Opinion: The inventory market’s rally was a head pretend and the sensible cash now could be with the bears
The inventory market, as measured by the S&P 500 Index
SPX,
has fallen beneath the 4100 stage. That’s important as a result of there beforehand was triple resistance at that stage, and when SPX broke out above that stage in late January, it appeared as if the subsequent leg of the “new” bull market was underway.
But SPX has not solely fallen beneath that supposed assist stage, it’s confirmed the pullback by buying and selling all the way in which right down to 4000. It seems that breakout above 4100 was a false one. These are harmful in bear markets (we final noticed one in January 2022).
So, now there may be resistance at 4200 (the early February highs), and whereas there may be some small assist ranges slightly below present ranges, the foremost assist is at 3900, after which 3760-3850. If SPX falls beneath 3760 (the December low) that might be an especially adverse improvement.
The McMillan Volatility Band (MVB) promote sign that was issued in early February stays in place. Its goal is the -4σ “modified Bollinger Band” which is at present at about 3920, however is falling.
Fairness-only put-call ratios are starting to weaken as nicely. The weighted ratio is now on a promote sign, in response to our pc evaluation applications (in addition to the bare eye). This promote sign is emanating from a really low (i.e., overbought) stage, and the final two from this stage had been promote alerts in April and August of 2022 — each sturdy promote alerts.
In the meantime, the usual ratio has additionally curled upward, however our pc evaluation applications usually are not but “saying” that it is a promote sign. This newest rise has a query mark on the accompanying chart.
Market breadth, which had been a stalwart of the bullish indicator on the way in which up in December and January, has weakened significantly. Each breadth oscillators generated confirmed promote alerts as of February 17th. The decline since then has been swift, and breadth has been very adverse, together with one 90% down day. That signifies that the breadth oscillators have already reached oversold standing. Nonetheless, the market can decline whereas these oscillators are oversold, so “oversold doesn’t imply purchase.” We have to await a confirmed purchase sign right here earlier than appearing.
One other indicator that has been bullish for fairly a while is “New 52-week Highs vs. New 52-week Lows.” This purchase sign is in jeopardy of being stopped out, though even when that occurs, a brand new promote sign is just not essentially in place. On Feb. 22, for the primary time this yr, New Lows outnumbered New Highs on the NYSE. If that occurs once more, this indicator’s purchase sign can be stopped out, and the indicator would return to impartial standing. A promote sign requires that New Lows outnumber New Highs for 2 consecutive days, and that the variety of New Lows is bigger than 100 on every of these two days.
The volatility complicated indicators are weakening however haven’t turned bearish but. First, VIX
VIX,
has returned to “spiking” mode — which means that it has risen greater than 3.0 factors over a three-day (or shorter) timeframe. That’s an oversold situation, and SPX can drop sharply whereas VIX is in “spiking” mode.
Ultimately, although, a VIX “spike peak” purchase sign might be generated. As one can see from the accompanying VIX chart, current “spike peak” purchase alerts haven’t labored out all that nicely – save for the sturdy purchase sign close to the October lows. A blue “B” on the chart is a shedding system commerce, whereas a pink “B” is a profitable one. Regardless, we’ll act on the brand new purchase sign when it seems.
The development of VIX remains bullish for shares so long as each VIX and its 20-day transferring common are beneath the 200-day MA. You may see that the 200-day MA is slightly below 25 and dropping. VIX continues to be nicely beneath that time.
The assemble of volatility derivatives stays modestly bullish for shares, in that the time period constructions of the VIX futures and of the CBOE Volatility Indices proceed to slope upward. We’re carefully watching the connection between the 2 VIX futures entrance months — March and April. Ought to March VIX futures start to commerce at costs greater than April VIX futures, that might be extraordinarily adverse. Thus far, that hasn’t occurred, however the distinction between the 2 has narrowed.
In abstract, the breakdown this week, coupled with promote alerts from the equity-only put-call ratios signifies that it’s best to once more set up a “core” bearish place. Then, alerts from different indicators could be traded alongside that.
New Suggestion: “Core” bearish place
As famous above, we need to set up and maintain a brand new “core” bearish place:
Purchase 2 SPY
SPY,
April (21st) places with a hanging value 10 factors out-of-the-money
And Promote 1 SPY April (21st) places with a hanging value 30 factors decrease.
