Any way you slice it, the bears control the stock market right now

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The U.S. stock market, as measured by the S&P 500 Index tried once again to penetrate through both the downtrend line that defines this bear market and the declining 200-day Moving Average of the S&P 500. Once again, it failed.

This is the fourth time since the market’s peak in January 2022 that SPX has failed to break the hold of the bear market. As a result, it is still a good idea to maintain a “core” bearish position.

The S&P 500 seemed to have moved into a bullish mode when it crossed above 3940, accompanied by positive signs from many of the internal indicators. But on Jan. 18 it closed back below 3940 and has moved even lower. This now establishes a resistance area at the recent highs, 4015. There is further resistance above that, at 4100. A breakout over 4100 would be a bullish game-changer, but that is looking less likely now.

There is support at 3900, and then stronger support in the 3760-3800 area. If that level were to be violated on the downside, the next leg of the bear market would be underway in full force.

There is not a McMillan Volatility Band (MVB) signal in place at this time. We are waiting for SPX to exceed either of the +/-4σ Bands to set up a new signal.

Equity-only put-call ratios are still below their peaks of about a week ago and thus are still on buy signals. However, as one can see from the accompanying charts, they are not exactly racing downwards. Rather, they are more or less moving sideways, which is not great confirmation of the buy signal. If they should move to new highs, that would negate the current buy signals and require new ones to be set up.

Market breadth has been extremely strong over the past two weeks. As a result, both breadth oscillators are on buy signals and both are in overbought territory. Being overbought can be a good thing when SPX is first breaking out on a new bullish leg. This was one of the most bullish indicators, but a failure of breadth could produce sell signals, so we will watch this situation closely. After the heavy selling on Jan. 18, these buy signals are still in place. 

Additionally, it should be noted that the “stocks only” breadth oscillator had become so overbought that it was near its all-time high. This general area of “extreme overbought-ness” has been reached twice before: once in June 2020 on the big rally after the pandemic selloff of March 2020, and again in August 2022. The market’s reaction after those two previous forays by the oscillator into dizzying heights was quite different: SPX continued on much higher after June 2020 but fell apart after August 2022. So, there is apparently no predictive value to the fact that the oscillator is extremely overbought. It will just depend on when the next sell signal arrives.

New highs vs. new lows

For the first time in about nine months, the “New Highs vs. New Lows” indicator has given a buy signal. NYSE new 52-week highs have numbered greater than 100 on each of the last four trading days, while new lows have been in single digits. This new buy signal would be stopped out if new lows were to exceed new highs for two consecutive days.

The general indicators surrounding VIX and its derivatives are remaining bullish in their outlook for stocks — at least for now. The VIX “spike peak” buy signal has expired, but the trend of VIX buy signal remains in place. Moreover, the construct of volatility derivatives continues to forecast a bullish outlook for stocks as well.

The one problem, though, is that VIX probed down to the 19 area, and for the past year, that is as low as it’s been. In other words, it has been a warning of a bearish turn in the market. In previous years, VIX at 19 was not a problem, but it has been during this bear market. 

There is currently a negative seasonal factor at work – something called the “January Defect,” and it lasts through the 18th trading day of January (Friday, Jan. 27). At that time, a bullish seasonal factor will come into play, as institutions typically have cash to invest at the end of January.

In summary, we recommend maintaining a “core” bearish position because of the downtrend line in SPX (and the negative seasonality), but we will continue to trade confirmed signals around that core position.

New Recommendation: “New Highs” buy signal

As noted above, a new buy signal has been generated by the “New Highs vs. New Lows” indicator. We are thus going to add a SPY call bull spread to our positions, based on this indicator:

Buy 1 SPY Feb (17th) at-the-money call 

And Sell 1 SPY Feb (17th) call with a striking price 15 points higher.

Stop yourself out of this position if New Lows on the NYSE exceed New Highs for two consecutive days.

New Recommendation: Crude Oil buy signal

A new put-call ratio buy signal has been generated by crude oil (futures) options. We will trade this with U.S. Oil Fund ETF options. This is a conditional recommendation in that we want to see follow-through on the upside by USO before we actually enter the position.

IF USO closes above 72,

THEN Buy 2 USO March (17th) 72 calls. 

USO: 70.21

If these calls are bought, we will hold as long as the weighted put-call ratio of crude oil futures options remains on a buy signal.

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 2 SPY expiring Jan (20th) 375 puts and Short 2 Jan (20th) 355 puts: this is our “core” bearish position. |As long as SPX remains in a downtrend, we want to maintain a position here. So sell this spread if you can, and replace it with the following: Buy 2 SPY Feb (17th) 375 puts and Sell 2 SPY Feb (17th) 355 puts.

Long 1 SPY expiring Jan (20th) 402 call and Short 1 SPY Jan (20th) 417 calls: this spread was bought at the close on December 13th, when the latest VIX “spike peak” buy signal was generated. Exit the spread now, since the 22 day holding period for “spike peak” buy signals has “expired.”

Long 2 PCAR Feb (17th) 97.20 puts: These puts were bought on December 20th, when they finally traded at our buy limit. We will continue to hold these puts as long as the weighted put-call ratio is on a sell signal.

Long 1 CVX Feb (17th) 180 call: We will hold this position as long as the put-call ratio of CVX remains on a buy signal.

Long 1 QQQ Feb (3rd) 279 put and Long 1 QQQ Feb (3rd) 282 put:  We bought these in line with the “January Defect” seasonal trade. One more QQQ at-the-money put should be bought at the close of trading today (January 19th). Your total position will thus be 3 long QQQ puts, which might each have a different striking price. With regard to taking partial profits, sell the first put that becomes 20 points in-the-money. Sell all the remaining puts at the close of trading on the 18th trading day of January — Friday, Jan. 27.

Long 2 OSH Feb (17th) 30 calls: Continue to hold without a stop as long as the takeover rumors are in place.

Long 1 SPY Feb (24th) 397 call and Short 1 SPY Feb (24th) 412 call: This spread was bought when the breakout over 3940 by SPX was confirmed, at the close on January 12th. Stop yourself out if SPX closes below 3890.

Send questions to:

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.


©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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