The stock market tests the bulls to see if they have what it takes

By Lawrence G. McMillan

Maintain a basic bullish position but keep your powder dry

The stock market, as measured by the S&P 500 SPX Index, has seen a few days of fairly significant declines, the latest coming after what was seen as a poor consumer price index. Actually, the number itself wasn't that bad, but it raised concerns that the Federal Reserve might not cut rates soon, if at all in the near future. Frankly, this seemed like a knee-jerk reaction to me, especially since most smart investors haven't been betting on rate cuts for some time now.

The S&P 500 and other major U.S. markets rebounded on Thursday, but if the S&P 500 closes below 5,050, that would be a much bigger negative as it would lead to technical selling. There is resistance in the 5,260 area, where the S&P 500 has peaked on four separate days in recent weeks.

This is still a bullish S&P 500 chart, as long as the index holds above 5,050, so we will maintain our basic bullish positions for now, albeit with out-of-the-money calls at that time.

Stock-only put-call ratios accelerated upward, which confirmed their sell signals (for stocks). When these sell signals come from the extreme lows of their charts – that is, extreme overbought conditions – as is the case now, they often prove to be quite sustainable. They will stay on sell signals until they turn around and start trending down.

Market breadth has remained generally weak and the sell signals from the breadth oscillator that appeared a week ago are still in place. Thus, breadth joins put-call ratios as the first two sell signals after a long rally in stocks.

The New York Stock Exchange's new highs continued to dominate the new lows, through April 10. On that day, the new lows took over, although only by a small margin: 46 to 36. If the new lows outnumber the new highs, that would stop the signal from purchase, which has been in place almost continuously since last November. If new highs dominate on Thursday, it will reset the indicator, and it will still remain bullish.

The Cboe Volatility Index, or VIX VIX, remained mostly subdued, so it was not influenced by the market's sharp declines. Yes, the VIX has been rising slowly since its low point just below 13 in late March. But it has not gone into “peak” mode (an increase of at least three points, over a three-day or shorter horizon, using closing prices). When the VIX is in peak mode, the stock market often declines sharply, but eventually a “peak peak” buy signal occurs. Anyway, Spike Mode hasn't happened recently.

The other potentially bearish aspect of the VIX has not appeared either – which would be the case if the VIX trend were to reverse upward. This would occur if the VIX and its 20-day moving average rose above the 200-day MA. Currently, the VIX itself is slightly above the 200-day MA, but the 20-day MA remains below it. Monitor this indicator for a potential sell signal.

The construction of volatility derivatives remains essentially bullish for stocks. Even with the recent sell-off in the S&P 500, the maturity structure of the VIX futures and Cboe Volatility Indexes has continued to grow. There have been slight variations in term structure, especially just before the CPI was released, but the upward slope is the dominant feature. The first month of April VIX futures are trading at a discount to the VIX, which is a bit concerning, but the rest of the futures are trading at a premium, and May continues to trade at a premium. higher than that of April, these are therefore positive signs. .

In summary, we maintain a central bullish position through the S&P 500 chart, but we trade other confirmed signals around this central position.

Summary of recommendations

In recent weeks, we have issued some conditional recommendations which have not all been fulfilled. The only one left at present is a potential longer-term buying signal from Walgreens Boots Alliance (WBA). We are keeping this recommendation open, but we will not continue to reprint the reasoning behind this transaction.

If WBA closes above $22.50, buy 4 WBA Jun 21 calls at 22.5 in line with the market.

New recommendation: SPY bear spread

We want to add a bearish position in line with sell signals from equity put-call ratios only.

Buy 2 SPY May 31 SPY puts at the money and sell 2 SPY May 31 puts with an exceptional price 30 points lower. We will maintain this position as long as the equity-only put-call ratios remain on sell signals.

New recommendation: AudioEye (AEYE)

AudioEye (AEYE) shares surged higher, trading at their highest prices since fall 2021. Additionally, stock and options volume increased sharply.

