Opinion: The bullish case for U.S. stocks is getting weaker

The stock market, as measured by the S&P 500 Index
is still trapped within its trading range. However, when SPX traded down through its 20-day Moving Average this week, coupled with the FOMC meeting’s conclusion, that seemed to get the ball rolling on the downside.

This is also a seasonally weak period for the market, so that is potentially contributing to the bearish argument as well. The support at 4330 is what really matters, though, and as long as that holds, SPX is still in its trading range that extends back several weeks. The upside of the trading range is 4540. A breakdown below 4330 or a breakout above 4540 should give the market some strong momentum in the direction of the breakout.

Since SPX has been in this trading range, realized volatility has decreased. Those calculations are based on closing prices; many trading days have had volatile intraday moves, only to see prices close little changed. As a result, the “modified Bollinger Bands” are now relatively close together. Even so, SPX has not touched either of the +/-4σ Bands, so our McMillan Volatility Band (MVB) buy signal remains in place.

Equity-only put-call ratios have moved sideways and even begun to roll over. If they roll over that would be a new buy signal. To the naked eye, both have rolled over to some extent. The computer analysis programs are statistical, though, and consider what is coming off the 21-day moving average. With that in mind, the analysis programs rate the standard ratio as a “buy,” but have not yet given that designation to the weighted ratio. Hence, only the standard ratio’s chart has a green “B” on it. 

Breadth has been very negative of late — especially “stocks only” breadth (i.e., the breadth of all stocks with listed options). Both breadth oscillators – the other being the NYSE oscillator — have been on sell signals since September 6th. They remain on those sell signals, and now the “stocks only” oscillator has descended into oversold territory. Surprisingly, NYSE breadth has been quite a bit better, so that oscillator is not yet oversold. In any case, oversold does not mean buy, so these oscillators are still bearish.

Plus, there is a new sell signal from the “New Highs vs. New Lows” indicator. This week, New 52-week Lows on the NYSE numbered greater than 100 issues for two consecutive days (and on both days, New Lows were greater than New Highs). That constitutes a sell signal. This sell signal will remain in force until New Highs outnumber New Lows for two consecutive days. We had a strong, long-lasting buy signal from this indicator this past March. We shall see if this one has the same staying power.

The above “internal” indicators are somewhat bearish, but the volatility-based indicators remain generally positive for stocks. This has been the case all along, for months and months. VIX
has bounced off its yearly lows at 13 several times in the last four months. Thus, the trend of VIX buy signal remains in place as long as VIX continues to close below its 200-day Moving Average (which is at 17.80 and declining). VIX has not even entered “spiking” mode, which would occur today on a close by VIX above 17.00. In other words, VIX continues to have a “no-worry” policy regarding the stock market (so far).

The construct of volatility derivatives remains generally bullish for stocks, too. The term structures of the VIX futures and of the CBOE Volatility Indices continue to slope upwards. The 9-day VIX (VIX9D) popped up just before the FOMC meeting earlier this week but is back down now after the meeting’s conclusion (even though the stock market is reacting badly to the meeting’s conclusion). Furthermore, the 1-year VIX (VIX1Y) just made a multi-year low this morning, as it is falling sharply. Apparently, there is selling of SPX options a year out. This is the lowest the 1-year VIX has been since February 2020. 

We are not carrying a “core” position as long as SPX remains between 4330 and 4540. However, we are trading individual indicator signals as they are confirmed.

New sell signal

As noted above, the “New Highs vs. New Lows” indicator has generated a sell signal. The last signal from this indicator was a buy signal last March that was quite successful. It remains to be seen whether this one will have that kind of staying power.

Buy 1 SPY
Oct (20th) at-the-money put

And Sell 1 SPY Oct (20th) put with a striking price 20 points lower. 

We will hold this position until New Highs outnumber New Lows on the NYSE for two consecutive days. 

New recommendation: Chef’s Warehouse (CHEF) puts

CHEF broke down badly to a multiyear low this week, and there has been a strong increase in bearish option activity. One could make an argument for this stock returning to the 2020 basing area, in the 12-18 range.

Buy 3 CHEF Nov (17th) 25 puts

In line with the market.

: 23.63 Nov (17th) 25 put: 2.20 bid, offered at 2.50

Since the breakdown has been so sharp, the trailing stop is at 26.50 for now. As time passes, we should be able to tighten that closer to the stock price.

Follow-up action: 

All stops are mental closing stops unless otherwise noted.

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 8 CRON
Oct (20th) 2 calls: Option volume continues5to be very strong. Hold without a stop.

Long 2 EW
Oct (20th) 75 puts: Sell these puts if EW closes above 76.

Long 4 SPY Sept (29th) 480 calls: This is the position taken in line with the CVB buy signal. We are holding SPY calls with a striking price equal to SPY’s all-time high. We are holding without a stop.

Long 1 SPY Oct (20th) 448 put: Bought in line with the equity-only put-call ratio sell signals. If you bought more than one, you might want to sell half, because the standard ratio has rolled over to a buy signal (but the weighted has not). Otherwise, we are going to hold this put until the weighted ratio rolls over to a buy.

Long 2 NTAP
Oct (20th) 80 puts: Sell these puts now, since the weighted put-call ratio has rolled over a buy signal. 

Long 2 EQR
Oct (20th) 65 puts: We will continue to hold as long as the weighted put-call ratio for EQR remains on a sell signal. 

Long 3 X
Oct (13th) 31 calls: Hold without a stop while takeover offers are sort out.

Long 2 PSX
Oct (13th) 123 calls: There has not been any specific news here, but the stock has roared ahead. Set a stop at 118 for these calls.

Long 1 SPY Oct (20th) 446 call and Short 1 SPY Oct (20th) 464 call: This spread was bought in line with the MVB buy signal of August 29th. This signal will remain in place unless SPX closes below its -4σ Band, which would stop out the signal. The target for the trade is for SPX to touch the +4σ Band.

Long 3 ADM
Oct (20th) 82.5 puts: We will hold this position as long as the weighted put-call ratio for ADM is on a sell signal. 

Long 5 TSHA
Oct (20th) 2.5 calls: The stop remains at 2.75.

Long 4 BKR
Oct (20th) 37 calls: The trailing stop remains at 35.80.

Long 0 DIS
Oct (13th) 81 puts: These puts were stopped out when DIS closed above 83.70 on Sept 14th

Long 2 SPY Sept (29th) 444 puts: Bought in line with the seasonally bearish period in the week after September expiration. Since SPX has traded down, sell half of your position. The remainder should be sold at the close of trading on Friday, Sept. 22.

Long 10 TEVA
Oct (20th) 10 calls:  Stop yourself out on a close below 9.75.

All stops are mental closing stops unless otherwise noted.

Send questions to: [email protected].

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. 

Simonne Stigall

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