Last week, the stock market fell again. The bulls attempted to engineer another rally attempt but were once again faced back as the bears pushed the S&P 500 Index to new relative closing lows (although the intraday low was set on May 12).
This is the third strong rally attempt since April 28 that has quickly failed. The bears have been relentless in their efforts to sell on the rallies. Thus, the bearish trend of the S&P SPX,
remains intact, as lower highs and lower lows continue to appear on the chart.
The aggressiveness of the bears, however, has produced and/or exacerbated oversold conditions. Those oversold conditions have stoked the rally attempts we have seen so far, but there will eventually be a stronger oversold rally, one that holds above the 20-day lower moving average (currently sitting at 4120). Above there, resistance exists at 4300, where two of the previous “one day wonder” rallies died out.
For now, there is support at the May 12 lows of 3858, but that could be tenuous. Below there, there should be stronger support near 3700.
Realized volatility has increased considerably. The S&P’s 20-day historical volatility (HV20) is now up to a whopping 36%. That’s higher than VIX, even though VIX has been such a laggard. This rise in HV20 has caused the “modified Bollinger Bands” to expand and as a result SPX has not closed below the -4σ band. That will be a prerequisite for a new buy signal from MVB.
Equity-only put-call ratios continue to rise. Therefore, they remain on sell signals and are in an oversold state. They are now at levels last seen in March and April 2020, but will not see any buying signals until they renew and start to decline.
The breadth of the market has been quite poor, although the amplitude oscillators have recovered from the oversold state they were in recently. Therefore, they could generate buy signals with only a day or two of positive amplitude.
Having said that, it is worth noting that the last few attempts to generate buy signals via these amplitude oscillators were very short-term affairs, before the bears once again crushed the amplitude. Therefore, we would not act on the first day the amplitude turns positive, preferring to wait for a bit more confirmation than that.
The new 52-week lows continue to outnumber the new 52-week highs, although the absolute number of new lows has narrowed in the past week. That is a modestly positive signal, but it is not a buy signal. That won’t happen until new highs outnumber new lows on the New York Stock Exchange for at least two consecutive days, and the number of new highs exceeds 100 on each of those days.
VIX continues to wander aimlessly at relatively low levels, considering the magnitude of the stock market’s decline thus far. There was a VIX “peak spike” buy signal on May 12, after VIX peaked at 31.77 that day. Believe it or not, the VIX has yet to exceed even that modest number, so the “peak high” buy signal is still in place.
The VIX trend is negative for stocks. That is, both the VIX and its 20-day moving average are above the 200-day MA. Given that the 200 day MA is around 22.50 and rising, the VIX would have to drop below that to end this medium-term sell signal of the VIX trend. Even if that were to happen, it would just make this indicator neutral, not positive.
Building volatility derivatives is moderately negative for stocks at the moment, but not in an outright sell signal. May VIX futures have expired, so the previous month is now June. We compare the June price to the July futures price to determine a signal: a sell signal would occur if June closed at least 1.00 point higher than July. That is not the case at the moment, as both are trading at roughly the same price.
The VIX futures term structure is skewed slightly lower at the moment, which is modestly negative for the stock, but again not a sell-out signal.
In summary, we continue to maintain a bearish “core” position, due to the negative trends that are in place (SPX down, VIX up). We will trade confirmed oversold buy signals around that if they occur.
New recommendation: Magnachip Semiconductor
Option volume on Magnachip Semiconductor MX,
rose significantly on Wednesday following reports that LX Group was working with Carlyle Group CG,
in a joint offer by the company. Stock volume patterns are positive and improving. There is support at 16.
Buy 5 MX Jun (17the) 20 calls
At a price of 1.55 or less.
