The stock market, as measured by the S&P 500 SPX Index,
continues to struggle mightily with resistance to all-time highs of around 4,238.
SPX has seen a daily record very close to this level for four consecutive days and seven times in the past month. Internal indicators are improving, but unless the price of the most important indicator can confirm it, we are not buying aggressively.
A breakout to new all-time highs, on a two day close basis (i.e. SPX must close at a new high above 4238 for two consecutive days) would have would constitute a major development and would require the addition of long positions.
However, as long as this resistance holds, bears have a chance to drop the market back to the low of its two-month trading rage that has now lasted for two months: 4060. Below that is support at 4000 and 3870, but for now the 4060 area is important because if it gives way, it would be a major negative disappointment.
Ironically, the SPDR S&P 500 ETF Trust SPY,
possesses hit two new all-time highs on an intraday basis over the past week. The difference is when dividends are paid by SPY shares versus SPX shares. A positive internal development is that the Russell 2000 Index RUT,
has become much stronger and is also on the verge of reaching new all-time highs. This is one of the internal metrics improvements I was talking about.
For the record, the McMillan Volatility Band (MVB) sell signal from May 11 is still in effect.
Stock-only ratios have declined over the past week, and both indicators (the Standard and weighted ratios) have issued buy signals accordingly. There have been some really big call buys, as stocks of memes and others influenced by coordinated social media buys have again exploded in many cases. As long as those buy and sell ratios are going down, it’s bullish for the stock market. Thus, these new buy signals are a further improvement of internal indicators.
The scale has been strong and is improving. Thus, the two width oscillators remain on the buy signals. They’ve moved into modest overbought territory, which is a good thing when SPX hits new heights (well, almost bursting). As such, width oscillators can withstand a day or two of negative width without necessarily turning around to sell signals. In addition, the cumulative width indicators hit new all-time highs in eight of the last ten trading days.
The new 52 week highs are again completely dominant compared to the new 52 week lows. In fact, the New York Stock Exchange’s new 52-week lows are back to single digits. This indicator remains bullish for equities.
Volatility also remains generally bullish in its stock market outlook, although the CBOE VIX Volatility Index,
remains stubbornly above 16. The VIX peak buy signal from May 21st remains in place and the overall trend of the VIX is downward. However, there are apparently enough traders still worried that they will continue to buy SPX puts, which keeps the VIX somewhat bloated. This is a minor negative factor, but it should still be noted.
The construction of volatility derivatives is also a bullish factor for the stock market. The VIX June futures contracts of the first month expire next week. July futures are trading at a very high premium to the VIX (around 3.00 points), and the structure of the terms of VIX futures rises through November. The term structure of the CBOE volatility index is also bottom-up.
In summary, there are buy signals and indicators of improvement almost everywhere. However, with confirmation from SPX, they don’t mean much. At this point, horse buying is still a smart move, although a two-day close above 4238 by SPX signals a strong move upward.
New recommendation: Covanta Holding
Rumors have circulated that Covanta Holding Corp. HOW ARE YOU,
was considering strategic alternatives, including the eventual sale of the business. The stock widened, accompanied by very strong and improving stock volume models, while options volume exploded to around ten times normal.
Buy July 6 CVA (16e) 17.5 calls at a price of 1.00 or less.
CVA: July 17.60 (16e) 17.5 call: offered at 1.00
New recommendation: SmileDirectClub
The action around SmileDirectClub Inc. SDC,
is based on a takeover rumor, and options volume has exploded, with over 172,000 contracts traded yesterday (164,000 of them call options). This is about five times normal. Inventory volume patterns are positive and improving.
Buy 4 SDC July (16e) 9 calls at a price of 1.50 or less.
DDC: July 9.73 (16e) 9 call: offered at 1.55
All stops are mental shutdown stops, unless otherwise noted.
Long 2 expiring SPY June (11e) 410 puts and short 2 SPY June (11e) 385 stakes: this trade was originally taken due to the MVB sell signal which occurred on May 12the. It would be stopped by SPX closing again above the +4 band, which is at 4320 and is moving sideways. The signal would hit its profit target if SPX trades on the -4 band. Right now, the lower band is around 4050 and is slowly increasing. We want to maintain a position here, as the sell signal is still in effect, so sell the current spread and replace it with the buy July 2 SPY (2sd) 410 bets. We no longer use a spread here, but only long put options.
Long 1 SPY June (18e) 420 put and Short 1 SPY June (18e) 400 set: this recommendation was based on the put-call ratio equity-only sell signal that was in place. Since this sell signal is no longer in place, get out of this gap.
Long 3 DUK June (18e) 100 calls: keep on going while waiting for the activist investor to produce a positive result.
Long 2 SPY June (18e) 415 calls and Short 2 SPY June (18e) 428 calls: this spread was bought when the most recent peak VIX peak buy signal was confirmed on Friday May 21st. It would be stopped if VIX returned to peak mode, that is, if it increased by at least 3.00 points over a period of 3 days or less (using closing prices).
Long 1 KSU June (18e) 300 call: KSU formally accepted the highest public tender offer of Canadian National (CNI). The transaction is for $ 200 in cash + 1,129 shares of CNI. So, with CNI at 110, the deal is worth $ 324. Of course, there will be regulatory delays. We’re going to hold on, so let’s see if this spread can tighten a bit. It is not clear whether or not Canadian Pacific the other bidder will come back with a higher bid or not. Finally, stop calls if CNI closes at 108 or less.
Long 1 SPY July (16e) 420 call and Long 1 SPY July (16e) 420 put: this long overlap anticipates that SPX is moving away from the 420 level in a volatile way. If SPX trades at 437, combine calls from strike 420 to strike 437 (or the strike closest to that). Conversely, if SPX trades at 403, roll the bets until strike 403.
Long 4 CERN June (18e) 80 calls: keep going as takeover rumors persist.
Long July 4 CSOD (16e) 47.5 calls: our recommendation was to buy these calls if CSOD closed above 47 which he did on June 4the. A 13-D dossier was filed by an activist investor and the headline went up. Set a trailing closing stop at 47.70.
Long 4 DBX July (16e) 28 calls: our recommendation was to buy those calls if DBX closed above 28.50 which he did on June 7the. It is also a situation of activist investor. Set a final closing stop at 27.
Send your questions to: [email protected]
Lawrence G. McMillan is President of McMillan Analysis, a Certified Commodity Investment and Trading Advisor. McMillan may hold positions in the securities recommended in this report, both personally and in accounts receivable. He is an experienced trader and fund manager and is the author of the bestselling book, Options as a Strategic Investment. www.optionstrategist.com.
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