading at or near all-time highs. The NASDAQ-100
NDX,
+0.55%
QQQ,
+0.56%
is keeping pace with it pretty well. Other major indexes have started to lag behind, though – especially the Russell 2000
RUT,
-0.86%
IWM,
-0.91%.
But what’s more concerning is that we are now seeing confirmed sell signals from breadth and from equity-only put-call ratios. More about that in a minute.
SPX has support at last week’s lows, at 4630. Below there, support also exists at the previous highs, 4525-4550. A close below 4630 would not only be a violation of support, but it would also confirm a McMillan Volatility Band (MVB) sell signal.
Right now, a “classic” modified Bollinger Band (mBB) sell signal is in effect, but we require further confirmation for the MVB sell signal. That “classic” sell signal would be stopped out by an SPX close above the +4σ Band, which would occur today on a close above 4730. That “stop out” was more realistic a couple of days ago, when it was lower, but that did not occur.
Lawrence McMillan
Also, realized volatility has fallen dramatically, and the S&P’s 20-day historical volatility (HV20) is down to 7%. That is quite low. In a broad sense, it indicates that the market is “overbought” and is wound tightly so that it might explode. An HV20 sell signal would occur if it rises to 11% or higher. Again, that does not seem imminent.
In something of a surprise, the equity-only put-call ratios have both rolled over to sell signals as of the close of trading on Nov. 17. On the accompanying charts, I have marked these with a “S?” to indicate that it is computer analysis making this call, and it is not necessarily obvious to the naked eye.
Sell signals occur when the ratios bottom out (make a local minimum) and begin to rise. The computer analysis – which knows, among other things, what is coming off the 21-day moving average – is “convinced” that the rise has begun.
Lawrence McMillan
Lawrence McMillan
Breadth has deteriorated over the past few days as well. As a result, both of our breadth oscillators are on sell signals, and are dropping rapidly.
This is the shortest-term of our indicators. These signals can reverse quickly, but the last breadth oscillator buy signals were in place for quite a long time (from Sept. 22 until about a week ago) and were quite successful.
Cumulative breadth measures have not made new all-time highs, as might be expected.
New 52-week highs have continued to outnumber new 52-week lows, but that differential is shrinking in terms of NYSE data. In terms of “stocks only” and NASDAQ data, it has already turned negative. A sell signal would occur here if NYSE new lows outnumber new highs and there are least 100 of the new lows.
So, many of the above indicators are turning negative. The implied volatility complex is not experiencing any such negativity. VIX
VIX,
+1.82%
is remaining relatively subdued (although it still won’t break below 15), and thus its 20-day moving average remains below the 200-day MA. That keeps the definition of the trend of VIX downward, and a down-trending VIX is bullish for stocks.
Furthermore, the construct of volatility derivatives remains bullish for stocks. The December VIX futures are now the front month, so we are interested in the relationship between December and January. As long as December is trading at a lower price than January (which it currently is by a rather large 2.00+ points), that is bullish for stocks. The terms structures of both the VIX futures and of the CBOE Volatility Indices slope upward, and that is positive for the stock market as well.
Lawrence McMillan
In summary, the S&P chart is still positive as long as SPX continues to remain above 4630, so we are recommending a “core” long position because of that (and because of the positive signals coming from VIX). However, there are some confirmed sell signals beginning to appear, and we will trade those around the “core” position.
Seasonally, things are bullish between Thanksgiving and the beginning of the new year (yes, I realize that was not the case in 2018, but it usually is), so the bears potentially have a very narrow window to work with.
New recommendation: Breadth oscillator sell signal
We did not get the confirmation we were looking for on Nov. 11 for a sell signal in our breadth oscillators. That eventually came this week. So, we are going to take a position now, since breadth continues to weaken:
Buy 1 SPY Dec (10th) at-the-money put
And sell 1 SPY Dec (10th) put with a striking price 20 points lower.
If this sell signal is confirmed, then it will remain in effect until our breadth oscillators improve to either generate a buy signal, or to cancel out this sell signal. Since that requires daily recalculation, it is impossible to predict in advance. We will update the situation weekly in this report.