So, for example, if SPY is buying and selling at 400, you’ll purchase the SPY April (21st) 390 places and promote the SPY April (21st) 360 places.
Initially, we’ll set a cease to shut out this place if SPX closes above 4200.
New suggestion: Potential VIX “spike peak” purchase sign
As famous above, VIX has returned to “spiking” mode. The very best value that it has reached whereas in “spiking” mode has been 23.63 (to date).
IF VIX closes no less than 3.0 factors beneath the best value that it has reached from February 22nd going ahead, (at present 23.63),
THEN
Purchase 1 SPY April (7th) at-the-money name
And Promote 1 SPY April (7th) name with a hanging value 15 factors greater.
Immediately, VIX is below 22, so it’s doable that this purchase sign may very well be accomplished as quickly because the shut of buying and selling at present. (it must fall beneath 20.63 at at present’s shut).
Comply with-up motion:
All stops are psychological closing stops until in any other case famous.
We’re utilizing a “commonplace” rolling process for our SPY spreads: in any vertical bull or bear unfold, if the underlying hits the quick strike, then roll your complete unfold. That might be roll up within the case of a name bull unfold, or roll down within the case of a bear put unfold. Keep in the identical expiration, and hold the space between the strikes the identical until in any other case instructed.
Lengthy 0 SPY Feb (24th) 412 name and Quick 0 SPY Feb (24th) 426 name: This unfold was purchased when the breakout over 3940 by SPX was confirmed, on the shut on January 12th. It was rolled up on February 1st, when SPY traded at 412. Then it was stopped out when $SPX closed beneath 4060 on Feb 21st.
Lengthy 1 SPY Mar (17th) 410 name and Quick 1 SPY Mar (17th) 425 name: This unfold was purchased in keeping with the “New Highs vs. New Lows” purchase alerts. It was rolled up on January 26th, when SPY traded at 404, after which it was rolled up once more at expiration. Cease your self out of this place if New Lows on the NYSE exceed New Highs for 2 consecutive days.
Lengthy 0 SPY Mar (17th) 415 name and Quick 0 SPY Mar (17th) 431 name: This commerce was stopped out on February 21st, when $SPX closed beneath 4020.
Lengthy 3 XM Mar (17th) 15 calls: Proceed to carry XM
XM,
whereas takeover rumors play out.
Lengthy 1 SPY Mar (17th) 410 put and Quick 1 SPY Mar (17th) 385 put: This bear unfold was purchased in keeping with the McMillan Volatility Band (MVB) promote sign. This commerce can be stopped out if SPX had been to shut again above the +4σ Band. We are going to hold you up to date concerning the place of the MVB every week.
Lengthy 2 CTLT Mar (17th) 70 calls: This takeover rumor continues to be “in play,” though CTLT
CTLT,
inventory has fallen barely. Proceed to carry whereas these rumors play out.
Lengthy 3 MANU
MANU,
Mar (17th) 25 calls: Maintain and not using a cease whereas the takeover rumors play out.
Lengthy 2 GRMN April (21st) 95 places: These had been purchased on February 21st, when GRMN
GRMN,
closed beneath 95. The following day, the corporate reported better-than-expected earnings, and shares jumped greater. We are going to stay on this place so long as the GRMN weighted put-call ratio stays on a promote sign.
All stops are psychological closing stops until in any other case famous.
Ship inquiries to: lmcmillan@optionstrategist.com.
Lawrence G. McMillan is president of McMillan Evaluation, a registered funding and commodity buying and selling advisor. McMillan could maintain positions in securities beneficial on this report, each personally and in consumer accounts. He’s an skilled dealer and cash supervisor and is the writer of the best-selling ebook, Choices as a Strategic Funding. www.optionstrategist.com
©McMillan Evaluation Company is registered with the SEC as an funding advisor and with the CFTC as a commodity buying and selling advisor. The data on this publication has been rigorously compiled from sources believed to be dependable, however accuracy and completeness usually are not assured. The officers or administrators of McMillan Evaluation Company, or accounts managed by such individuals could have positions within the securities beneficial within the advisory.