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The stock market, as measured by the S&P 500 Index
SPX,
improved this week, as SPX broke out to the upside, through the downtrend line that had existed for most of February and March. That doesn’t mean that the SPX chart is outright bullish, though, for there is formidable resistance at both 4200 and 4300. It’s just not a bearish chart right now.
Several indicators are overbought at this time, and some of them might be issuing sell-signals soon. In addition, SPX has advanced above its +3σ “modified Bollinger Band.” The McMillan Volatility Band (MVB) buy signal (green “B” on the SPX chart) remains in place and would reach its target if SPX were to trade at the +4σ Band, which is at roughly 4150 and rising slowly.
There is minor support near 4050 with stronger support at 3970 (where the small gaps on the SPX chart would be filled). A close below 3950 would be bearish, though, as it would more or less negate the positive work that was done over the past couple of weeks.
Equity-only put-call ratios remain on buy signals after faltering a bit this week. The ratios turned up modestly for a couple of days but have now moved back down to a new relative low — thus solidifying the recent buy signals. The total put-call ratio remains on a buy signal as well.
These indicators will remain bullish for stocks as long the ratios continue to decline. In a related matter, the e-mini futures weighted put-call ratio is already giving a new sell signal from a very overbought status near the bottom of its chart. I consider that to be subsidiary to the equity-only put-call ratios, but it is worth noting.
Breadth, however, has become something of a problem. Breadth was tremendously positive during the rally, with positive breadth on every one of the seven trading days between March 24th and April 3rd. Since then, however, there has been a vast deterioration in breadth, and the breadth oscillators are on the verge of rolling over to sell signals. They would do so if breadth is negative today.
New 52-week Highs vs. New 52-week Lows (using NYSE data) is in a neutral state right now. The previous sell signal was stopped out a week ago, and a new signal has not emerged yet.
VIX
VIX,
continues to remain at low levels. That means the that the “spike peak” and trend of VIX buy signals remain intact. The only potential problem is that VIX is once again at or below19. Over the past year, that has generally been an oversold condition that has manifested itself in a decline in SPX — sometimes minor, sometimes more serious.
The construct of volatility derivatives remains modestly bullish for stocks. That means that the term structure of the VIX futures slopes upward in the front end, but then levels off after 4 or 5 months. The term structure of the CBOE volatility indices is more uniformly bullish throughout.
Overall, we exited our “core” bearish position when SPX rose above resistance at 4080, simultaneously breaking the downtrend line from February and March. However, the SPX chart is not bullish. Meanwhile, we will continue to trade signals from our individual internal indicators as they arise.
New Recommendation: Assurant Inc. (AIZ)
There is a new weighted put-call ratio buy signal in AIZ.
AIZ,
However, we want to see the stock break out over resistance at 120 before taking on a position:
Conditional Call Buy in AIZ:
IF AIZ closes above 120, THEN Buy 2 AIZ May (19th) 120 calls.
If this position is established, we will hold until the weighted put-call ratio rolls over to a sell signal.
New Recommendation: Carrier Corp. (CARR)
A new put-call ratio sell signal has been issued in CARR
CARR,
and the stock has already broken below support.
Buy 3 CARR June (16th) 42.5 puts
In line with the market.
CARR: 41.95 June (16th) 42.5 put: 2.45 bid, offered at 2.55
As with the AIZ recommendation, we will hold these puts until the put-call ratio rolls over and begins to decline — i.e., as long as the sell signal is in place on the put-call ratio chart.
Follow-Up Action:
We are using 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 GRMN April (21st) 95 puts: These were bought on February 21st, when GRMN
GRMN,
closed below 95. We will remain in this position as long as the GRMN weighted put-call ratio remains on a sell signal.
Long 0 SPY
SPY,
April (21st) 390 and short 0 SPY April (21st) 360 puts: This is our “core” bearish position. The position was closed when SPX closed above 4080 on March 31st. We are thus no longer holding a “core” bearish position.
Long 0 LLAP Apr (21st) 2 calls: This position was stopped out when LLAP
LLAP,
closed below 1.90.
Long 2 OMC Apr (21st) 85 puts: The weighted put-call ratio in OMC
OMC,
has curled over and begun to decline. Sell these puts now.
Long 0 SPY May (19th) 391 put and Short 0 SPY May (19th) 351 put: This spread was bought in line with the sell signals from the “New Highs vs. New Lows” indicator. Per instructions in last week’s report, this spread was sold on March 30th, when new highs exceeded new lows on the NYSE.
Long 1 SPY Apr (21st) 411 call and Short 1 SPY Apr (21st) 431 call: This call bull-spread was bought in line with the VIX “spike peak” buy signal. It was rolled up 20 points on each side when SPY traded at 411 on April 3rd. We are using a return to “spiking mode” as a stop. That is, exit the position if VIX rises by at least 3 points over any 1-, 2-, or 3-day period. Currently, that would make the closing stop at 21.55, based on the VIX close of 18.55 on April 3rd.
Long 1 SPY Apr (28th) 410 call and Short 1 SPY Apr (28th) 425 call: This position was bought in line with the MVB buy signal. It was rolled up 15 points on each side, when SPY traded at 410 on April 3rd. The target here is for SPX to trade at its +4σ Band, which is at roughly 4150 and rising slowly.
Long 1 SPY May (19th) 395 call and Short 1 May (19th) 415 call: This spread was bought in line with the equity-only put-call ratio buy signals. It would be stopped out if the ratios moved above their recent peaks. Again, that is something that we will update weekly.
Long 1 SPY May (5th) 403 call and short 1 SPY May (5th) 416 call: This spread was bought in line with the breadth oscillator sell signals that occurred around March 27th. It will be stopped out if the breadth oscillators return to sell signals. They are on the verge of doing that now. Beginning today, keep a running (cumulative) total of NYSE breadth (advances minus declines); it that total is negative at the end of any day, exit this spread.
Long 3 ARNC May (19th) 27 calls: Option volume has decreased slightly here, but the takeover rumors are still in place. Continue to hold ARNC
ARNC,
without a stop, while these rumors play out.
All stops are mental closing stops unless otherwise noted.
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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