New recommendation: Equity-only put-call ratio sell signals
As noted above, the computer analysis programs have confirmed that the equity-only put-call ratios are rolling over and are going to trend upward. That is a sell signal for this indicator.
Buy 1 SPY Dec (10th) at-the-money put
And sell 1 SPY Dec (10th) put with a striking price 20 points lower.
This trade will be stopped out if the ratios begin to fall again. We will monitor the situation and report it weekly. The is no stop, per se, for this trade on a daily basis.
New conditional recommendation: MVB sell signal
A McMillan Volatility Band (MVB) sell signal is a re-confirmation of the “classic” modified Bollinger Band sell signal. The “classic” signal has occurred, so now we are merely looking for the confirmation, which will come on an SPX close below 4630.
IF SPX closes below 4630,
THEN buy 1 SPY Dec (10th) at-the-money put
And sell 1 SPY Dec (10th) put with a striking price 20 points lower.
If this MVB sell signal is confirmed, it would then be stopped out by a close above the +4σ Band. We will update that condition weekly.
New conditional recommendation: NYSE new 52-week highs vs. lows
As noted above, the number of new 52-week highs has been outnumbering 52-week lows quite easily. But that may be beginning to change. On Nov. 17, there were slightly more new lows in terms of NASDAQ data and also in terms of “stocks only” data. We are concerned with NYSE data for this indicator, though.
IF NYSE new 52-week lows numbers at least 100 issues
And on the same day,
IF NYSE new 52-week lows outnumbers NYSE new 52-week highs
THEN buy 1 SPY Dec (10th) at-the-money put
And sell 1 SPY Dec (10th) put with a striking price 20 points lower.
If this sell signal is confirmed, it would be stopped out later, if NYSE new highs outnumber NYSE new lows for two consecutive days.
New conditional recommendation: CMS Energy
This is a repeat from the last two week. The put-call ratio buy signal in CMS Energy
CMS,
+0.74%
is still in effect, but we want further confirmation by the price of the underlying stock:
Conditional call buy in CMS:
IF CMS closes above 61.50,
THEN buy 2 CMS Dec (17th) 60 calls
CMS: 59.71
Follow-up action
All stops are mental closing stops unless otherwise noted.
Long 3 PCAR Nov (19th) 85 calls: These calls were bought and then rolled, in line with a weighted put-call ratio buy signal for Paccar
PCAR,
-0.70%,
which is still in effect. Roll to the Dec (17th) 90 calls now. We will continue to hold as long as the put-call ratio buy signal is in place.
Long 4 EVH Nov (19th) 30 calls: The takeover talks are supposedly still going on here, but Evolent Health
EVH,
-1.30%
is weakening. Continue to hold.
Long 2 ADP Nov (19th) 230 calls: The put-call ratio buy signal remains in effect here, and we rolled up when ADP
ADP,
-0.02%
traded at 230. Now roll to the Dec (19th) 235 calls.
Long 2 NKE Nov (19th) 175 calls: We rolled up when Nike
NKE,
+2.06%
traded at 165 on Oct. 29 and rolled up again when the stock traded at 175 on Nov. 4. The put-call ratio has now rolled over to a sell signal, so sell these calls and close this profitable positions.
Long 4 CCJ Dec (17th) 26 calls: The closing stop remains at 24.50.
Long 2 SPY Nov (26th) 465 calls: SPY calls were bought on the upside breakout to new highs (after reversing from a long put bear spread) and then rolled higher. The closing stop remains at 461, basis SPY.
Long 2 CONE Nov (19th) 80 calls: CyrusOne
CONE,
+0.03%
accepted a $90.50 all-cash buyout offer from a private-equity group. This was great news for us, so sell the calls now to close the position. Be sure to receive at least parity for your long calls.
Long 2 SPY Nov (26th) 465 calls: This is our “core” long position. The closing stop remains at 461, basis SPY.
Long 2 AUPH Nov (19th) 30 calls: We are holding without a stop while the takeover rumors play out.
Send questions to: lmcmillan@optionstrategist.com.
Lawrence G. McMillan is president of McMillan Analysis, a registered investment and commodity trading 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.”
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 accuracy and completeness are not guaranteed. The officers or directors of McMillan Analysis Corp., or accounts managed by such persons may have positions in the securities recommended in the advisory.