Buy 3 AEYE Calls on May 17, 12.5 online with the market. Stop if AEYE closes below $10.90.

Follow-up actions:

All stops are mental closing stops unless otherwise noted.

We use a standard rolling procedure for our SPY spreads: in any bull or bear vertical spread, if the underlying hits the short strike, then roll the entire spread. This would be a roll up in the case of a call bull spread or a roll down in the case of a bear put spread. Stay in the same exhale and keep the same distance between strokes unless otherwise instructed.

Long 0 XLP April 5, 76 Calls: These calls were terminated when XLP XLP closed below $74.70 on April 3.

Long 2 SPY calls expiring April 12, 520: This position was initially a long straddle position. It was consolidated and the puts were sold. This is essentially our fundamental bullish position. Looking forward to the calls of May 3,520. Re-run the calls whenever they reach at least eight points in the money.

Long 1 expiring SPY call April 12, 520: This was also originally a long overlap. The put was sold and the call was renewed several times. Looking forward to the calls of May 3,520. Roll up every time the call is eight points in the money.

Long 3 TLT TLT puts of May 19, 95: roll down until the puts of May 19, 90. We will maintain our position as long as the put-call ratio sell signal is in place for Treasury bonds.

SPY Expiring Long 1 Call April 12, 520: This call was purchased in line with the new highs versus the new lower buy signal. It has been rolled up several times. Stop if the NYSE new lows exceed the new highs for two consecutive days. On April 10, the new lows exceeded the new highs, so there is a two-part follow-up for this trade:

1) If the new NYSE lows outnumber the new highs from April 11, sell the calls to close the position.

2) If the new lows do not exceed the new highs of April 11, move to the 520 calls of May 3. Roll up every time the call is eight points in the money.

Long 4 BKR April 19, 30 calls: Bought when Baker Hughes (BKR) closed above $30 on March 6. The put-call ratio has now shifted to a sell signal, so sell the calls to close the position. It was a profitable position.

Long 6 QBTS (QBTS) April 19 1.0 calls: stop remains at 1.75.

Long 3 APA (APA) May 17 32.5 calls: The put-call ratio has moved to a sell signal, so sell these calls. It will be for a small profit.

Long 4 CSX May (17) 37.50 puts: Bought when CSX (CSX) closed below $37.50 on March 14. We will hold these puts as long as the weighted put-call ratio for CSX remains on a sell signal.

Long 2 DKNG (DKNG) May 17, 46 calls: The stop remains at 43:40.

Long 2 SVXY SVXY April 19 113 calls: April VIX futures in the first month settled at a discount to the VIX on April 5, so these calls should have been sold. Sell ​​now if you haven't already.

Long 4 RSI (RSI) May 17, 5 call: Maintain without stop at first, in order to let the redemption rumors unfold.

Long 2 MCD (MCD) May 17 275 puts: We will hold this position as long as the weighted put-call ratio remains on a sell signal.

Long Put 1 SPY May 3, 513: We will hold these puts as long as the width oscillators remain on sell signals.

All stops are mental closing stops unless otherwise noted.

Send your questions to: [email protected].

Lawrence G. McMillan is President of McMillan Analysis, a registered commodities investment and trading advisor. McMillan may hold positions in securities recommended in this report, both personally and in client accounts. He is an experienced trader and fund manager and is the author of the best-selling book “Options As A Strategic Investment”. www.optionsstrategist.com

(c) McMillan Analysis Corporation is registered with the SEC as an investment advisor and with the CFTC as a commodity trading advisor. The information contained in this newsletter has been carefully compiled from sources believed to be reliable, but its accuracy and completeness are not guaranteed. Officers or directors of McMillan Analysis Corporation, or accounts managed by such individuals, may hold positions in the securities recommended in the advisory.

-Lawrence G. McMillan

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04/13/24 1100ET

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