This past week, the stock market fell again. The bulls tried to engineer another rally attempt but once again, it was thrown back in their face, 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 into rallies. Thus, the downtrend in the S&P SPX,
remains intact, as lower highs and lower lows continue to appear on the chart.
The bears’ aggressiveness, however, has produced and / or exacerbated oversold conditions. Those oversold conditions have stoked what rally attempts we’ve seen so far, but eventually there will be a stronger oversold rally – one which carries to and above the declining 20-day moving average (which is currently at 4120). Above there, resistance exists at the 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, stronger support should exist near 3700.
Realized volatility has increased considerably. The S & P’s 20-day historical volatility (HV20) is now up to a whopping 36%. That is higher than VIX, although VIX has been such a laggard. This increase 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 to a new MVB buy signal.
Equity-only put-call ratios continue to soar. Thus they remain on sell signals and are in an oversold state. They are now at levels last seen in March and April of 2020, but they will not register buy signals until they roll over and begin to decline.
Market breadth has been quite poor, although the breadth oscillators have rebounded from the deeply oversold state that they were recently in. Thus they could generate buy signals with just one or two days of positive breadth.
Having said that, it is worth noting that the last few attempts to generate buy signals by these breadth oscillators were very short-term affairs, before the bears once again crushed breadth. So we would not act on the first day that breadth turns positive – preferring to wait for a bit more confirmation than that.
New 52-week lows continue to outnumber new 52-week highs, although the absolute number of new lows has shrunk in the past week. That is a modestly positive sign, but it is not a buy signal. That will not occur until new highs outnumber new lows on the NYSE for at least two consecutive days, and the number of new highs is greater than 100 on each of those days.
VIX continues to wander somewhat aimlessly at relatively low levels, considering the magnitude of the stock market decline thus far. There was a VIX “spike peak” buy signal on May 12, after VIX had peaked at 31.77 that day. Believe it or not, VIX has not yet exceeded even that modest number, so that “spike peak” buy signal is still in effect.
The trend of VIX is negative for stocks. That is, both VIX and its 20-day moving average are above the 200-day MA. Since the 200-day MA is at about 22.50 and rising, VIX would have to fall below that to terminate this intermediate-term sell signal from the trend of VIX. Even if that were to occur, it would merely turn this indicator neutral, not positive.
The construct of volatility derivatives is modestly negative for stocks right now but is not on an outright sell signal. The May VIX futures have expired, so the front month is now June. We compare the price of June with that of July futures to determine a signal: a sell signal would occur if June were to settle at least 1.00 point higher than July. That is not the case right now, as both are trading at roughly the same price.
The term structure of the VIX futures slopes slightly downward right now, which is modestly negative for stocks, but again is not a full sell signal.
In summary, we continue to maintain a “core” bearish position, because of the negative trends that are in effect (down for SPX, up for VIX). We will trade confirmed oversold buy signals around that if they occur.
New recommendation: Magnachip Semiconductor
Option volume in Magnachip Semiconductor MX,
increased significantly on Wednesday following reports that LX Group was working with Carlyle Group CG,
on a joint bid for the company. Stock volume patterns are positive and improving. There is support at 16.
Buy 5 MX Jun (17th) 20 calls
At a price of 1.55 or less.
MX: 19.65 Jun (17th) 20 call: 1.35 bid, offered at 1.55
New recommendation: Potential buy signal
As noted in the market commentary at the beginning of this newsletter, we are not buying until confirmed buy signals have been established. In a weekly newsletter, it is difficult to lay out all the possibilities, especially in an extremely volatile market such as this one. But this recommendation’s conditions are easy to track, so we will go with a potential buy signal from the new highs vs. new lows indicator:
IF NYSE new highs outnumber NYSE new lows for two consecutive days,
Spirit IF new highs are at least 100 in number of both of those days,
Buy 1 SPY Jun (17th) at-the-money call
And Sell 1 SPY Jun (17th) call with a striking price 13 points higher.
If the trade is established, then stop yourself out if new lows outnumber new highs for two consecutive days.
Market insight: Bottom-pickers
It seems to me that there are a lot of analysts getting media exposure that are generally trying to pick the bottom of this market. That is a fool’s game, and it results in getting crushed on each move lower. Where are the trend-followers? Those are the people that one should be listening to.
James Dines, a famous independent stock market analyst, died this past week. That was a loss for the industry, and he will be missed. He was a unique individual and was on top of many trends.
I first came across his work in 1972, just prior to the very nasty bear market of 1973-1974. He was a staunch trend follower, and it was terrific advice for me as a young trader at the time. He would draw a downtrend line on the chart of the Dow 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 the trend today rather than trying to the hero who picks the day of the exact bottom. It has been my experience that even if someone does pick the exact bottom, they 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 correct side of the market for a long time before it reversed.
All stops are mental closing stops unless otherwise noted.
We are going to implement a “standard” rolling procedure for our 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 2 expiring ZEN May (20th) 125 calls and short 2 May (20th) 140 calls: Even though option volume has remained fairly heavy, Zendesk ZEN,
stock-price action has been poor. Allow these calls to expire and do not replace them.
Long 3 expiring SAVE May (20th) 25 calls: Spirit Airlines SAVE,
has indicated that it is not interested in the higher offer from JetBlue JBLU,
so allow these calls to expire and do not replace them.
Long 2 expiring ENV May (20th) 80 calls: Do not replace these expiring calls.
Long 2 expiring SPY May (20th) 401 puts and short 2 SPY May (20th) 376 puts: We originally bought this spread in line with the sell signal from the trend of VIX. It was rolled down when SPY traded at 401 on May 9. This is our “core” bearish position and we will hold it as long as VIX remains above its 200-day moving average, which is currently at about 22. Sell this spread and replace it with the following:
Buy 2 SPY June (17th) at-the-money puts and
Sell 2 SPY June (17th) puts with a striking price 25 points lower.
Long 4 expiring MAT May (20th) 25 calls: We bought these because of the Mattel MAT,
takeover rumors that have been spreading. Roll to the June (17th) 25 calls. The closing, trailing stop remains at 24.
Long 1 SPY June (17th) 392 call and short 1 June (17th) 412 calls: VIX confirmed a “spike peak” buy signal at the close of trading on May 12, and we bought this spread. Stop yourself out on a VIX close above 31.77 – the VIX closing price on the day the signal was confirmed.
Long 3 BKI June (17th) 70 calls: Continue to hold while the spread in 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,
is trading at 70.60, which is still a very wide spread.
Send questions to: email@example.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 bestselling book “Options as a Strategic Investment.”
Disclaimer: © McMillan Analysis Corp. 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 Corp., or accounts managed by such persons may have positions in the securities recommended in the advisory.