MX: June 19.65 (17the) Call 20: offer 1.35, offered at 1.55
New Recommendation: Potential Buy Signal
As stated in the market commentary at the beginning of this newsletter, we will not buy until confirmed buy signals have been established. In a weekly newsletter, it’s hard to lay out all the possibilities, especially in an extremely volatile market like this one. But the conditions of this recommendation are easy to trace, so we’ll go with a Potential buy signal from the New Highs vs. New Lows indicator:
IF the new NYSE highs outnumber the new NYSE lows for two consecutive days,
Y IF the new highs are at least 100 in number on those two days,
Buy 1 SPY Jun (17the) at-the-money call
And Sell 1 SPY Jun (17the) call with an attractive price 13 points higher.
If the trade is set, stop if the new lows outnumber the new highs for two consecutive days.
Market Outlook: Bottom Pickers
It seems to me that there are a lot of analysts who get media exposure who are generally trying to bottom this market. That’s a fool’s game, and results in getting crushed on every move lower. Where are the trend followers? Those are the people one should be listening to.
James Dines, a famous independent stock analyst, died last week. That was a loss for the industry, and he will be missed. He was a unique individual and was aware of many trends.
I first came across his work in 1972, just before the very unpleasant bear market of 1973-1974. He was a strong trend follower, and it was great advice for me as a young trader at the time. He would draw a downtrend line on the Dow Jones chart and say, “By geometry, this market is still in a downtrend.” Whether that was geometry or not is beside the point, it was a downtrend.
More traders should pay attention to today’s trend instead of dealing with the hero who picks the exact bottom day. In my experience, even if someone picks the exact bottom, they’ve probably picked a higher bottom several times before that. Of course, trend followers will never pick the exact bottom, but they will have been on the right side of the market for a long time before it reversed.
follow up action
All stops are mental shutdown stops unless otherwise noted.
We are going to implement a “standard” rolling procedure for our SPY spreads: in any vertical up or down spread, if the underlying hits the short strike price, then roll the entire spread. that would be roll up in the case of a bull spread call, or roll below in the case of a bear put spread. Stay on the same expiration and keep the same distance between hits unless otherwise noted.
Long 2 expiring ZEN May (20the) 125 calls and short May 2 (20the) 140 calls: Although the volume of options has remained fairly high, Zendesk ZEN,
share price action has been poor. Please allow these calls to expire and do not replace them.
3 pitches expiring SAVE May (20the) 25 calls: Spirit Airlines SAVE,
you have indicated you are not interested in JetBlue JBLU’s increased offering,
so allow these calls to expire and don’t replace them.
Long 2 expiring ENV May (20the) 80 calls: Do not replace these expired calls.
Long 2 due SPY May (20the) 401 puts and shorts 2 SPY May (20the) 376 puts: We originally bought this spread in line with the sell signal on the trend of VIX. It was lowered when SPY traded at 401 on May 9. This is our “central” bearish position and we will hold it as long as the VIX remains above its 200 day moving average, which is currently around 22. Sell this spread and replace it with the following:
Buy 2 SPY June (17the) at-the-money put options and
Sell 2 SPY June (17the) puts a striking price 25 points lower.
4 lengths that expire MAT May (20the) 25 calls: We bought these by Mattel MAT,
acquisition rumors that have been spreading. roll to the June (17the) 25 calls. The closing trailing stop remains at 24.
Long 1 SPY June (17the) 392 call and short June 1 (17the) 412 calls: VIX confirmed a “peak high” buy signal at the close of trading on May 12, and we bought this spread. Stop on a VIX close above 31.77, the closing price of VIX on the day the signal was confirmed.
Largo 3 BKI June (17the) 70 calls: Keep holding on as long as the spread on this deal remains wide. The deal is 63.20 + 0.2 * Intercontinental Exchange ICE,
which is worth $82.22 with ICE trading at 95.11. black Knight Bki,
It trades at 70.60, which is still a very wide spread.
Send your questions to: firstname.lastname@example.org.
Lawrence G. McMillan is president of McMillan Analysis, a registered commodity trading and investment 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”.
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 bulletin has been carefully compiled from sources believed to be reliable, but its accuracy or completeness is not guaranteed. Officers or directors of McMillan Analysis Corp., or accounts managed by such persons, may hold positions in the securities recommended in the notice.