The stock market becomes a picnic for bears

By LawrenceG. McMillan

Failed recoveries, weak oil prices and strong sell signals

The stock market, as measured by the S&P 500 SPX Index, saw a sharp oversold rally from a low near 4,950 to its falling 20-day moving average. Oversold rallies in bear markets usually fizzle out at or just above this 20-day moving average. There is now an incipient downtrend line (see attached SPX chart) that is approaching the 20-day moving average. As long as this downtrend line is in place, the bears have the upper hand. Even a rally above this line would likely face resistance near 5,150-5,180 and then the all-time highs at 5,260.

On a more positive note, the McMillan Volatility Band buy signal remains in effect. His objective is +4 Modified Bollinger Band (mBB), which is currently at 5,280 and falling. MVB buy signal would be stopped if SPX closes below -4 Band, which is near 4,900 and also falling.

Stock-only put-call ratios remain solidly skewed toward sell signals for the stock market as they continue to rise. They were not influenced by the recent oversold rally and remained on sell signals throughout. These sell signals would only be reversed if the ratios peaked and started to decline.

The market's breadth has been swinging somewhat wildly, but buy signals from breadth oscillators were generated over a week ago, and these are still in place.

The New York Stock Exchange's new highs and new lows remained somewhat subdued (none reached 100 on any day), so this indicator remains in a neutral state.

There are currently two conflicting indicator signals emanating from the Cboe VIX Volatility Index. The first is the “peak spike” buy signal, which occurred two weeks ago. This buy signal will remain in place for 22 trading days or until the VIX returns to “spike” mode, whichever comes first. But this rise in the VIX also generated a trend in VIX sell signals, as the VIX moved above its 200-day moving average. This sell signal would be stopped if the VIX closed below the 200-day moving average for two consecutive days. It closed below for a day, but not two, last week.

The volatility derivatives construct remains bullish for stocks, although concerns have recently emerged. Term structures continue to rise, but May front-end VIX futures are within 20 cents of June VIX futures. If the May price trades significantly above June, that would be bearish for the stock.

In summary, we maintain a basic bearish stance, consistent with the negative S&P 500 chart and equity-only put-call ratios. However, we will trade other confirmed signals around this central position.

New recommendations: summary

In recent weeks, we have issued some conditional recommendations which have not all been fulfilled. The only one left 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: the American oil fund puts

There is a put-call ratio sell signal in the US Oil Fund USO, as well as a sell signal in crude oil futures options.

Buy 3 USO June 21 76 put in line with the market.

We will hold these puts as long as the put-call ratio is on a sell signal.

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 3 TLT TLT May 17 90 puts: We will maintain our position as long as the put-call ratio sell signal is in place for Treasuries.

Long 4 CSX May 17 37.50 puts: Roll until May 17 32.5 puts. Even though the put-call ratio appears to have peaked, we will be moving lower here as CSX (CSX) remains in a downtrend.

Long 4 RSI (RSI) May 17, 5 call: We will maintain our position without stopping to let the buyout 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 1 SPY SPY May 3 502 put: Close the position now, as the width oscillators are no longer on sell signals.

Long 2 SPY Puts on May 31, 516 and Short 2 SPY on May 31, 486: Hold this position as long as the stock-only put-call ratios remain on sell signals. This is our main bearish position for now.

Long 3 AEYE (AEYE) May 17 Calls at 12:5 p.m.: Raise the stop at 12:20 p.m.

Long 1 SPY May 24, 502 put and short 1 SPY May 24, 482: Was purchased in accordance with the trend of the VIX sell signal. Stop out of this spread if the VIX closes below its 200-day moving average for two consecutive days. Currently, the 200-day moving average is just below 15.

Long 1 SPY May 24,500 Call and Short 1 SPY May 24,515 Call: Was purchased in accordance with the April 22 VIX peak-peak buy signal.

We will change the stop: exit the position if the VIX returns to peak mode, that is, if it closes at least 3.0 points higher in a period of three days or less. Today would be a close at 6:39 p.m. or above. Otherwise, the position will be closed after 22 trading days.

Long call 1 SPY May 31, 508 and short 1 SPY May 31, 524: this is the MVB buy signal. His goal is for the S&P 500 to trade at +4. Band. The buy signal would be stopped if the S&P 500 closed below -4 Band.

Long 10 POET (POET) June 21 2 call: Raise the trailing closing stop to 1.63.

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 the author of “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.

-Laurent -G -. McMillan

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05-04-24 0711ET

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